This is a transcript of the October 14, 2001 Enron analyst conference call. There was a cute story about this call. Jeff Skilling had resigned as CEO of Enron Corporation, and was in Fredricksburg, Texas with his brother on vacation. He and his brother were in the car listening to the call and Jeff was very pleased with the results of the call. Of course, only two weeks later, Andy Fastow would be fired and the mudslide would begin.
Monthly Archives: January 2010
What we have here is an Enron Online Management Report from July 17-27, 2001. Bliss yourself out.
In 2007, Sherron Watkins was still making a go of her company which presumed to tell other companies how to be ethical. This, coming from an admitted insider trader. Anyway, I got my hands on one of her presentations, and am now sharing it with the world.
This is truly a fascinating document. While pleading guilty, Rick Causey’s attorney makes the point that Causey believed he was following GAAP and acting ethically. I support Rick Causey; he is not guilty. Not under any interpretation of the law, not of acting unethically, not of anything. He is a stand-up guy.
Download the transcript of Causey Sentencing and watch your understanding of the Skilling/Lay case explode into a million silvery shards.
Check out Kirkendall’s post on the DOJ’s response to Jeff Skilling’s appeal to the Supreme Court. Color me amazed that the DOJ is basically confining it’s case to statements made regarding Enron Broadband Services and Enron Energy Services.
It couldn’t be because the EBS case is the only case with a defendant who refuses to take a plea, could it?
A usual thorough job by Kirkendall, complete with the actual DOJ reply.
Almost every executive accused of crimes was accused of insider trading; it was like a tax for working there. Prosecutors believed it was an easy allegation to make; executives, by virtue of their position, do have insider information, and many did sell. Because the stock did so well for so long, and since, their theory goes, everyone and every project was corrupt from the C-Suite to the mail room, insider trading must have been part of the bundle of malfeasance.
After reading various indictments, however, from Broadband to Corporate, it would appear that the prosecution believes that people sell their stock while it is rising. Some do, I suppose, but if you’re trading on insider information, usually that means you know some material information which will force the stock to decline, thus you save yourself the expected loss. A good example of this is Martha Stewart, who – the theory goes – sold when her friend, the CEO of ImClone, told her that they did not receive FDA approval for an experimental drug and thus, the stock would decline. Stewart sold her stock on the information that nobody else had, and avoided a sharp decline in the value of her stock. That’s what the prosecution says, and I frankly tend to doubt it, but the example is a pretty classic case of insider trading.
Yet if you read what the executives at Enron did, it was generally the exact opposite – they sold when the stock was still rising. Imagine a case in which I told you to sell Cara Ellison Corp. stock because tomorrow we’re announcing a cure for cancer.
Would you sell? If you were wise, no, you’d hold on to those puppies because they’re about to make you a lot of money. In this case, my insider tip to you is worthless. You’re not about to do anything at all but watch your bank account get fat.
Prosecutors can not convict a defendant for declining to sell his stock as stock rises. Yet it appears that in the cases of Jeff Skilling, Ken Rice, Ken Lay, Cliff Baxter, Rex Shelby, Joe Hirko, and Scott Yeager, they all sold when they were still making money. (Sidebar: Ken Rice did make one trade illegally – when Skilling revealed that he was going to leave. But Rice was not convicted of that and it is worth noting that Rice did not dump all his stock – just some.) Most executives wanted to diversify their portfolios. Even Ken Rice said that 80% of his fortune was tied to Enron. It makes sense to diversify (just ask those poor, helpless Enron employees whose retirements accounts vanished because they were too stupid to spread their retirement income over several investments.)
I would like to explore Jeff Skilling’s September 14 stock sale a little more.
On August 14, 2001 Jeff Skilling left Enron.
Almost a month later, on September 6, Jeff called his broker and asked to sell some stock. If he was trading on insider information, as the DOJ alleges, why did he wait a month after he left to sell on insider information? The DOJ alleges that his “insider information” was that Enron was corrupt (ie, the “secret side deals” with LJM.) If indeed that was true, why not start dumping it while he was still CEO? His indictment alleges that the conspiracy was hatched in September 1999. So why did he buy so much stock during the period between September 1999 and August 2001, only to decide to sell it after he’d left. If he knew it was a “house of cards”, why not sell it on August 15? August 14 was a Tuesday, his broker was open, but he didn’t sell anything. He did not sell on Wednesday. Not on Thursday, or that Friday. Instead, he waited three weeks, in which time the stock was in freefall. Why? WHY NOT SELL ON HIS SUPPOSED INSIDER INFORMATION during those weeks? Why wait?
In any case, he was not able to sell because his broker needed confirmation that he was no longer an executive of the company, and thus the sale did not have to be reported.
Skilling said okay and hung up. The next day, Friday, September 7, 2001, his broker received the confirmation he needed. Yet Skilling did not call him back. He did not call him over the weekend with an urgent appeal to sell first thing on Monday. He did not call him back on Monday. On Tuesday, September 11, 2001, the markets closed. On the first day the markets were open again, September 17, he called and sold a much larger block of stock than he had originally planned. Why? Because all the markets were tanking. He still did not sell all of his stock. He sold some. If Skilling possessed insider information about a conspiracy at Enron, September 11, 2001 would have been a fine opportunity to sell off most of the stock. But he didn’t.
After September 17 – his last Enron stock sale – he still netted more Enron stock than he’d had the year before. He was a net Enron investor.
Jeff Skilling did not trade on insider information. It’s true he had plenty of insider information – he knew what the company was doing. But he had no knowledge whatsoever of any conspiracy at Enron.
The same holds true for the other defendants who are accused of selling on insider information. Indeed, the pattern of stock sales shows that most Enron defendants sold when things were good.
The allegation of insider trading at Enron simply doesn’t stand up to scrutiny.
January 23, 2002, Dr. Ken Lay resigned as CEO from Enron Corporation. He had been CEO since 1986, except for the six months in 2001 when he was Chairman and Jeff Skilling was CEO.
Dr. Lay’s resignation came when he finally decided that he was part of the ‘old guard’ and could no longer retain the trust of Wall Street, which Enron desperately needed to reclaim any part of its former glory. The company had declared bankruptcy and there was talk of re-organizing around the pipelines. But Dr. Lay, who had given much of his life to the company, simply decided it was best for Enron if he were no longer a part of it.
According to this document in the Official Record of the Broadband Trial, Ken Rice had fifteen meetings with the FBI:
It is not difficult to see how during the course of fifteen meetings with various federal agents, one can start to “get one’s mind right”. That is, start to agree with the FBI – sort of Stockholm Syndrome for the accused. One of the things I am absolutely certain of is that there were no lies uttered at the 2000 Analyst Conference (or anywhere else) but during the course of those interviews, FBI agents counted forty-five things that were material statements of fact over two hours. Of those statements, four or five could be construed as false or misleading or ‘over-representing’. Of course those were standard puffery. I doubt that you could find any successful company that didn’t do similar puffery at their analyst conference. Incidentally, courts have found that puffery does not constitute fraud.
It was a crazy day for all the executives at the Conference. Scott McNealy tried to bail at the last minute because he was sick. Skilling and Joe Hirko convinced him to come. He said he would speak for only a couple minutes and it turned out to be quite awhile.
The Enron executives had to rearrange the whole schedule to fit him, and the government claimed that they had re-arranged the schedule for the market impact.
That’s the thing about the prosecution… they don’t have to get their witnesses to lie. They convict with a version of the truth. By distorting and twisting the context and by inflaming the jury pool you can get a jury to believe almost anything is criminal.
Was it even puffery, what Ken Rice said? I don’t know. I’ve watched the tapes and read the transcripts until my eyes bleed, but I am unable to find any statement at all – from Rice or anyone else – that was demonstrably untrue.
Oh no, I have a new Enron crush! His name is Ellis Giles. He was one of Rex Shelby’s guys at Modulus who later moved to EBS with the core group. He was, and is, a very brilliant and extremely talented computer engineer. I’ve written about him before; he was the same programmer who wrote the very software that Tomko was trying to have admitted to prove it exists.
What I like most about this exchange is Giles got Judge Gilmore to actually show some sense of humor. Tomko then compounded it with a little quip of his own.
This is Giles on direct; he’s being questioned by Ed Tomko, Rex Shelby’s lovely attorney:
Q. Mr. Giles, where do you live? Not your house number or anything, but where do you live?
A. In Houston.
Q. How long have you lived in Houston, sir?
A. Grew up in Pearland. Moved to Houston for college and lived here ever since.
Q. Where did you go to college?
A. I went to Rice University.
Q. When was that, sir?
A. Started in ’93 and graduated in 1998.
Q. With what degree?
A. I received two degrees — two undergraduate degrees, a degree in computer science with a minor in economics and a degree in electrical and computer engineering, both with honors.
Q. And you took — you got those degrees at the same –
A. Simultaneously. Yes.
Q. So, you have two majors and a minor?
Q. Did you receive any other awards or recognition while
at Rice University?
A. Yes. I received undergraduate research grants for priority packet routing on the Internet. I received an award for the most outstanding computer science student at Rice. I also received an award for first place in the national computer science competition, the American Computer Science League. I believe that’s all. [Note: Oh that's all?]
Q. Now, after you graduated from Rice, did you get your first job?
Q. Where was that?
A. It was at Modulus Technologies.
Q. Approximately when was that?
A. September of 1998.
Q. How did you find your way to Modulus?
A. A buddy of mine interviewed there, but he was more of an electrical engineering systems designer and I was more of a computer science student. So, I had actually interviewed
for another job, and we swapped jobs, actually.
Q. Where are you employed now, sir?
A. I have my own consulting and software company.
Q. What do you do in that capacity?
A. I develop and market a couple of software products myself, and I also do consulting work.
Q. Have you obtained for or applied for any patents?
Q. Can you tell the jury what they are.
A. A patent I’m applying for is for a piece of software I developed called Photo No-No. What it actually does is it is parental control software. It’s quite different from the software that exists today which just blocks websites and words. What it actually does is takes an image as
it’s loaded off the Internet and looks at it and examines it
for content and decides whether the image, by looking at it, is bad or good. It works sort of the way the human eye does.
Q. Any other patent?
A. That’s the only one right now. [Note: Really, Giles? You have to stop being such a lazy ass and try to do something with your life. Sheesh.]
Q. Have you done any work at all for the Department of Homeland Security?
Q. When was that?
A. That was 2002 to 2003.
Q. Are you free to speak about what type of work you did for them?
Q. Can you tell the jury what that is.
THE COURT: You don’t have to kill us if you tell us, do you?
THE WITNESS: I might. [HAHAHAH! I love your wit, Mr. Giles. You crack me up.]
MR. TOMKO: Don’t try to cheer me up. [OMG! I also love your wit, Mr. Tomko!]
THE COURT: They’re not going to try to kill us.
I spoke to one of Collins’ former bosses at Enron today and this is what he had to say about Collins:
We all knew he was nutty… every day was some new crazy thing with him. The highest maintenance employee ever. Also, any employee who asks to be given $18 million after he has already quit is probably not going to do well on the ‘Good Employee’ scale. So, I would have to say no, he was not a good employee.
I love that statement: the highest maintenance employee ever. That cracks me up.
January 21, 2000 was Rex Shelby’s first-ever stock trade. Shelby had always avoided the stock market. When, through a weird series of circumstances, he ended up with Enron stock options, he simply got rid of them at the first responsible opportunity. A friend, David Berberian, was a little more knowledgeable than Shelby and advised him when to sell. Berberian sold on the same days as Shelby.
Even so, according to the government, despite his actual lack of trading experience, he was so deviously clever that he knew to hold his stock until he had some inside information to trade on!
This is “the book”, the final version of the hand-out that went to analysts at the 2000 conference. [PDF]
I’ve described Bill Collins before, and indeed even described this letter. This is part of a letter that Bill Collins sent to Ken Rice. Collins had sold stock right before the analyst conference, and when he saw how the stock had increased, he had second thoughts. So he thought he’d just jot a note to Rice and Rice would happily write a check for $18 million. It didn’t happen that way. I’ve cut out the first four pages of this letter because it’s a bunch of EBS political stuff, and centered on the request for $18 million because it is one of the very few funny things that happened because of the 2000 Analyst Conference.