Unraveling Enron

The recipe for the defense in the long-awaited Enron trial opening in Houston on Monday appears to be one part denial and one part defiance.

In contesting federal conspiracy and fraud charges, former Chairman Kenneth Lay and Chief Executive Jeffrey Skilling are expected to deny that they knew of fraudulent schemes carried out by underlings and defy the government to prove that any of their own business decisions were illegal.

"It may be their only defense, but it's probably not so bad," said former federal prosecutor Robert Mintz, a securities lawyer in New Jersey. "Strategically, it's a difficult case for the government to prove."

At the heart of the government's case are allegations that the two men who stood atop the Enron pyramid conspired to mislead the public about the energy-trading company's financial condition; lied to employees, investors and credit-rating agencies; and, in Skilling's case, knowingly filed false financial reports.

Prosecutors are still honing their case as the start of jury selection approaches. In court filings Jan. 20, they pared down the list of charges and spelled out which criminal lies they say the two defendants told in the run-up to Enron's Dec. 2, 2001, bankruptcy filing.

Federal investigators think that Enron used crooked finance and accounting schemes to hide debt and massage its reported profits. The goal was to please Wall Street and keep the company's stock price flying high. But as the allegedly sham transactions came to light in the latter half of 2001, the company crumbled, wiping out thousands of jobs and a stock-market value that had once topped $68 billion.

Many Enron workers saw their retirement savings wiped out. Meanwhile, Lay made profits of more than $217 million on the sale of Enron stock between 1998 and 2001, according to the government's 65-page indictment, while Skilling netted more than $89 million.

Lay, 63, and Skilling, 52, are the ultimate targets of a four-year investigation by the Justice Department's Enron Task Force. They could spend the rest of their lives in prison if convicted of all charges.

Of the scandals that engulfed Corporate America in the early part of the decade, Enron wasn't the biggest in dollar terms — WorldCom Communications takes that dubious prize. But the reverberations from the collapse of the Houston-based energy company arguably have been the most profound, touching off a surge of regulatory reform unseen since the 1930s.

"This is the big enchilada of the white-collar corruption cases," said Adam Gershowitz, assistant law professor at Houston's South Texas College of Law.

Prosecutors so far have obtained guilty pleas from 16 people, including Enron's former chief financial officer, Andrew Fastow, 44, considered the architect of off-the-books partnerships at the crux of the alleged fraud. He is expected to be one of the principal witnesses against his former bosses.

"Fastow blatantly engaged in illegal conduct. Why would you let him plead out unless you thought you could make your case against Skilling and Lay?" Gershowitz said.

Lay's contention

Prosecutors are so desperate for a conviction, Lay contends, that they have stooped to threats and intimidation.

Last month, Lay and Skilling's co-defendant, former Enron Chief Accounting Officer Richard Causey, 46, abruptly switched his plea to guilty and agreed to cooperate with the government.

Lay reacted by quickly posting on his personal Internet site (www.kenlayinfo.com) a statement terming Causey "a victim of the government's continuing abuse of power."

"Most of his money was frozen when he was indicted," Lay continued, "thus limiting his ability to defend himself. He was told that he may be facing 35 to 40 years in prison with no hope of parole, and he did what he thought he needed to do to provide for his family."

Lay had made similar allegations in a mid-December speech to a crowd of 500 at the Houston Forum, a business group that sponsors talks by politicians, diplomats and corporate executives.

"It's like a trial horse — they're trying it out to see how it plays," said Houston attorney Dick DeGuerin, who worked with Lay's lead defense lawyer, Michael Ramsey, to win the 2003 acquittal of Robert Durst, an eccentric New York millionaire accused of killing and dismembering an acquaintance in Galveston, Texas.

"I'd say they probably need a better focus group than the downtown businessmen's club," he added, referring to the grudge Houston-area residents appear to hold against Lay and Skilling. In pretrial questionnaires sent to hundred of potential jurors, some 80 percent of respondents held negative opinions about the defendants, DeGuerin said.

Efforts to move trial

The defense teams have repeatedly called for the trial to be moved to another city, but U.S. District Judge Sim Lake has rejected their entreaties.

Lay's main defense is that despite having a doctorate in economics, he was a true figurehead in the last few years of his tenure. Skilling, an intense former McKinsey & Co. consultant with a master's in business administration from Harvard, took over as president and chief operating officer in early 1997 and basically ran the company from then until his surprise resignation on Aug. 14, 2001, barely six months after he'd become chief executive.

Most of the charges against Lay stem from the period after Skilling resigned and Lay had to resume the chief executive's role. He is accused of lying on several occasions, including a Sept. 26, 2001, online conference when he assured Enron employees that "the third quarter is looking great. We will hit our numbers." He said this, the government alleges, despite knowing that the company's finances were unraveling.

Skilling has not been as talkative as Lay, but in a series of recent interviews, he and his chief defense lawyer, Daniel Petrocelli, have contended that the government is trying to criminalize legitimate business decisions.

Skilling also will emphasize that he was advised by outside lawyers and auditors, who approved the accounting transactions in question.

"Not one lawyer has been charged," noted Houston defense lawyer Joel Androphy. "If none of the lawyers committed criminal acts, then how can the clients who followed their advice be guilty?"

Still, the presence of the affable Causey as a potential witness is a problem for Lay and Skilling. He could support Fastow's testimony and make a better impression on the jury, Androphy said.

The prosecution, led by Enron Task Force director Sean Berkowitz, has yet to include Causey on its witness list but may file an amended list before the trial begins. Causey also could be used as a rebuttal witness to counter statements by Lay or Skilling if they take the stand as expected, legal experts said.

Assistant U.S. Attorney John Hueston, one of the four Enron Task Force members who will try the case, declined to comment Monday on the government's case.