SC Lawyer, July 2006, #4. Enron and you.

• Author: By John Freeman

South Carolina Lawyer

Ethics Columns.

SC Lawyer, July 2006, #4.

Enron and you

South Carolina LawyerJuly 2006Enron and youBy John FreemanKen Lay and Jeffrey Skilling's recent convictions guarantee that, absent appellate reversals, each will spend most or all of his remaining years behind bars. That two former corporate management titans will soon be eating at government expense is a spectacle many ethics teachers are studying. What lessons does Enron's demise hold for us? The answer is, "many."

First and foremost, what Enron teaches is that hubris is not only ill-becoming, it is a dangerous personal quality. "Hubris" is a great word. According to online authority Wikipedia, it connotes "exaggerated pride or selfconfidence, often resulting in fatal retribution." Hubris, in other words, is arrogance that invites punishment.

Wise people, including accomplished lawyers, do not exude hubris. The most respected professionals tend to be those who have earned great esteem but are blessed with the humility to present themselves to all as genuinely warm, caring and approachable. What goes around tends to come around in the legal profession, and prima donnas tend to get theirs eventually.

Ken Lay, it turns out, was two-faced. The conventional wisdom was that Lay supposedly presented himself to others as a folksy, down-home guy. Court observers thus expected him to charm the jury. Unfortunately for him, Lay had another, less publicized side to his personality. Lay could be self-absorbed. The jury saw through the good-old-boy act, confronting instead a rich, self-centered man "who drank his coffee only from a particular kind of china cup, [who] had a company plane's interior repainted during a layover because he didn't like the color, [and who] in myriad ways he suggested that rules were for lesser beings." Mimi Swartz, The Three Faces of Ken Lay, New York Times, available at www.nytimes.com/2006/05/21/opinion/21swartz.html?_r=1&oref=slogin.

Another Enron teaching relates to the time-honored obligation to follow talk with consistent actions. Enron featured an impressive set of written ethics rules, administered at the top by Lay and Skilling. Page 12 of Enron's Code of Ethics was entitled "Business Ethics." Among the defunct company's lofty ethical precepts found on page 12: "Relations with the Company's many publics-customers, shareholders, governments, employees, suppliers, press and banks-will be conducted in honesty, candor and fairness." The jury evidently found Lay and Skilling short on "honesty and candor" once they took the witness stand.

Immediately following Lay and Skilling's convictions, I had an e-mail conversation with Loren Steffy, a newspaper reporter who closely followed the Lay-Skilling trial for the Houston Chronicle. I asked him to comment on the prosecution's strategy and execution. His take was interesting. He said the prosecution did a beautiful job of steering clear of the wildly complicated accounting issues, focusing instead on the lies the defendants told or suffered to be told. In other words, in the biggest and most complicated business fraud case ever, the prosecution won by following the KISS rule. The prosecution counted on the jury smelling out the lying, and the jury came through.

For transactional lawyers Enron's demise is a wake-up call. Surely one of the most disquieting aspects of Enron's collapse and Lay and Skilling's convictions is the reality that no fraud that big and intricate could have been pulled off without the active connivance of well-paid and impressively credentialed lawyers. We all know lawyers are amongst American society's most well recognized scapegoats, most particularly the trial lawyers. Indeed, according to one report, "Fortune 1000 companies spend a fortune on legal fees, averaging $12 million a year on litigation costs." Michael Keating,

Excess of Lawyers is a Costly Problem, Crain's Cleveland Business, April 25, 2005, at 10, available on Lexis, News Library, Curnws database. Doing the math suggests a drain of $1.2 billion annually for America's largest companies.

Truly, $1.2 billion is a lot of money, but $60 billion is a bigger fortune, and $60 billion is the market capitalization that disappeared when Enron, one company, tanked. That enormous economic loss was not caused by trial lawyers. Rather, it was set up and aided and abetted by transactional lawyers, conniving accountants and wayward investment bankers. Each of these service providers failed ethically. Like Lay and Skilling, each failed accurately and honestly to assess the reality that Enron's business operation was a huge sham. So complete was the self-deception that Lay and Skilling testified fervently Enron was a healthy, vibrant company right up to the minute it filed bankruptcy. The jury saw a different Enron.

Any lawyer serving a business client (or, really, any other client) needs always to be alert to the possibility of client fraud. Aiding and abetting gives rise to joint and several liability and is a fearsome deterrent. Corporate service providers risk punishment for disregarding red flags that are there to be seen. See, e.g., In re WorldCom Securities Litigation, 346 F.Supp.2d 628, 672-73 (S.D.N.Y. 2004) (discussing concept of "red flags" in fraud cases).

Of course, aiding and abetting fraud is unethical for lawyers. See SCACR 407, Rules 1.2(d), 4.1, 8.4(a) & (d). Stated differently, "If somebody must go to jail, make sure it's the client and not you." Ken Lay and Jeff Skilling ignored this precept, and now they will pay the price.