Enron Trial at Halfway Point

March 22, 2006

The fraud and conspiracy trial of Enron Corp. founder Kenneth Lay and former CEO Jeffrey Skilling is reaching its halfway mark: Seven weeks, 15 prosecution witnesses and more to come.

Yet for all the government’s methodical efforts to show through documents, video and audio tapes and those witnesses’ memories of how the former corporate titans repeatedly lied about the disgraced company’s financial health, the jury’s conclusion may hinge on what the defendants say if they testify as expected.

The government has already brought on its highly anticipated witnesses. This past week started with former Chief Financial Officer Andrew Fastow’s fourth and last day on the stand. Fastow, an admitted liar and thief, hid none of his own culpability as he said he helped Lay and Skilling lie about Enron’s financial health.

The week wrapped with Sherron Watkins, the former vice president hailed as a hero by Congress for warning Lay of impending financial disaster months before the company crashed, denting Lay’s claim that he believed the company was strong at the time.

Yet a conviction is far from a foregone conclusion.

“It’s the difference between legitimate spinning and impermissible lying,” Robert Mintz, a former federal prosecutor who has followed the trial, said of what will likely drive the outcome of the biggest fraud case to emerge from the recent era of corporate scandals.

“In a case like this, if Lay or Skilling or both take the stand, it becomes almost a new trial in the sense that jurors will either believe them or disbelieve them,” Mintz said.

The government’s “brick by brick” approach is living up to expectations of putting together a puzzle without betting all on a single witness, said Michael Wynne, another former federal prosecutor in Houston who has observed much of the trial.

Even Fastow, who has been vilified for stealing millions and running scams that helped fuel the company’s 2001 collapse, isn’t the government’s linchpin — and his public excoriation through brutal cross-examination provided plenty of drama, Wynne said.

Lay has said repeatedly he will testify — most recently in a speech to Houston business and academic leaders more than a month before the trial commenced. Lead Skilling lawyer Daniel Petrocelli told jurors during his opening statement his client would do the same.

Both can change their minds, particularly if they decide the government’s case is weak and they don’t need to subject themselves to bruising cross-examination.

“If they testify, and we’ve been promised that, it is going to be one for the ages,” Wynne said.

The government contends that Lay and Skilling repeatedly spouted ebullient optimism about Enron’s financial strength when they allegedly knew accounting tricks propped up weak ventures and hid losses.

The defendants counter that there was no fraud at Enron, they did nothing wrong, and scathing publicity along with diminished market confidence pushed the company into bankruptcy protection in December 2001.

Prosecutors said they expect to wrap up their case by the last week of March. Then the defense gets its turn, and the government can have the last word with rebuttal witnesses.

“We’ll probably end before the end of April,” U.S. District Judge Sim Lake told jurors this past week, indicating that both sides may have severely whittled their cases in a trial that had been expected to last four months or more.

So far, Mintz said, “The government has done a very solid job and the defense has done its job as well.

“The government had its witnesses well prepared, but as with all witnesses, there are certain vulnerabilities that can’t be avoided and the defense did an excellent job of highlighting those for the jury. Those who cut deals can’t run from those deals. Those who have lied previously can’t deny it,” he said.

Wynne said both sides “are trying to arm individual jurors who may be leaning their way with arguments or examples to pull out during jury deliberations.”

So far, seven ex-Enron executives who pleaded guilty to crimes have testified. Two other cooperators who haven’t been charged with crimes — one who paid half a million dollars to settle regulatory allegations of manipulating Enron’s books and another who obtained an immunity deal — also spoke from the witness chair.

Of the rest, three were ex-executives who said they unearthed alarming financial problems and voiced concerns to no avail; two were rank-and-file Enron workers who lost their jobs and retirement savings when the company collapsed; and one is an accountant still employed by what is left of Enron who explained how the company once developed spending and profit plans to meet earnings goals.

In the coming week, prosecutors aim to present two former Arthur Andersen LLP accountants who once audited Enron’s books; a credit rating analyst for Standard & Poors; and Ben Glisan Jr., the former Enron treasurer who pleaded guilty to conspiracy for creating financial structures to cook the company’s books and is serving the five-year maximum prison term for his crime.

The cooperators provide an inside view and admit they participated in string of lies. Those like Watkins who voiced concerns demonstrate that top executives had access to negative financial information that contradicted rosy public statements. The victims provide a human view of what ex-workers lost when the company crumbled.

The ex-Andersen accountants are expected to testify that Enron hid the true nature of transactions to get their approvals, and the credit rating analyst is expected to say Enron’s investment grade rating assumed the company’s financial disclosures were accurate.

The defense teams have consistently challenged credibility of cooperators, indicating they succumbed to government pressure to plead guilty and hope for a lenient sentence rather than risk a trial. Some were likable, others weren’t, but whether jurors believe them is paramount, Wynne said.

“It’s not a question of whether you want to bring them home for dinner or if you like them,” he said. “It’s whether or not they are providing evidence that tends to prove up the counts in the indictment. You’ve got to put them on the stand and you’ve got to tell the whole story.”

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