Enron prosecutions and SEC cases

analysisThe FBI’s account of the case states that the multi-agency Enron Task Force, combining investigators and analysts from the FBI, the IRS Criminal Investigation Division and the SEC with DOJ prosecutors, conducted a five-year investigation in which twenty-two people were convicted, including Enron’s chief executive officer, president/chief operating officer, chief financial officer, treasurer, chief accounting officer and heads of business units. The FBI adds that tracing of hundreds of bank and brokerage accounts supported the seizure of more than $168 million in assets, and that more than $105 million was forfeited to help compensate victims. ¹

analysisOfficial tallies of the prosecutions changed over time. A Senate Permanent Subcommittee on Investigations staff report of December 11, 2002 noted that Andrew Fastow had been indicted and that Michael Kopper and the trader Timothy Belden had pleaded guilty. The DOJ reported twenty-six individuals charged, including 19 former Enron executives, on October 30, 2003; the same number charged on January 14, 2004, with seven people and Arthur Andersen LLP convicted and more than $93 million in criminal proceeds restrained; twenty-nine charged on May 6, 2004, including 20 former executives, with ten people and Andersen convicted, two sentenced to jail and more than $150 million restrained; and thirty-one defendants charged on July 8, 2004, including 21 former executives, with eleven convicted, among them Fastow and former treasurer Ben Glisan, and more than $161 million restrained. The U.S. Supreme Court reversed Arthur Andersen’s conviction on May 31, 2005. ^{2 3 4 5 6 7}

analysisAndrew S. Fastow pleaded guilty on January 14, 2004 to two counts of conspiracy to commit securities and wire fraud. On May 25, 2006 a federal jury in Houston convicted Kenneth L. Lay on all six counts with which he was charged at trial and Jeffrey K. Skilling on 19 of the 28 counts pending against him, both having maintained at trial that there had been no fraud at Enron and that negative publicity and diminishing market confidence caused its collapse; Lay died on July 5, 2006 and a federal judge voided his conviction in October 2006, while Skilling, after the U.S. Supreme Court on June 24, 2010 vacated the Fifth Circuit’s ruling on his conspiracy conviction, waived further challenges to his convictions under a May 2013 sentencing agreement and was resentenced. ^{2 8 9 10 11 12}

analysisRichard A. Causey, Enron’s former chief accounting officer, was indicted in January 2004; a superseding indictment of July 7, 2004 joined Kenneth L. Lay to the case against Causey and Jeffrey K. Skilling and added a money-laundering conspiracy count and four money-laundering counts against Causey relating to fraudulent hedging vehicles. On December 28, 2005, before the jury verdict of May 25, 2006 against Lay and Skilling, Causey pleaded guilty to one count of securities fraud before Judge Sim Lake of the U.S. District Court for the Southern District of Texas. He admitted conspiring with members of Enron’s senior management to make false and misleading statements about Enron’s financial condition in SEC filings and analyst calls. The plea agreement called for seven years in prison, reducible by up to two years for full cooperation, forfeiture of $1.25 million and surrender of any deferred-compensation claims against Enron. ^{1 2 3 4}

analysisOn November 15, 2006 Judge Sim Lake sentenced Causey to 66 months in prison on the securities fraud count; under his plea agreement he also agreed to forfeit $1.25 million to the government, pay a $25,000 fine and give up any deferred-compensation claims against Enron. A press report of the same day, citing a wire service, said that the sentence of five and a half years was below the seven years Causey had earlier agreed to, possibly reflecting his cooperation with prosecutors, put the deferred compensation he gave up at about $250,000, and reported that he was one of the only former Enron executives who did not keep some money for himself from the illegal transactions; that account is not an official record. ^{5 6}

analysisIn a complaint filed on January 22, 2004 (SEC v. Richard A. Causey, No. H-04-0284, S.D. Tex.) the SEC alleged that Causey and others manipulated Enron’s reported earnings, including by manipulating the merchant asset portfolio, improperly using off-balance-sheet special purpose entities, manipulating segment reporting to conceal losses at Enron Energy Services, manipulating expenses to conceal losses at Enron Broadband Services and manipulating wholesale trading reserves to conceal earnings volatility and losses. Causey consented to judgment without admitting or denying the allegations. On February 8, 2007 the court entered a consent final judgment permanently enjoining him from violating the antifraud, periodic reporting, books and records and internal control provisions and permanently barring him from serving as an officer or director of a public company; he also consented to an administrative order barring him from appearing or practising before the SEC as an accountant. The SEC’s release states that his criminal plea included forfeiture of a total of $1.5 million, whereas the DOJ’s plea and sentencing releases give $1.25 million. ^{7 5}

analysisAccording to the SEC’s August 2002 complaint, Michael J. Kopper held various positions at Enron from approximately 1994 through July 2001, for most of that time reporting to Enron’s chief financial officer. A December 2002 Senate staff report called him Fastow’s key assistant, and a 2007 press report described him as a former managing director of Enron Global Finance and a top lieutenant to Fastow. ^{1 2 3 4}

analysisOn August 21, 2002 Kopper pleaded guilty in Houston to an information charging a conspiracy, described by the DOJ as conspiracy to commit wire fraud and money laundering, from 1997 through July 2001 with others inside and outside Enron, including Enron’s chief financial officer, through three schemes, RADR, Chewco and Southampton, that kept Enron investments off its balance sheet; he cooperated with the government’s investigation. The same day he settled the SEC’s fraud action (No. H-02-3127, S.D. Tex.) without admitting or denying the allegations, accepting a permanent injunction and an officer and director bar and agreeing to disgorge and forfeit approximately $12 million, which also satisfied the criminal forfeiture. Kopper’s sentence is known only from a press report: a January 31, 2007 report, citing a Houston newspaper, stated that U.S. District Judge Ewing Werlein Jr. had sentenced him the previous autumn to 37 months in prison, against a possible 15-year sentence, after prosecutors urged leniency because of his cooperation, and that he had reported to prison that week. The sentencing judgment is not among the retained records. ^{4 5 6 3}

analysisOn September 10, 2003 former Enron treasurer Ben F. Glisan, Jr., named in 26 counts of the superseding indictment of May 1, 2003, pleaded guilty before Judge Kenneth Hoyt in Houston to conspiracy to commit wire and securities fraud and was immediately sentenced under his plea agreement to 60 months in prison and three years of supervised release; he agreed to forfeit $938,000 and not to seek a refund of approximately $412,000 in income taxes. Glisan admitted that as treasurer he and others conspired to falsify Enron’s reported results, including through the Talon (Raptor I) structure in 2000. A press report of the same day said that the five-year sentence made him the first Enron executive to go to jail and quoted the head of the DOJ’s Enron Task Force as saying that the plea agreement and jail term sent a strong message to other people; that characterization is the press report’s, not an official record. ^{5 7}

analysisThe same day the SEC charged Glisan (SEC v. Ben F. Glisan, Jr., No. H-03-3628, S.D. Tex.) with antifraud, lying-to-auditors, periodic-reporting, books-and-records and internal-controls violations, alleging that he took part in transactions designed to inflate Enron’s earnings and operating cash flows while concealing its debt, including the Raptor sham hedges used to avoid earnings write-downs of over $1 billion, the sham “sale” of an interest in Nigerian barges to Merrill Lynch and prepay transactions that were loans disguised as commodity sales contracts. Glisan consented, without admitting or denying the allegations, to a final judgment permanently enjoining him from further violations and to an officer and director bar. ⁸

analysisLea W. Fastow, a former Enron assistant treasurer and Andrew Fastow’s wife, faced felony charges before her plea. A September 2003 DOJ release states that she was charged in May 2003 with conspiracy to commit wire fraud, money laundering conspiracy and filing false tax returns, while a July 2004 press report refers to six felony tax and conspiracy charges filed in April 2003 and adds that she had left Enron in 1997, before most of the schemes were devised; the two sources give different months, and the indictment itself is not among the retained records. On January 14, 2004 the DOJ announced that she had agreed to plead guilty before Judge David Hittner in Houston to filing a false joint tax return for 2000 that omitted income from a partnership related to Enron. With an estimated guideline range of 10 to 16 months, the parties agreed to recommend a sentence at the low end, which would allow a split sentence of five months’ incarceration and five months’ home confinement. Her felony charges were dismissed under the cooperation agreement on which she was sentenced in May 2004. ^{1 2 3 4}

analysisOn May 6, 2004 Judge David Hittner sentenced Lea Fastow to one year in jail followed by one year of supervised release after she pleaded guilty to one misdemeanor count of filing a false federal income tax return; the court rejected the parties’ joint recommendation of a split sentence. The government accepted the misdemeanor plea as part of a cooperation agreement, and she relinquished any claim to almost $30 million in forfeited funds seized by the Enron Task Force in May 2003 for the benefit of victims of the fraud. A July 2004 press report states that she surrendered that month to begin her year in prison at a federal detention facility in Houston. ^{3 2}

analysisJeffrey McMahon was Enron’s treasurer from April 1998 through March 2000, according to the SEC’s June 2007 complaint; the examiner’s third interim report dates his replacement by Glisan to February 2000, when he moved to Enron Industrial Markets. McMahon replaced Andrew Fastow as Enron’s chief financial officer on October 24, 2001, later served as president and chief operating officer, including after the December 2001 bankruptcy filing, and on April 19, 2002 announced his resignation effective June 1, 2002. He was also the defendant in Official Employment-Related Issues Committee v. McMahon (In re Enron Corp.), 316 B.R. 251 (2004), an action to avoid preference and constructive fraudulent transfers. As a July 25, 2005 opinion of the U.S. Bankruptcy Court for the Northern District of Texas recounted, the court in that case declined to stay the avoidance action despite McMahon’s concern about his Fifth Amendment privilege, the plaintiff having agreed to defer any claim involving his intent regarding the transfers. ^{1 2 3 4 5}

analysisOn June 20, 2007 the SEC charged McMahon (SEC v. Jeffrey McMahon, No. H-07-2051, S.D. Tex.) with violating the antifraud provisions and aiding and abetting Enron’s reporting and record-keeping violations. The SEC alleged that he took part in the purported sale of an interest in Nigerian power barges to Merrill Lynch, which an oral side agreement by McMahon and others left without transfer of risk, allowing Enron to report $12 million of earnings in the fourth quarter of 1999 improperly, and that as treasurer and later as chief financial officer he made false and misleading statements to credit rating agencies about Enron’s cash flow, failing to disclose the contribution of structured financings. McMahon settled without admitting or denying the allegations, agreeing to a permanent injunction, a five-year officer and director bar, $150,000 in disgorgement and prejudgment interest, a $150,000 civil penalty, and suspension from appearing or practising before the SEC as an accountant with a right to reapply after three years; his attorney said he appreciated the opportunity to put the matter behind him. ^{2 4}

analysisOn October 30, 2003 David W. Delainey, former chief executive officer of Enron North America and Enron Energy Services, pleaded guilty before Judge Kenneth Hoyt in Houston to a one-count indictment charging insider trading, agreed to cooperate and to forfeit more than $4.25 million in net proceeds. He admitted knowing of and participating in aspects of a scheme by Enron’s senior managers from at least 1998 through late 2001 to deceive investors, including improper reserving of earnings and the use of one unit’s California trading profits to conceal another unit’s losses, and selling Enron stock for net proceeds of $4,256,006.67 between January 10, 2000 and January 11, 2001 on the basis of material non-public information. The same day the SEC charged him with violating the antifraud provisions (Litigation Release No. 18435), alleging that he and others manipulated Enron’s reported earnings through reserve accounts, concealment of losses, inflation of asset values, fraudulent hedging devices and improper accounting techniques, and that he sold large amounts of Enron stock while in possession of material non-public information. Delainey settled without admitting or denying the allegations, agreeing to a permanent injunction, an officer and director bar, nominal disgorgement of $100 and a civil penalty of approximately $3.74 million. ^{1 2 3}

analysisOn September 18, 2006 Delainey was sentenced to 30 months in prison on one count of insider trading; the same DOJ release reported that another former Enron executive had been sentenced on September 15, 2006 to four years of probation and a $10,000 fine on one count of conspiracy to commit securities fraud. A February 28, 2006 press report on the trial of Lay and Skilling stated that Delainey testified that he reluctantly went along with a Skilling-approved plan to move the trading arm of Enron Energy Services into the larger wholesale trading business to hide $200 million in losses, that Enron wrongly dipped into reserves to meet and beat earnings targets under pressure from Skilling, and that at Enron it was “standard operating procedure” to be “pretty fast and loose” with the rules. That testimony is not a finding, and the defence contested the prosecution’s case: the defendants maintained that there had been no fraud at Enron. ^{4 5}

analysisOn July 29, 2008 the SEC filed a civil action (SEC v. Lou L. Pai, No. H-08-2338, S.D. Tex.) against Lou L. Pai, former chairman and chief executive officer of Enron Energy Services, alleging that between May 18 and June 7, 2001, shortly before leaving Enron, he sold 338,897 Enron shares and exercised options resulting in the sale of 572,818 more after learning of substantial contract-related losses at EES; had those losses been reported, the segment would have shown a first-quarter 2001 loss of at least $60 million instead of the reported $40 million profit. Pai settled the same day without admitting or denying the allegations, consenting to a final judgment permanently enjoining him from violating Section 10(b) and Rule 10b-5, barring him from serving as an officer or director of a public company for five years and requiring $30 million in disgorgement and prejudgment interest, subject to a $6 million offset for his earlier waiver of insurance coverage for the benefit of Enron investors, plus a $1.5 million civil penalty. A later press report states that he was never charged criminally in the Enron matter. ^{6 7}

analysisA July 30, 2008 press report on the settlement said that the SEC described it as one of the largest ever with an individual for alleged insider trading, that Pai would pay the remaining $25.5 million, after credit for $6 million of forfeited insurance coverage, into an SEC-administered fund for injured Enron shareholders, and that he had sold nearly $300 million of Enron stock before leaving the company in mid-2001; the $300 million figure is the publication’s own and does not appear in the SEC’s release. Pai’s attorney said Pai was pleased to conclude the matter in a settlement involving no admission of wrongdoing. ⁸

analysisOn May 1, 2003 the SEC filed an amended complaint charging executives of Enron’s broadband subsidiary, Enron Broadband Services (EBS), with fraud and insider trading; it named seven defendants, two of whom the SEC had first charged on March 12, 2003. A related criminal indictment, as described by the DOJ in September 2003, charged two EBS executives together with the unit’s former chairman, its former president and co-chief executive, its former chief operating officer and two former senior vice presidents with a long-running scheme to defraud investors through false statements and press releases about EBS’s financial condition. These were charges and allegations; outcomes for most of these defendants are not in the retained records. The SEC settled its civil fraud charges against the former EBS chairman on July 30, 2004 and against the former chief operating officer on August 31, 2004. A June 2007 press report states that the former head of the broadband unit pleaded guilty to securities fraud and was sentenced to 27 months in prison. According to the government’s brief as quoted in the Supreme Court’s opinion in Skilling v. United States, the jury in the Hirko case deliberated for several days and did not convict any Enron defendant. ^{1 2 3 4}

analysisIn June 2002 the Justice Department charged three former British bankers of National Westminster Bank Plc (NatWest) with wire fraud in an alleged $7.3 million scheme involving Enron, and in September 2002 a federal grand jury in Houston indicted them for wire fraud in a scheme involving the Southampton special purpose entity. The SEC’s August 2002 complaint against Kopper alleged that in about February 2000 Kopper, the three NatWest bankers and others caused Enron to buy NatWest’s interest in LJM Cayman partnership assets for $20 million while paying NatWest only $1 million, and that the three bankers received approximately $7.3 million. These are charges and allegations. A press report of August 2002 stated that none of the three bankers was yet in custody; the retained records contain no later plea, trial or sentencing record for them, so their outcome is not shown. ^{2 5 6 7}

analysisThe SEC’s Enron enforcement index also lists actions against other former Enron employees: a former chief accounting officer of Enron North America, charged with fraud on October 9, 2003; an investor-relations official (May 19, 2004) and the former executive vice-president and director of investor relations (August 25, 2004); two former executives charged on February 7 and February 8, 2005; a former Enron accountant and a former Enron attorney who simultaneously settled charges filed on March 27, 2006; two former in-house lawyers charged with securities fraud and related violations on March 28, 2007, with a further litigation release and administrative proceedings against them on January 26, 2009; and two former executives who settled civil fraud charges on August 6, 2007. ¹