HOUSTON — Kenneth Lay, the former Enron Corp. chief executive who insisted he knew nothing about financial fraud at the energy trading giant, has been indicted on criminal charges, sources said on Wednesday.
The action caps a three-year investigation that has already seen several other executives charged and, in some cases, already sentenced to prison for their roles in the company’s scandalous collapse.
In a statement, Lay, 62, said he would surrender to authorities Thursday. “I have done nothing wrong, and the indictment is not justified,” he said.
The specific charges remained under seal. Prosecutors from the Justice Department’s Enron Task Force presented an indictment to U.S. Magistrate Judge Mary Milloy in Houston on Wednesday, and at their request she sealed both the indictment and an arrest warrant, the sources said.
A hearing before Milloy was scheduled for late Thursday morning. Lay’s lawyer, Michael Ramsey, didn’t immediately return a call for comment.
The Securities and Exchange Commission was expected to bring civil fraud charges against Lay on Thursday, including making false and misleading statements and insider trading, a person familiar with the case said, speaking on condition of anonymity.
Prosecutors have aggressively pursued the one-time celebrity CEO and friend and contributor to President Bush who led Enron’s rise to No. 7 in the Fortune 500 and resigned within weeks of its stunning failure. Barring last-minute delays, Lay is the 30th and highest-profile individual charged.
In Columbia, friends remembered the former resident.
“Ken has been in our prayers and remains there,” said Bonnie Cassida, pastor at Bethel Baptist Church, which Lay attended when he lived here. “We believe that he’ll make the best of whatever happens.”
Charley Blackmore, who graduated from Hickman High School in 1963 with Lay’s sister Sharon, remembers Lay as “an intellectual sort of guy, and he was loved by most everyone.”
Les Proctor, who met Lay in junior high school and who remains his friend to this day, said that because Lay was CEO of a fraudulent company, his indictment isn’t surprising. It doesn’t mean, however, that he acted illegally. Proctor said he will continue to stand by his friend, with whom he corresponds frequently.
“I don’t think he set out for any of this to happen,” Proctor said. “A lot of people were hurt by the fall of Enron, and certainly Ken was hurt just as much as anyone.”
Lay will be the second Enron CEO to be charged. Jeffrey Skilling, who succeeded Lay and then stepped down abruptly in August 2001, shortly before the scandal broke, was charged with nearly three dozen counts of fraud and other crimes in February.
Waiting to testify for the prosecution is former finance chief Andrew Fastow, who pleaded guilty to two conspiracy counts in January. Fastow admitted to engineering partnerships and financial schemes to hide Enron debt and inflate profits while pocketing millions for himself.
Enron’s collapse led a series of corporate scandals that led to Congress’ passage of the Sarbanes-Oxley Act two years ago, a package of sweeping reforms to securities law. Thousands of Enron’s workers lost their jobs, and the stock fell from a high of $90 in August 2000 to just pennies, wiping out many workers’ retirement savings.
The charges against Skilling and former top accountant Richard Causey target actions over several years leading up to Enron’s collapse, while allegations against Lay were expected to focus on his actions after he resumed the role of CEO upon Skilling’s abrupt resignation in August 2001, the sources said.
Days after Skilling’s resignation, Lay met privately with Sherron Watkins, then an executive on Fastow’s staff, who had sent him a lengthy memo warning of impending doom from Fastow’s myriad schemes to hide debt and inflate profits.
But Lay told The New York Times last month that he didn’t believe the company had serious problems and trusted other senior managers — including Fastow and Causey — when they reassured him that all was fine.
Skilling and Causey are awaiting trial on charges of conspiracy, fraud and insider trading. Both pleaded innocent and are free on bond.
Prosecutors are more likely to tie Lay to making false or misleading statements rather than directing the fraud at Enron, said Bala Dharan, accounting professor at Rice University and co-author of “Enron: Corporate Fiascos and their Implications.”
In an interview with Newsday, Dharan said, the Justice Department is making the argument that Fastow was the real mastermind behind the accounting fraud that destroyed the company.
The case against Lay would “still be a strong indictment, but it would have a different flavor,” Dharan said. “The paper trail starts getting really thin at these levels.
“Nobody was signing anything. Most of the decisions were being made by verbal communications.”
Henry Hu, a corporate securities law professor at the University of Texas Law School, told Newsday that with Fastow in jail, his wife, Lea, a former Enron finance executive, going to jail, and Skilling indicted, “I don’t think it (a conviction of Lay) is as important as it would have been a year ago, from the point of view of a deterrent effect.”
Missourian reporter Sadie Gurman contributed to this story.