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On eve of Enron trial, aftershocks

The energy empire's collapse still reverberates - even in the Tampa Bay area - as the trial of the founder and CEO begins.

By KRIS HUNDLEY
Published January 29, 2006

If Enron Corp. had not imploded in late 2001, Mary Anne Reilly might be celebrating her 28th year with Arthur Andersen's Tampa tax practice.

Clearwater's Tech Data Corp. would be spending $5-million less each year on its auditors.

And Bob Merritt probably never would have resigned as chief financial officer of Tampa's Outback Steakhouse Inc. in Tampa.

On Monday, Enron's former two top executives are scheduled for trial in Houston, more than four years after their energy empire crumbled with astonishing speed and widespread repercussions. Enron founder Kenneth Lay and former chief executive Jeffrey Skilling face multiple counts of fraud and conspiracy. Skilling's lawyers will argue that Enron's financial machinations, the disclosure of which led to the company's bankruptcy in 2001, were perfectly legal. Lay, who built Enron into the nation's seventh largest corporation, says he was unaware of any wrongdoing.

Though Houston was the epicenter of the Enron debacle, its fall sent shock waves nationwide. Tom James, chief executive of the investment firm Raymond James Financial Inc. in St. Petersburg, knew and admired Lay when he ran a gas pipeline company in Winter Park in the 1970s and served on the prestigious Florida Council of 100.

"He was a solid corporate citizen," said James, who remembers being stunned when Enron unraveled. "Ken may have convinced himself he didn't do anything wrong, but I'll tell you, he did something wrong."

Reilly never knew Lay nor did she have any involvement with Enron's account while at Andersen. But her career took a sharp detour when the giant accounting firm closed in mid 2002 after it was convicted of obstruction of justice in connection with its Enron business. Now head of her own tax firm in Tampa, Reilly said she felt some vindication last summer when the Supreme Court overturned the Andersen judgment.

"Once when I was testifying as an expert witness, the opposing attorney tried to taint me as an Enron figure, asking me if I hadn't been convicted," she said. "So the Supreme Court decision certainly eliminates that posturing."

While Enron's collapse spattered sleaze over accountants and corporate executives, it left the public deeply puzzled, said Robert Schmuhl, professor of American Studies at the University of Notre Dame in South Bend, Ind., and an observer of Enron's collapse.

"From the outside, everything looked so splendid, but inside misdeeds on a grand scale were taking place," he said. "It showed that large, well-respected businesses could be manipulated to the advantage of a few insiders, while the workers and investors suffered."

Since Enron, there has been a cascade of corporate malfeasance, from WorldCom to HealthSouth. The economy has moved through a recession into a recovery and real estate boom. The nation has become mired in a war in Iraq and resigned to terrorist threats. But Enron still stands as a watershed, when what seemed solid turned to sand, changing the lives of millions, including many in the Tampa Bay area.

While Enron employees lost about $1.1-billion in their retirement plan when Enron's stock became worthless, Florida's retirement fund took a hit as well. One of its money managers, Alliance Capital Management, continued to load up on Enron shares in fall 2001, even after a government investigation into the company had been announced. Last April, a jury decided Alliance did nothing wrong for decisions that cost the state fund $281-million.

The nation's Enron-led drive into energy deregulation came to a screeching halt and with it the ambitious plans at Tampa's TECO Energy Inc. Under the leadership of Bob Fagan, TECO had partnered with an Enron subsidiary to build power plants in Arizona and Arkansas. TECO advanced $300-million in the deal, money that would largely disappear when Enron went bankrupt. After TECO posted heavy losses, saw its debt rating sink and its stock price drop, Fagan resigned in mid 2004.

At Andersen, Reilly, along with 85,000 other associates, had to find new jobs.

"In many ways it was a blessing in disguise," said Reilly, who is still working with many of the same clients she had at Andersen. "But at the time, it was devastating. I always thought I'd leave Andersen. I didn't think Andersen would leave me."

Enron's most durable legacy may the Sarbanes-Oxley Act, passed in July 2002 in response to Enron and other corporate miscreants. The law increases public companies' auditing requirements, expands independent directors' responsibilities and forces top executives to sign financial reports.

At Tech Data, chief executive Steve Raymund said Sarbanes-Oxley has meant an additional $5-million in auditing expenses each year.

"It's created a big bureaucratic burden for large and small companies alike which international competitors don't have to bear," said Raymund, whose computer distribution business has revenues of about $20-billion annually. "Our controls are probably better than before, but how much insurance can we afford to pay for?"

The head of Raymond James said he figures his company's accounting bills have doubled under the new law.

"I'd like to say they're adding value, but they really aren't," CEO James said. "I'm not sure they'd help me catch an evildoer in my own organization."

James, who chairs his own company's board and is an outside director at Outback, said Sarbanes-Oxley has forced independent directors to become more involved in corporate decisions. His work with Outback, where he chairs the audit committee, now takes 12 days a year compared with six to eight days before Sarbanes-Oxley, he said.

"You do get a more activist board and probably more effective oversight process," James said. "I can tell you lots of board members don't want to go to war with the CEO, but as someone who is CEO, I don't need them if they don't do that."

Alex Sink, retired Bank of America Florida president and an outside director at Raymond James, said Sarbanes-Oxley has given independent board members a clear message.

"Our fiduciary responsibility is not to the management, but to the shareholders of the companies," said Sink, who is also on the board of First Advantage Corp. in St. Petersburg. "It has set independent directors free to ask tough questions of management."

Sink said she's now more likely to demand, rather than merely recommend, that management bring in additional talent in key areas like risk management. She's keenly aware that Enron's outside board members made a $168-million settlement with investors as a result of their failure to block management's financial schemes.

"I've certainly thought long and hard about participating in boards," said Sink, who is running for the Florida government's office of chief financial officer in November and will resign all corporate boards if elected. "It's a scary thing. Because as a board member you will never know everything that's going on in a company."

Merritt, who was Outback's chief financial officer for 15 years before resigning in April, blames "overzealous and undersupervised bean counters" for developing new accounting rules that border on lunacy, but do little to prevent future scandals.

"We've changed the whole way in which the financial and auditing world is run, but what have we done to affect biz decisionmaking process? Nothing," he said.

Merritt said Sarbanes-Oxley makes executives personally responsible for even an honest error by an underling, a situation he found untenable.

"The amount I was being paid was not worth the risk to my personal wealth," he said. "And if that results in the longest-term CFOs getting out, how is that going to help the investing public?"

While Merritt thinks Sarbanes-Oxley went overboard on its auditing requirements, he doesn't think it goes far enough in making changes in how boards operate. Directors may meet more often now, but they still tend to rubber-stamp management's decisions, he said.

Merritt, who recently joined the board of a Deerfield, Ill., restaurant chain, also slammed public companies that appoint people with no business experience, like politicians and actors, as outside directors. And though he sat on Outback's board for 14 years, where Chris Sullivan served as chief executive and chairman, Merritt thinks giving one person both titles is a "huge mistake." Regarding the independence of Outback's board, Merritt said, "It's not been historically, but it's moved in that direction."

As Skilling and Lay finally come to court Monday, Merritt and several other local executives dismissed the trial as anticlimactic and unlikely to have much impact, regardless of the verdict.

But others like Tom James will be watching the trial - and the testimony of 16 Enron executives who have already pleaded guilty - carefully.

"I will be very disturbed, very unhappy if they get off," he said. "For us to have integrity of process and a trust level with the public, it is absolutely imperative that we punish these people."

Information from Times files and researcher Caryn Baird was used in this story. Kris Hundley can be reached at hundley@sptimes.com or 727 892-2996.

[Last modified January 29, 2006, 01:29:06]