Getting Lay:

Sometime in mid-January, the worm turned for Enron executives. You could see it in the way George W. Bush raced to distance himself from his friend Kenneth L. Lay, like Prince Hal denouncing Falstaff: "I know thee not, old man. Fall to thy prayers." And it's beginning to look as if Lay, the recently resigned chairman and CEO of the energy trading corporation, may have need of prayer. Calls for criminal prosecution of Enron heads have begun to sound—and remarkably, free-market conservatives, including one formerly on the Enron payroll, have been the first to raise their voices.

"Jail 'em. All the Enron and Arthur Andersen principals and then some," wrote National Review economics columnist Larry Kudlow. "Why? To save our system of corporate governance, which used to be the best in the world." The fact that Kudlow himself was in the process of disclosing some $50,000 in consultant's fees from Enron made the denunciation all the more striking.

The case against Lay and other Enron executives, particularly former CEO Jeffrey Skilling and former CFO Andrew Fastow, would likely center on two recent revelations. First, there's the matter of document shredding on the part of both Arthur Andersen and Enron. Evidence of such activity could support an obstruction-of-justice charge. Second, and perhaps more gravely for Enron chiefs, an August communiqué from Vice President Sherron Watkins reportedly warned Lay that the company might "implode in a wave of accounting scandals." Lay dumped some of his own Enron stock shortly after receiving that letter—and yet, in a September online chat, he told employees that company shares were an "incredible bargain." If Lay and other Enron execs had personally acted on the basis of concerns like Watkins's but kept them concealed from shareholders (including employees), they could be convicted of securities fraud.

Before Watkins's "smoking gun" letter leaked out, it might have been possible to believe that Lay was, as he was fond of claiming, merely a company figurehead. Sure, he had great political connections; but of course he wasn't aware of Enron's dealings through offshore partnerships like "Raptor" and "Jedi II." (Andrew Fastow must have liked John Williams soundtracks.) Now, this tale really strains credulity. But does that mean that Lay and other members of the Enron team can really be brought up on charges? Enron's executives cannot be presumed guilty, and we must remember that we've only begun to hear their side of the story. The facts of the case are not all known; more spill out every day in congressional and other investigations. Nor is it possible to predict how federal prosecutors at the Department of Justice (to say nothing of investigators at the Securities and Exchange Commission) will ultimately decide to pursue Enron's principals.

Nevertheless, it's probably safe to assume that there will be a serious Enron dragnet and that it will muster politics and outrage in equal measure. "It seems to me that letting Lay off with a plea or an easy settlement is not as likely as it might be in another case," observes Lawrence Mitchell, a corporate-law professor at George Washington University and author of the recent book Corporate Irresponsibility. "Essentially, this is almost the corporate equivalent of the O.J. trial."

Lay presumably knows that. On the same day that Kudlow was calling for incarceration, The New York Times ran a cover story interviewing Lay's attorney, Earl J. Silbert, who tried to explain away the appearance of wrongdoing on his client's part. When Lay sold Enron shares late last year, Silbert explained, he was merely trying to raise cash to pay off loans from his own company. In fact, said Silbert, Lay was optimistic about Enron's future at the time.

It sure sounds like Silbert wants to head off insider-trading charges, which, according to Mitchell, are the "principal way" federal prosecutors might hope to nab Lay. Such charges could entail up to 10 years in prison and a fine of $1 million; additional civil damages could cost far more. About Silbert's spin, Mitchell comments: "Whether or not Lay was optimistic about Enron . . . , his team was not. His obligation to the market was either to disclose that information or to refrain from trading."

The relevant law here is the 1934 Securities Exchange Act, which contains several securities fraud provisions, including a two-pronged statute that prohibits both insider trading and misdisclosure (concealing or misrepresenting the company's financial status). The two offenses are closely linked: Insider trading involves acting on undisclosed information, whereas misdisclosure enters the picture when executives mislead their shareholders. Because they were trading stock in their own company, Enron execs like Lay could be vulnerable on both counts. These are not easy charges to prove, however. For a criminal conviction, the prosecutor has to establish willful intent (in a civil case, recklessness). The trouble then becomes pinning down the defendant's mental state at a given time, perhaps even on a given day—the day that Lay received the Watkins memo, for instance. "If the executives can demonstrate that they were out of the loop or misled by a subordinate such that they honestly believed, if somewhat foolishly, that there was nothing bad going on, they may have a defense," says Donald Langevoort, a securities-law expert at the Georgetown University Law Center.

Still, federal prosecutors have tried-and-true methods for proving intent. They can offer immunity to key players—in this case, perhaps document shredders or Enron's second tier of corporate management—in exchange for their cooperation with the criminal probe. The real fun could come in when prosecutors turn to Arthur Andersen's and Enron's underlings and get them to rat out higher-ups, resulting in back-stabbing, recriminations, wire-wearing, and the like. As John Aisenbrey, a former assistant U.S. attorney, told the Kansas City Star recently: "If I were prosecuting this case, I would use the threat of indicting Arthur Andersen itself to crack open the case against the Enron people."

Prosecutors can also throw a wide range of lesser charges at the little fish in order to reach the big ones. The obstruction-of-justice front may be "spiciest," according to Stanford Law School's white-collar-crime expert Robert Weisberg. "The shredding of documents is simply the most dramatic fact right now before the public," he says, "and it's the least legitimately explainable thing that anybody did." Prosecutors would have to trace the destruction of files back past the people who actually did the dirty work and pin it on those who ordered it.

Other possible charges include catchalls like wire and mail fraud (which "just cover an incredible variety of things," says Weisberg). These could probably be used against executives or underlings. Prosecutors could even invoke the Racketeer Influenced and Corrupt Organization Act and threaten Enron peons with severe penalties unless they sing like canaries. It all depends on how proactive and dogged prosecutors want to be—and that's a political question. "There's a pretty good laundry list to choose from" when it comes to criminal charges, notes Lawrence Mitchell. "And even if Lay gets away without criminal convictions, I cannot believe that there aren't some accountants at Arthur Andersen that wind up in jail."

Is there a chance that Lay will get away without criminal convictions? If your vindictive juices are starting to flow, you might want to take pause. Langevoort says that he would be "shocked" if we didn't see criminal charges against Enron heads, in addition to a wide range of civil suits; but he warns that the end result could easily be settlements all around, "with self-serving statements by both sides saying that 'we were confident that we would win, but we wanted to put this behind us.'" After all, many such settlements followed the savings-and-loan scandals of the 1980s. And we can be sure that Enron will have the best lawyers money can buy.

Ironically, the main thing blocking such a lukewarm outcome could be the Bush administration. The White House just might feel obligated to convince us that it was never soft on Enron. (Consider it a sort of Larry Kudlow effect writ large.) Letting Lay and his cronies take the fall might help to insulate the Republican Party from more sweeping criticism. There's also the sheer size of the Department of Justice task force charged with pursuing the Enron affair; attorneys from Washington, D.C., to San Francisco, including a Houston-based field office, are already on the case. Congress and the SEC have launched their own investigations. Revelations from private suits—scores have already been filed—could end up filtering into criminal ones. With this many lawyers and investigators turning the ground, a lot of evidence will emerge. To what extent it will bear on Lay and his cohorts remains a question, of course.

Sure, it's speculative. But the potential drama and magnitude of Ken Lay's criminal prosecution inevitably brings another momentous case to mind: that of Michael Milken, the so-called junk bond king of Drexel Burnham Lambert. Taken down on charges of securities fraud in 1990, Milken served two years in jail and paid a $1-billion fine. In a recent op-ed in The Philadelphia Inquirer titled "Punish the real Enron villains: The top executives," the University of Pennsylvania corporate-law professor and bankruptcy expert David Skeel noted "eerie similarities" between the collapses of Drexel and Enron.

As Skeel sees it, "Michael Milken invented the junk bond, and along with Drexel rode that to very high highs. And at the point where the early wave was cresting, and Drexel was no longer the only game in town, all the criminal stuff came up." Likewise with Enron: "Enron pioneered the idea of trading energy. It was the only game in town, had enormous early success; then encountered competition, had a little more trouble maintaining its profit levels"—and started to bend the rules.

The chief difference is that Lay and friends were officers of the company whose stock they may have illegally traded; Michael Milken wasn't. But when it comes to prosecution, the goal is to connect the dots between individuals and actual crimes. In that sense, the Enron executives' proximity to the alleged crime scene probably doesn't hurt. If anything, it may make the case against them easier to prove.