The Enron Effect

Enron's stock price was up 36% last week, despite the news that founder Ken Lay and former CEO Jeff Skilling had been convicted of lying to investors and employees as the company sank into bankruptcy in 2001. Can't find this heady little stock on the N.Y.S.E.? Try looking on the "pink sheets," where Enron is now a penny stock listed as ECSPQ.PK. The once mighty energy firm, which traded at $90 a share six years ago, is selling for 15¢, up 4¢ on the day after the verdicts. It would be laughable if so many people hadn't lost so much--stockholders lost $60 billion in market value, long-serving employees lost more than $2 billion in pension money, and 5,600 people lost their jobs.

Today not much is left of the pipeline company that Lay, the preacher's son from Missouri, turned into a high-flying purveyor of wind and water, electricity and energy emissions and, ultimately, hot air. Billionaire investor Warren Buffett now owns the Big E's biggest pipeline. Texan T. Boone Pickens has replaced Enron as the nation's biggest energy trader. A holding company that operated Enron's international assets last week sold off 15 pipelines and power plants, from Bolivia to Turkey.

After a four-year investigation, 16 weeks of testimony and less than six days of deliberations, a jury of eight women and four men decided the decline and fall of Enron weren't just bad press and bad luck, as the two had claimed. The rot came from within. For all the Porsches parked in the company garage, it turns out Enron didn't have much in the bank. Forensic auditors have discovered that cash flow in 2000--the money left over after the bills are paid--was a negative $153 million, not the heady $3 billion claimed. The nearly $1 billion profit was bogus. (Forget 2001. Even the auditors couldn't fathom the books that year.)

The jury found that Lay criminally touted the stock even after whistle-blower Sherron Watkins gave him her famous memo in August 2001 warning that Enron's accounting was deeply flawed; Skilling had quit only days before. Both men were found guilty on every charge of fraud and conspiracy in the indictment--six against Lay, 13 against Skilling. While Skilling was acquitted on nine charges of insider trading, he and Lay were also convicted on various other charges involving stock sales and audits. The 64-year-old founder faces up to 165 years of hard time; Skilling, 52, is up against a possible 185 years.

Sam Buell, an early member of the Enron Task Force, remembers how difficult it was to assemble a case back in January 2002--a month after the company's bankruptcy and with the suicide of Enron's vice chairman Cliff Baxter seared into everyone's conscience. "Enron was the 9/11 of the financial markets," says Buell, now a visiting law professor at the University of Texas, "but nobody wanted to be a witness." Slowly, the task force's prosecutors turned the screws on the bad guys. But it was early 2004 before they had enough "serious momentum" to indict Skilling. CFO Andrew Fastow and 15 others turned state's evidence in plea deals. Lay was indicted in July 2004.