The Case Against Ken Lay

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Determined to nail Lay & Co., the Justice Department created its first-ever company-specific investigative team. The Enron Task Force cherry-picked seasoned fraud prosecutors from across the country as well as dozens of financially sophisticated FBI agents, including two former auditors. Until this spring, the hard-charging team was led by Leslie Caldwell, a former criminal-division chief in the U.S. Attorney's office in San Francisco who was adept at getting defendants to "flip"cooperate with prosecutors in exchange for lesser charges. The team first went after mid-level managers and got plea bargains or agreed not to prosecute in return for their cooperation, and would eventually climb the corporate ladder all the way up to Lay.

The task force also pored over the paper trail, looking for evidence that the CEO knew that the company was in deep trouble. The day after Skilling resigned, future whistle-blower Sherron Watkins gave Lay a memo detailing some of the shadiest transactions that might cause Enron to "implode in a wave of accounting scandals." As Lay tasked a law firm to look into the middle manager's allegations, his chief of staff beseeched him in an e-mail to address the company's aggressive accounting practices and "near mercenary culture." A few weeks later, general counsel Lance Schuler, in an internal document, likened the firm's off-the-book transactions to "crack cocaine."

The prosecutors finally managed to break into Enron's upper management in January. Former CFO Fastow, who invoked the Fifth Amendment before Congress in 2002, agreed to cooperate in a plea bargain reached after his wife Lea, the mother of their two young sons, was indicted for tax evasion. "There was no Godfather moment," says a lawyer familiar with the case. "They just indicted his wife and let him and his lawyers draw their own conclusions on what that would mean for his family." This week Lea Fastow, whose six felony charges were dropped to a single misdemeanor, is scheduled to become the second ex-Enron staff member to go to jail.

To date, the task force has charged 31 defendants and netted 10 guilty pleas from former Enron employees. And Lay's indictment may not be the grand finale. Federal prosecutors made clear last week that more charges are coming. Arthur Andersen, the Big Five accounting firm convicted of obstructing justice in the Enron investigation, is now defunct, but other companies like Merrill Lynch that were involved in questionable partnerships may face further scrutiny. Enron's greatest legacy, however, is no doubt the passage of the Sarbanes-Oxley Act, which, among other things, requires CEOs to sign off on the veracity of their company's financial statements.