Recalling the July 8, 2004 Arrest and Indictment of Enron’s Chairman Kenneth Lay on the 15th Anniversary

When I opened the Enron investigation on December 4, 2001, I included Kenneth Lay as a predicated subject, along with Jeffrey Skilling and Andrew Fastow.?Prior to opening the case immediately after Enron filed bankruptcy, I had been following the company based on articles primarily in the Wall Street Journal and Houston Chronicle that began in October 2001 contemporaneous with Enron’s third quarter earnings release wherein they reported a loss of over $600 million and a nonrecurring earnings charge of $1.01 billion.?That same day, in an Analyst Call, Enron announced a $1.2 billion reduction in shareholder equity.?John Emschwiller and Rebecca Smith from the Journal and Mary Flood of the Chronicle were outstanding in their reporting on Enron, Fastow, Lay, Skilling and Enron’s accounting issues.?Over the next four plus years, their reporting would continue to disclose new facts and witnesses that would benefit the FBI’s criminal investigation.?I predicated Lay as a subject based primarily on the sanguine statements he made about the company after Jeffrey Skilling resigned in August 2001, and which continued after the third quarter earnings release.?The statements he made were incongruent with the true financial condition of the company.

Kenneth Lay was extremely well liked at Enron.?He liked people, and people liked him.?He was very much an avuncular or even grandfather type figure at the company.?When he walked into a room, he remembered the names of employees’ spouses, children and grandchildren and their activities.?He treated people right at the company.?However, employees did not always know the true Kenneth Lay who acted out of self-interest and preservation, lied to them, overlooked transgressions by employees as long as they were making money for the company and who overtly hired family members in a culture of nepotism.?

Following the resignation of Enron CEO Jeffrey Skilling on August 14, 2001, Lay stepped down from Chairman to CEO to take a more active role in the company’s management.?Thereafter, he met with his senior most executives and heads of business units.?He was told there were systemic problems at the company; the international assets were inflated by $5 billion; and the balance sheet reflected approximately $7 billion in embedded losses that needed to be reported.?Additionally, Lay received emails and memos from several employees detailing problems at the company.?In spite of ominous information from multiple sources, Lay publicly proclaimed Enron was doing great.?

On September 26, 2001, Lay held an on-line forum with Enron employees and stated “[t] he third quarter is looking great.?We are continuing to have strong growth in our businesses, and at this time I think we’re positioned for a very strong fourth quarter.”?He added “we have record operating and financial results” and “the balance sheet is strong.”?In reality, Lay knew Enron was preparing to announce a significant quarterly loss for the first time since 1997 and had committed a $1.2 billion accounting error, among other problems facing the company.?

In an early October 2001 telephone call with a representative of Standard & Poor’s Credit Rating Agency, Lay stated that Enron and its auditors had “scrubbed” the company’s books and that no additional write downs would be forthcoming.?However, Lay knew Enron’s international assets were being carried on its books for billions of dollars in excess of their fair market value.?He also knew he had made misrepresentations to representatives of Arthur Andersen in order to conceal the Wessex Water $700 million goodwill impairment, and had falsely claimed that Enron would pursue a growth strategy in the water business.?In addition, Lay knew Enron’s auditors had not been able to scrub the books due to misrepresentations by him and others regarding Wessex goodwill.?

Lay also lied and misrepresented during the October 16, 2001 Analyst Call to discuss Enron’s third quarter 2001 earnings.?Lay attempted to mislead the investing public and omit information about the announced losses to minimize the negative effect on Enron’s stock price by describing them as “non-recurring;” however, Lay knew the losses were not properly characterized as non-recurring.?In addition, Lay stated “In connection with the early termination of the Raptor structures, shareholder’s equity will be reduced by approximately $1.2 billion.”?In fact, Lay knew the equity reduction was not from the termination of the “Raptor” structures, but principally from a huge accounting error by Enron.?In further efforts to deflect attention from the equity reduction, Lay and others chose not to disclose the problem in Enron’s third quarter earnings press release.?

Enron held a special conference call with securities analysts on October 23, 2001, in an effort to dispel growing public concerns about Enron’s stock, which had lost 25 percent of its value in the week following the October 16, 2001 earnings announcement.?During the call, Lay stated, “[w]e are not trying to conceal anything.?We’re not hiding anything.?We’re really trying to make sure that the analysts and shareholders and the debt holders really know what’s going on here.?So, we are not trying to hold anything back..... I’m disclosing everything we’ve found.”?In fact, while professing candor, Lay failed to disclose numerous dire facts about the state of Enron’s business.

Shortly after the Analyst Call, Lay attended another all-employee meeting that was webcast live to all of Enron’s 28,000 employees.?Lay stated “[o]ur liquidity is fine.?As a matter of fact it’s better than fine, it’s strong.....”?In actuality, Lay knew in order to maintain liquidity Enron had been forced to take the unusual step of offering its pipelines as collateral to obtain a billion dollar bank loan.?Lay also knew the only readily available source of capital was a $3 billion line of credit, which, if drawn down, would signal the dire straits of Enron’s finances.?Three days later, Lay authorized the withdrawal of the entire $3 billion from the line of credit.?

The investigation of Kenneth Lay would continue for nearly three and a half years and involve in excess of five Special Assistant United States Attorneys (prosecutors) and over 20 FBI agents and result in an 11 count indictment filed on July 7, 2004.?The Lay investigation would follow many trails but primarily focused on: 1) Accounting Fraud;?2) Influence Peddling / Outreach; 3) Public Statements; and 4) Stock Sales / Enron Line of Credit.?

During the course of the investigation, agents continuously worked to tie Lay to Fastow’s shady and often criminal LJM off balance sheet equity partnership deals wherein underperforming assets were moved from Enron’s books or transactions initiated for Enron to meet its quarterly earnings targets.?While Lay was involved in seeking the Board of Directors’ approval for an exception to the Enron Code of Conduct to allow Fastow to operate the equity partnerships and engage in transactions with Enron, it could not be determined Lay had detailed knowledge of the fraudulent transactions.?Lay desperately tried to distance himself and Enron from the Raptor structured finance transactions that were used to hedge troubled assets and itself became problematic when Enron’s stock price declined.?Although Lay had been present at May 2000 and April 2001 Finance Committee meetings for the Raptor presentations, was warned about them by Sherron Watkins in an August 15, 2001 memo, and the fact they were mentioned numerous times in a Vinson and Elkins investigative report to Lay, at least three times in mid-October 2001, contemporaneous with the earnings release, he vaguely described them as “certain vehicles” or said the vehicle did not have a name.?Lay also had specific knowledge related to problems with the Enron Energy Services business unit and the consolidation of its risk book into the trading operations to fraudulently hide over $500 million in quarterly losses.?

The Enron Task Force learned that as Enron was in its death spiral in the autumn of 2001, Kenneth Lay reached out to several members of President George W. Bush’s administration. In February 2002, a list of 16 VIPs was compiled related to Enron and specifically Ken Lay’s influence peddling.?Subsequently letters were sent requesting documents pertaining to contacts between Enron officials and agency employees at the Departments of Commerce, Energy, State and Treasury.?The Special Assistant to President Bush agreed to provide copies of documents the White House was turning over to Senator Joseph Lieberman’s committee.?Thereafter, agents began a concentrated effort to interview the who’s who of the Bush administration and politics to determine if Lay sought relief or some type of bailout.?Agents interviewed Vice President Dick Cheney, Commerce Secretary Donald Evans, Treasury Secretary Paul O’Neill, Federal Reserve Chairman Alan Greenspan, Former Treasury Secretary and Citigroup Chairman Robert Rubin, Henry Kissinger, Senator Phil Gramm, Presidential Chief of Staff Andrew Card, Presidential Deputy Chief of Staff Joshua Bolton and many others.?Agents determined Ken Lay reached out to several of these individuals, talked about the dire straights Enron was in and possible effects on the financial markets but did not directly ask for help or any type of bailout.?For example in a late October or early November 2001 conversation between Lay and Commerce Secretary Donald Evans, Lay expressed concern because Moody's was considering downgrading the rating of Enron’s paper.?Lay told Evans that a downgrade in the paper would cause liquidity problems for Enron and wanted him to be aware of the situation because Enron was a big trader of energy, and Enron’s downgraded paper could cause an impact on the energy industry.?During this conversation, Lay was very concerned about the rating of Enron’s paper, but he did not ask Evans to contact Moody's.

As an aside, it was actually Enron’s President Greg Whalley who asked the Treasury Department for assistance.?Whalley spoke with Under-Secretary of the Treasury Peter Fisher over six to eight phone conversations.?On one call Whalley asked Fisher to make calls to banks on Enron’s behalf.?Fisher told agents he was silent on the issue and did not respond.?Although he made no calls on Enron’s behalf, on October 31, 2001, Fisher had a conversation with Citigroup Chairman Robert Rubin and decided to “take Rubin’s temperature” regarding Citigroup’s exposure with Enron loans.?Rubin stated Citigroup was comfortable with the large number of loans Enron had taken.?Subsequently on November 8, 2011, Rubin called Fisher and asked what Fisher thought about calling rating agencies on Enron’s behalf.?Fisher advised he would not make any such calls.?He said Rubin might have started the conversation with “this may not be a good idea, but........”?

There were no shortage of Lay investigative avenues, but the investigation was reinvigorated and refocused in January 2004 when Assistant United States Attorney John Hueston from Orange County, California joined the Enron Task Force.?John brought a new vision and enthusiasm to the investigation.?His addition would be what was needed to bring a successful investigation against Kenneth Lay.?

Immediately after Hueston started, there was a Lay investigative strategy meeting on January 21, 2004 that would define the investigation and lead to Lay’s indictment on July 7, 2004.?Identified investigative areas included Lay’s statements made in the third quarter of 2001 during analyst calls, road shows and employee meetings; Lay’s line of credit and loans from Enron; and disclosure issues.?A follow-up meeting was held on January 28, 2004 to discuss more line of credit issues, Lay’s knowledge of Enron’s financial difficulties, the September 2001 Woodlands Resort Enron Management meeting and other potential investigative areas.?

The investigation began to focus more closely on Lay’s autumn 2001 stock sales.?As Enron’s stock price was declining and for a period of time Enron employees were locked out of making changes to their retirement accounts because of a poorly timed change in plan administrators, Lay was publicly encouraging employees to keep their retirements in Enron stock and vociferously proclaimed he was a net buyer of Enron stock.?Secretly Ken Lay was selling stock and a lot of it.?In 2001, Lay sold 1.77 million shares of Enron stock for a total of approximately $70.1 million; however, the sales were not on the open market for everyone to see.?Kenneth Lay had a $4 million line of credit at Enron that was raised to $7.5 million in October 2001.?Lay was charging up his line of credit and then using Enron stock to pay it off.?Normally when an officer or director purchases or sells stock, it is reported every time to the Securities and Exchange Commission; however, in this case, because he was selling stock back to the company it only had to be reported after the end of the year.?Employees had no idea Ken Lay lied to them in proclaiming he was a net buyer of Enron stock.?At trial, Lay asserted he sold his stock to meet margin calls because of the declining value of Enron stock, but the government showed Lay had choices in meeting the margin calls as a result of other liquidity.?He consciously chose to sell his stock back to the company.?

As things heated up and the investigation intensified in the spring of 2004, Lay and his attorneys started feeling the pressure.?In mid-March, Enron Task Force head attorney Andrew Weissmann received a letter from Mike Ramsey, Lay’s primary attorney, expressing his willingness to come in and resolve any issues.?Ramsey and five other attorneys subsequently met with Weissmann on or about April 6, 2004.?It was a “dog and pony show” that did not last a long time.?They explained Lay was in the same position as the Board of Directors in that he was not in the know, and that he sold his stock because of financial pressure.?It would seem Lay’s attorneys were so focused on insider trading charges they neglected to see all of his potential criminal liability.??

Ramsey and company again came in to meet with Enron Task Force attorneys on June 4, 2004, but it was a non-event. They bad mouthed the Board of Directors, and focused on conclusions of the Bankruptcy Examiner’s report.?

Grand jury for Lay’s indictment was scheduled for July 7, 2004; however, like many investigative activities on the case, word of the potential indictment spread.?On June 17, 2004, I received a call from the FBI head of the Task Force in Washington, D.C. telling me Andrew Weissmann was very upset because the night before he had received a call from Mary Flood at the Houston Chronicle asking if the superseding indictment would push back the trial date for Merrill Lynch bankers charged in another portion of the investigation. Weissmann was upset because the Lay indictment had been discussed on a DOJ/FBI conference call the day before.?I told the agent in DC I felt sure no one from Houston was leaking to Mary Flood and everyone felt as strongly and angry as I did when we knew Leslie Caldwell and Andrew Weissmann leaked information to the press.?I also reminded the DC agent how paper thin the Task Force office walls were at the federal courthouse, and someone standing outside could hear pretty much everything.?I received a similar call from the head agent in DC on Wednesday, July 21, 2004, about an article in the preceding Saturday’s Houston Chronicle that reported Ken Lay would be indicted soon.?I had read the article and told him it actually quoted attorneys close to the case.?Thankfully it referenced attorneys close to the case otherwise FBI agents would have been falsely blamed.?

Subsequently, Andrew Weissmann would press the DC FBI agent in charge of the case to request the Office of Professional Responsibility (internal affairs) to initiate a leak investigation because he believed someone from the FBI was leaking information to the press.?The DC agent and I never thought anyone from the FBI was leaking, and both believed it was someone from the Department of Justice, probably Weissmann himself.?Weissmann was such a hypocrite requesting a leak investigation because agents had entered the Task Force offices at the courthouse and observed him meeting one-on-one with reporters from multiple news organizations.?A High Bureau Official (HBO) visited the Task Force in Houston on June 24, 2004.?Over lunch, the FBI Task Force head in DC and I both discussed Weissmann’s request for a leak investigation. The HBO said in his experience prosecutors were the source of leaks more than agents.?He said if there was a leak investigation it would include Department of Justice prosecutorial personnel as well.?Additionally, he asked about subpoenaing reporter Mary Flood’s phone records.?I told him that was a step I did not recommend we take, and did not.?Thankfully OPR never initiated a leak investigation as it would have had such a deleterious effect on the case.?

As we moved closer to July 7th, speculation and activity at the courthouse increased substantially.?The day before the indictment, the Houston agent responsible for media matters received a call from Mary Flood at the Houston Chronicle asking what time she should be at the courthouse to see Ken Lay brought in.?Another reporter contacted the media agent and asked if the indictment was Wednesday or Thursday.?He said he should be hearing soon because “DC leaks like a sieve.”?The agent asked him if he meant the FBI or DOJ to which the reporter responded “DOJ.”?He added this was the only time they did not find out at least 48 hours in advance and added “you know how it works up there.”?So much for Weissmann’s belief someone from the FBI was leaking information.

On Wednesday, July 7, 2004, an 11 count indictment was returned against Kenneth Lay charging him with one count of Conspiracy to Commit Securities and Wire Fraud; two counts of Wire Fraud related to statements in employee meetings; four counts of Securities Fraud related to statements to securities analysts and rating agency representatives; one count of Bank Fraud; and three counts of False Statements to a Bank.?

Lay was scheduled to surrender at the Houston FBI office at 6:30 am on July 8, 2004, but he arrived early at approximately 6:20 am.?Dressed neatly in a navy blue blazer, grey slacks, blue shirt and red tie, he was dropped off without his attorneys present.?The Houston Chronicle reported he was dropped off by his wife and pastor.?Lay was very calm and friendly.?While being fingerprinted, an agent told Lay he was doing a good job, and he responded he did not want to be a professional at it.?After being photographed, Lay looked at me and said he had worked with the FBI on several occasions and that we were doing a good job, just doing our jobs.?Agents discussed possibly removing Lay’s belt and tie as he could not keep them at the courthouse; however, Lay said he preferred to keep them on until he got to the federal courthouse and inside the Marshals Service’s office.?Unlike Jeffrey Skilling, I did not drive Lay to the courthouse.?Transporting agents told me Lay talked about running, skiing and exercise.?He said he worked out everyday and been running since the 1960s when it was not so popular.?Lay stated he did not have knee problems until about 14 months previously when he hurt his knee skiing in Colorado and had to have minor knee surgery.?Lay thought we were looking for him the previous Saturday because there was a suspicious car parked in front of his residential building.?

Following Lay’s initial appearance hearing, Andrew Weissmann held a mini-press conference in front of the courthouse.?The timing could not have been worse as it was at the same time as the main press conference in Washington, D.C.?I later learned Deputy Attorney General James Comey was angry with Weissmann about his mini-press conference because of the conflict with DC.?Comey was also angry because he had previously been upstaged by former Enron Task Force head attorney Leslie Caldwell when the press highlighted her comments over Comey’s.?So, even way back then James Comey loved his time in the media and was protective of it.?

Lay was subsequently convicted on all counts in May 2006.?However, he died of a massive heart attack on the morning of July 5, 2006 while staying outside of Aspen, Colorado.?Consistent with case law in the Fifth Circuit, Lay’s indictment and convictions were vacated inasmuch as he did not have the opportunity to exhaust his appeals.?

Lay is best summarized by a here unidentified Enron employee who said, “Lay went from being a pollyanna until August 26th, to being in denial until October 16th, to being delusional.”?

Note: After more than 28 years of service, Michael E. Anderson retired from the FBI on November 30, 2017 as Assistant Special Agent in Charge of the White Collar Crime Branch in Houston, Texas. Agent Anderson previously served as Supervisor of the Enron Task Force in Houston and was awarded the Attorney General’s Award for Exceptional Service, the highest award given by the Department of Justice, for his work on the Enron case. The Enron investigation is the largest and most complex White Collar Crime investigation in FBI history and resulted in 23 convictions and over $100 million in forfeiture to the victims of the Enron fraud. Agent Anderson has spoken about the Enron investigation and Ethics across the United States and in Hong Kong.?To contact him about potential speaking opportunities, you may message him on LinkedIn.?Agent Anderson is currently conducting research for a book on the Enron case hopefully to be released in 2020.??