Almost four and a half years after Enron declared bankruptcy, a Houston jury of eight women and four men reached a consensus last Thursday. They concluded that Enron founder Kenneth L. Lay and former CEO Jeffrey K. Skilling were indeed guilty of fraud and conspiracy in the larger-than-life accounting hustle that cost thousands of workers their jobs and drained $60 billion in shareholder value. Lay was convicted on all six counts and Skilling was convicted on 19 of 28 counts.

The trial took 51 witnesses, 56 days of testimony over 16 weeks, 27 boxes of evidence, and five days of deliberations. In the years leading up to it, federal prosecutors spent endless hours and countless millions securing the guilty pleas of 16 former Enron employees. Some of these employees’ testimonies were the key to convincing jurors that Lay and Skilling were, in fact, aware of Enron’s curiouser and curiouser approach to financial accounting, despite the defendants’ blithe public proclamations and later courtroom claims to the contrary.

Both Skilling and Lay testified in their own defense, arguing essentially that Enron’s collapse was more of a classic run on the bank caused by a panicky investment climate than a deliberate fraud. They blamed CFO Andrew Fastow for any fraud that might have occurred, but insisted that they were focused on the big picture and certainly didn’t direct or know about any fraud until much later.

Skilling testified that he never signed paperwork approving Fastow’s deals and he was more focused on building new businesses. Lay said that he was “very much of a decentralized person” and a “delegator,” who didn’t even have time to read his e-mails and relied on others to do so.

But jurors said afterwards that they simply didn’t find that testimony compelling. "Both defendants said they had their hands firmly on the wheel," juror Freddy Delgado, an elementary school principal, told the media. "To say you didn't know what was going on in your company . . . was not the right thing to do."

"The jury has spoken, and they have sent a powerful message," Justice Department Task Force Director Sean M. Berkowitz told reporters. "You can't lie to shareholders. You can't put yourself above employees' interests. . . . No matter how rich you are, you have to play by the rules just like anyone else."

Skilling and Lay could face decades in prison when they are sentenced in September. The two, who have already reportedly spent $70 million on their defense, are both appealing.

“We have just begun to fight," Skilling’s attorney, Daniel Petrocelli told the media following the trial. Promising “a full and vigorous appeal,” he announced that, "We're going to take a look at everything. I know there are a number of issues we litigated hard and lost even before the trial."

Legal experts quoted in the media generally give Lay and Skilling a poor shot at successfully appealing the conviction.

Lay was also convicted of four counts of bank fraud and making false statement in a separate trial conducted following the main trial related to personal loans.

Harvey Pitt dissects the Enron verdict; http://www.forbes.com/home/ceonetwork/2006/05/25/qna-pitt-enron-cx_hc_0525dissectingtheverdict.html

A new report on mortgage lender Fannie Mae’s accounting describes “extensive financial fraud.” According to the report, prepared by the Office of Federal Housing Enterprise Oversight (OFHEO) after a 16-month investigation, the company spent six years falsifying earnings numbers so that top executives could meet earnings targets, collecting $25 million in bonuses. The total value of the fraud was $10.6 billion.

Following the report’s release, Fannie Mae agreed to pay $400 million in penalties, but did not admit or deny guilt. Now investigators will move on to more closely documenting the specific roles that current and former and current executives played in the fraud.

The report describes a board of directors that was asleep at the wheel while CEO Franklin Raines and CFO J. Timothy Howard manipulated earnings so that they could get the maximum payouts. Raines earned $90 million in compensation between 1998 and 2003. The report said he created an “unethical and arrogant culture” at the top of company.

The report also notes two transactions with Goldman Sachs Group that allowed the company to push $107 million of earnings into future years to smooth earnings targets.

As part of the settlement, Fannie Mae will have to review the conduct of its executives. Current CEO Daniel H. Mudd and current Chairman Stephen B. Ashley were on the board of directors during the entire six years of fraud. The company must also consider retroactively firing Raines and Howard, cutting them off from millions of dollars in severance compensation.

This latest report follows up a separate report released in February, which concluded that Raines and Howard “contributed to a culture that improperly stressed stable earnings growth," and that the management team Raines hired was "inadequate and in some respects was not competent."

According to that report, overseen by former Sen. Warren Rudman:

“Fannie Mae manipulated accounting,” Associated Press:

http://www.businessweek.com/ap/financialnews/D8HPOVJO0.htm?campaign_id=apn_home_down&chan=db

“A Fannie Mae Settlement Is Reported,”

By ERIC DASH and STEPHEN LABATON of the New York Times: http://www.nytimes.com/2006/05/23/business/23fannie.html

Fork it over, Fannie Mae, LA Times editorial: http://www.latimes.com/news/opinion/editorials/la-ed-fannie27may27,0,3976209.story?coll=la-news-comment-editorials

3. Allegations of stock-options backdating grow

A year after FASB finally mandated that companies list stock options as an expense, the Securities Exchange Commission and New York Attorney General Eliot Spitzer are reportedly now investigating potential illegal stock-options grant backdating at at least 22 corporations.

Backdating the grants benefits executives, because the earlier the grant date, the lower the stock price at the grant date. When executives sell their options, they get the difference between the current price and the grant date price, so they stand to benefit if options are backdated.

Last week, anti-virus software maker McAfee announced that it was in informal talks with the SEC about backdating and was conducting an internal investigation.

Other companies reportedly under investigation for illegal activity include: Caremark Rx Inc., SafeNet Inc., Vitesse Semiconductor Corp., Affiliated Computer Services Inc., UnitedHealth Group Inc., Nyfix Inc., Comverse Technology Inc., American Tower Corp., Brooks Automation Inc., Jabil Circuit Co., RSA Security Inc., Mercury Interactive Corp., KLA-Tencor Corp.

In response, the California Public Employees’ Retirement System (CalPERS) is asking companies whose stock options granting practices are under investigation for more data on how the companies are setting finance and executive pay.

“SEC looking at options backdating by McAfee,” San Jose Mercury News

Washington Corruption

The FBI last week released an affidavit describing widespread corruption the agency found in an investigation of Rep. William Jefferson (D-La.).

The FBI recorded conversations and meetings that Jefferson had with an investor in iGate, a technology company that Jefferson allegedly used his influence to help gain business in Africa in exchange for bribes. The FBI tracked Jefferson accepting $100,000 in marked bills from that investor, money Jefferson said he would use to bribe African officials. An FBI raid four days later found $90,000 of that cash in Jefferson’s freezer, wrapped in foil inside plastic food containers.

Court documents also describe videotape evidence of Jefferson passing back slips of paper back and forth at a hotel, demanding more money and describing himself as a man "in the shadows, behind the curtain," the affidavit said. On videotape, Jefferson reportedly talks of money being funneled to a bank account in his children names and then says, "All these damn notes we're writing to each other as if we're talking, as if the FBI is watching.”

Vernon Jackson, chief of iGate Inc., has already pleaded guilty and admitted to paying hundreds of thousands of dollars to bribe Jefferson and his family members so that Jefferson could use his influence to help secure contracts in Africa.

Reportedly, the FBI is also looking at "at least seven other" bribery schemes in which Jefferson "sought things of value in return for his performance of official acts." Reportedly, there are a number of companies listed under the names of Jefferson, his wife, or other relatives.

But Jefferson has remained defiant in his innocence, and he has refused to step down from his position on the House and Ways and Means Committee.

Meanwhile, House members of both parties seem largely unified in their belief that the FBI’s aggressive investigation tactics are an unconstitutional overreach that violates the separation of powers between the executive and legislative branches.

In response, President Bush sealed the seized materials for 45 days, and Attorney General Alberto Gonzales and FBI director Robert S. Mueller III both said that they would resign if they were forced to return the seized evidence. Senate Majority Leader Bill Frist (R-Tenn.) has also come out publicly in support of the raids.

According to a report in the Los Angeles Times, the Justice Department has grown much more aggressive in prosecuting public corruption, with more than 600 agents working on 2,000 investigations at federal, state, and local levels.

“The Justice Department also seems to be departing from past practice by giving largely unfettered power to investigate such cases to U.S. attorneys across the country. The result, some current and former officials said, is a sort of feeding frenzy of new cases — the strength of which is far from clear.”

"A lot of offices are smelling blood in the water," said a government official who requested anonymity because of the sensitive nature of the investigations. "Whether anything comes out of these things … is another question."

“Attorney General prepared to quit over Jefferson probe,” http://today.reuters.com/news/newsArticle.aspx?type=politicsNews&storyID=2006-05-27T061137Z_01_N26285010_RTRUKOC_0_US-CRIME-JEFFERSON.xml

5. Safavian trial gets underway

The trial of David H. Safavian, the former General Services Administration chief of staff charged with repeatedly lying to investigators looking into the doings of his friend Jack Abramoff, got underway last week. Safavian, who went to Scotland on a 2002 golf trip sponsored by Abramoff, initially told prosecutors that Abramoff had no business before the GSA.

The Safavian trial is the first or what are likely to be several surrounding the allegedly corrupt activities of lobbyist Abramoff.

Last week, prosecutors presented jurors with e-mails that showed Safavian offering advice on how Abramoff could get government properties he was seeking to acquire in between accepting invitations to play golf or to enjoy local sporting events from Abramoff’s box seats.

As the White House’s chief procurement officer, Safavian was in charge of the purchasing and leasing of government property, and Abramoff was allegedly looking to buy some government properties, one of which wanted to use for a luxury hotel, working with his tribal clients on the deal.

"Will we get an advantage if the tribe is a partner in the structure? How big a share should they have?" Abramoff wrote in an e-mail. Safavian responded: "The answer to your question is having the tribe involved will help significantly."

In opening arguments, prosecutor Peter Zeidenberg told a jury that "The defendant lied, concealed and misled" federal investigators. He promised to show "examples of concrete assistance" Safavian offered and to prove that Safavian was also in the know regarding Abramoff’s interactions with Senate staffers.

Safavian’s lawyer, Barbara Van Gelder, argued that Safavian was misled by Abramoff, and besides, Abramoff didn’t have any formal business with the GSA, and besides, "This evidence is mostly paper.”

For more, see: “Safavian Jury Is Shown More Abramoff E-Mail,”

By Susan Schmidt, Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2006/05/26/AR2006052601856.html

“Safavian Lied About Dealings With Abramoff, Prosecutor Says,”

By Jeffrey H. Birnbaum: http://www.washingtonpost.com/wp-dyn/content/article/2006/05/24/AR2006052400349.html

With public corruption continuing to dominate the headlines, we need to keep pushing for the most important reform – clean elections. It’s time to end the ridiculous policy whereby candidates continually have to pander to special interests and lobbyists in order to have the money they need to run a competitive campaign.

Already seven states and two cities have passed Clean Election campaign reform. But if we’re going to clean up Washington, we need for Congress to pass such a reform. Let’s keep the pressure on.

As this week’s Action Item, please either contact your members of Congress directly about the importance of Clean Elections, or at least sign Public Campaign’s petition demanding clean elections at: http://ga3.org/campaign/CleanElectionsA

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1. Skilling, Lay convicted of fraud, conspiracy

3. Allegations of stock-options backdating grow

“SEC looking at options backdating by McAfee,” San Jose Mercury News

5. Safavian trial gets underway

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