The energy giants who flew too close to the sun

It was the ultimate "perp walk" - Kenneth Lay, friend of two presidents and founder of the erstwhile seventh-largest corporation in America - was paraded yesterday in handcuffs on his way to the federal courthouse in Houston to be formally charged with "spearheading" the most spectacular fraud in modern US business history.

Paraded in handcuffs and frogmarched into court, the former Enron chief Kenneth Lay can no longer turn to President Bush for help, reports Rupert Cornwell

It was the ultimate "perp walk" - Kenneth Lay, friend of two presidents and founder of the erstwhile seventh-largest corporation in America - was paraded yesterday in handcuffs on his way to the federal courthouse in Houston to be formally charged with "spearheading" the most spectacular fraud in modern US business history.

Just three years ago Ken Lay was chairman of Enron, which was seen as one of the most innovative and efficiently run companies in the US. True, in that distant pre-9/11 summer of 2001, a few were starting to have the odd doubt, that the Enron story might just be too good to be true. But apart from a clutch of top executives at Enron and its auditors, Arthur Andersen, no one could have imagined that before the year was out Enron would have imploded in a $67bn (£36bn) bankruptcy that would come to symbolise an entire era of corporate chicanery, ruthlessness and greed. In the course of 2002 other companies - Tyco, WorldCom and Adelphia - would tumble into disgrace. None, however, had the impact of Enron.

The firm Mr Lay created back in 1985 was the embodiment of the modern conglomerate. "We like to think of ourselves as the Microsoft of the energy world," the chairman liked to boast, as Enron's sales, profits and stock continued an apparently unstoppable ascent. Enron, however, was an edifice built on fraud. Its collapse consumed the savings of thousands of its employees, brought down the venerable Arthur Andersen - convicted of obstruction of justice in 2002 - and shook the credibility of US financial markets. Its demise prompted the biggest overhaul of accounting and corporate regulations in decades and, for a while at least, its shadow fell on the White House.

Mr Lay was its friend and benefactor. Over the years, the company contributed $600,000 to the various campaigns of George W Bush, and Enron jets helped to ferry the Bush team back and forth from Florida during the contested aftermath of the 2000 election. A grateful President nicknamed him "Kenny Boy". Enron's folding refocused attention on Mr Bush's cloudy business career, and "Kenny Boy's" trial may yet do so again.

The 11-count indictment was formally unsealed yesterday. It accuses Mr Lay of "taking over the helm of a criminal scheme" during the last months of Enron's life and charges him with fraud and insider-trading. Mr Lay concealed $7bn of Enron debt, thus conveying a false picture to investors and its own employees, it says.

The former chairman has been released on unsecured bail of $500,000. If convicted, however, he faces up to 30 years in prison. "This proves that no man, however powerful, is above the law," James Comey, the deputy US attorney general, declared.

But matters may not be simple. Mr Lay has plainly been a target of the Justice Department from the outset, but it took investigators two and a half years to bring the charges - and they came only after Andrew Fastow, Enron's former finance director and prime architect of the gigantic fraud, agreed to co-operate with prosecutors in exchange for a 10-year jail term.

Throughout, Mr Lay has proclaimed his innocence: "I have done nothing wrong; the indictment is not justified," he said in a brief statement shortly after news of the charges trickled out. In court yesterday he responded with a crisp "not guilty" as each of the counts was read. His lawyers served notice they would fight the case tooth and nail.

Their argument will be that during the period Enron went sour, Mr Lay was not chief executive officer but a chairman whose duties were mainly ceremonial. He thus had no idea of the web of off-balance sheet partnerships created by Mr Fastow to prop up Enron's stock price and conceal billions of dollars of losses and debt.

That too will be the defence of Jeffrey Skilling, Enron's chief executive officer until his surprise resignation for "personal reasons" in August 2001, less than four months before the end. It will, however, be a far harder sell for Mr Skilling, who was renowned for his bullying, micro-managing style.

The 11 counts against Mr Lay have been added to an earlier indictment against Mr Skilling and Enron's former chief accounting officer, Rick Causey - an indication that the three will be tried together as co-authors of the disaster.

Some legal experts believe that the case against Mr Lay is the weakest. Reputedly he was not one for e-mails and memos, making it less likely there will be an incriminating paper-trail. In court, it could be a case of his word against that of a convicted felon who has done a deal to shorten his sentence.

But even Mr Lay's lawyers cannot dispute that between August 2001 and the bankruptcy filing of 2 December 2001, their client was chief executive as well as chairman. That August, after Mr Skilling left, he received the celebrated letter from the whistle-blower Sherron Watkins, an Enron vice-president, warning of a massive accounting scandal. Yet Mr Lay insisted until the end that nothing was wrong, all the while selling large chunks of his Enron holdings. (Ordinary employees, whose pension holdings were largely in Enron stock, were barred from doing so.)

Moreover, the defendant portrayed as an ignorant front-man is a trained economist, a skilled businessman who founded Enron and steered the group through its early expansion. He was knowledgeable enough to have been frequently consulted by an energy taskforce headed by Vice-President Dick Cheney in 2001, and at one stage was widely tipped to be a member of the Bush cabinet.

Lastly, as other lawyers point out, ignorance is no excuse. Mr Lay's ultimate duty was to protect the interest of shareholders.

Even if he escapes legal punishment, Mr Lay's life is in ruins. A man worth $400m barely three years ago has been reduced to his last $1m, net of an anticipated $20m of legal fees. His Colorado ski lodge has gone; his wife, Linda, has sold off much of the family furniture. The once-feted grandee of the Texas business establishment is now rarely seen, except at his Methodist church in Houston on Sundays.

His company too is little more than a picked-over carcass. The workforce has fallen from 32,000 to 10,000. The empire whose sales topped $100bn in 2000 now has a few pipelines in Latin America, some power plants across Europe, the Caribbean and China, and a mid-sized telecoms network.

As for creditors, owed $67bn, they will get 20 cents in the dollar if they're lucky. Such is the inglorious end of Mr Lay's Enron, emblem of an era that American business will want to forget; history most certainly will not.

Languishing in his spartan Moscow prison cell yesterday Mikhail Borisovich Khodorkovsky, 41, could only sit and wait for the shadows to close around Yukos, the successful oil giant which he fashioned in his own image.

Nine years after he and his associates snapped up the firm for a fraction of what it was worth and joined the exclusive ranks of Russia's super-rich, the post-Soviet roller-coaster which he rode with such aplomb finally appeared to have hit the buffers. With $15.2bn to his name, Mr Khodorkovsky may remain the country's wealthiest man on paper but his ability to influence events has never been the same since he was arrested at gunpoint on an icy Siberian runway last October and charged with fraud and embezzlement to the tune of $1bn. At a stroke, Russia's premier capitalist and "oligarch of oligarchs" was brought crashing down and put in his place.

Like the other inmates of the capital's overcrowded, disease-ridden Matrosskaya Tishina prison, Mr Khodorkovsky's bread is black and accompanied by buckwheat porridge.

The champagne and caviar he used to lavish on corporate hospitality is long gone and Yukos, once a model of what Russian firms could become, is close to being systematically dismembered.

On Wednesday police swooped to seize safes from the offices of top executives. Assets and bank accounts were frozen; creditors have been left fuming. The Russian tax police are looking for $3.4bn in unpaid taxes for the year 2000, which Yukos cannot pay. Mr Khodorkovsky's personal empire is on the brink of collapse.

Mired in fear and ignorance the company can only wait for the coup de grâce or pray for a reprieve from Russian President Vladimir Putin. Clutching at what may be the last straw, Mr Khodorkovsky has raised the white flag and offered to surrender "a part" of his stake in Yukos to save the company from bankruptcy.

But, like anyone who holds all the cards, the Kremlin is considering its options and has so far not responded. Few doubt, however, that while Mr Khodorkovsky and his associates may be charged with a plethora of white-collar crimes his real crime was to bite the hand which fed him so prodigiously.

He made his fortune during the mid 1990s, when the east was in full swing and the Russian state was selling off its crown jewels for peanuts.

In that sense, he was no different from any of the other so-called robber barons who built fortunes among the ashes of the Soviet Empire under the patronage of the then president Boris Yeltsin.

"You can't call these people thieves in the true sense of the word. They were allowed to steal. They were given the keys to the flat where the money lies and told to help themselves," said one Moscow analyst, who preferred to remain nameless.

Mr Khodorkovsky thrived on the dearth of rules and regulations. The good times rolled for the man who had started his career running a student cafe at his college.

In 1988 he founded one of the first licensed banks in Russia - Menatep - which became the main investment vehicle for his asset buying spree. In 1994 he and his business partners bought a 20 per cent stake in Russia's largest fertiliser producer for just $225,000.

But 1995 was the real turning point. That was when he snapped up a controlling stake in Yukos, then a disparate patchwork of inefficient Soviet-era oil firms. He paid just $350m - two years later it was valued at $9bn. Today it is Russia's largest private oil company.

Yukos and Mr Khodorkovsky used a series of tax minimisation schemes which have since been declared illegal, but most analysts agree that everyone else was using the same devices. But it was the spectacular success of Yukos that was to be his downfall.

Apparently forgetting that he had prospered on the back of anarchy, corruption and lawlessness, Mr Khodorkovsky decided to clean up his and the firm's act and do things by the book.

"He became an over-mighty subject and he wasn't discreet about it," one senior diplomatic source who knew Mr Khodorkovsky, said.

He had a televised argument with President Putin about corruption and he used his influence to block tax rises on natural resources." The oligarch went as far as to tell President Putin that various "odious people" would have to be got rid of and that things were "coming to a head" on the corruption front. Mr Putin publicly recoiled.

Mr Khodorkovsky also bought his own anti-Kremlin newspaper, urged the government to relinquish its control of oil pipeline construction policy and hinted that he would sell off part of his oil empire to an American firm. Indeed, Mr Khodorkovsky made no secret of the fact that he entertained political ambitions - there was talk of him standing against President Putin in 2008.

"He was trying to build up a large number of seats in the Duma [parliament] and was pushing the liberal multi-party idea," said the diplomat. As such, he supported the Union of Rightist forces and Yabloko parties, breaching the unwritten rules of the game.

Mr Putin had made it clear when he officially assumed the presidency in 2000 that he would leave the oligarchs alone if they stayed out of his domain. But Mr Khodorkovsky had other ideas.

"He was breaking the concordat," said the diplomat. "It was not surprising that they tried to rein him in, particularly in election year. But what surprised everyone was that he didn't pull back. He had that glitter of martyrdom in his eyes and decided to continue his course, not to pull back. He knew the rules of the game like everyone else and he broke them."

Russia's nascent capitalism may have been wild and unpredictable but there were rules. According to those who know him, Mr Khodorkovsky, a chemist by education, never did anything without careful consideration and weighing up the consequences.

"He's a man of many levels and is very complex," said one of his colleagues, speaking anonymously. "He seemed to be able to see things in advance of others. He studied formulas and theories and tested them out." Some analysts believe that the Khodorkovsky case is not so much about politics, but about a phenomenon which has bedevilled Russia throughout the centuries - wealth redistribution.

"This case is starting to be perceived as an economic one, as a conflict around property," argues Andrey Ryabov, of the Moscow Carnegie Centre. "This is all about the process of redistributing assets among the new class who came to power with President Putin."