Meanwhile, checking in on the Enron Broadband trial

With the Scrushy trial out of the way, those interested in the criminalization of business are now focusing on the Enron Broadband trial, which is slogging through its eleventh week.

Houston Chronicle Enron reporter Mary Flood battles through the chloroforming pace of the trial to file this report on the fourth day of testimony of the third of the five defendants to tesify — former Enron Broadband CEO Joe Hirko.

Given the glacial examination and cross-examination of the defendants, my earlier prediction was wrong that the trial would pick up speed during the defense case. It now appears that the trial will not wind up until sometime in mid-July.

The trial has resembled a low-scoring, extra innings baseball game — long periods of tedious boredom spiked by brief spasms of chaotic excitement. Although it is impossible to predict how the jury is responding to the tedium, one thing appears to be reasonably clear — a case that looked like a layup for the prosecution at the beginning of the trial has turned into an old fashioned dogfight.

The trial began in a lively manner as former Enron CEO Jeff Skilling popped in to check out the proceedings first hand, resulting in the prosecution requesting that the judge exclude him from the courtroom for the rest of the case.

Then, the prosecution’s troubles began when the testimony of it’s key witness — former Enron Broadband co-CEO Ken Rice — was impeached as the defense showed on cross-examination that a portion of his testimony related to a video segment that was never shown to analysts as the prosecution and Mr. Rice had represented to the jury on direct. The prosecution compounded that error by attempting to shift the blame for its oversight to a female video contractor, a tactic that could well backfire among a jury of predominantly middle-aged Texas men.

However, after those interesting early stages of the trial, the remainder of the prosecution’s case-in-chief was mind-numbingly boring, which sparked a jury rebellion at one point. Understandably nervous about the effect of the slow proceedings on the jury, the prosecution quickened their presentation so that they completed their case-in-chief in five weeks, but, in so doing, may have undersold their case against two of the five defendants — former EBS executives Kevin Howard and Michael Krautz — whose criminal exposure relates to their participation in a structured finance transaction that is separate and apart from the insider trading and money laundering charges against the other three defendants.

Then, as the defense case opened, the prosecution’s case took another huge potential hit when a former Enron Broadband engineer testified that the prosecution had threatened him if he chose to testify during the trial, which brought into focus a dubious Enron prosecution tactic of chilling key defense witnesses in the Enron criminal trials.

Nevertheless, as with the early excitement in the trial, that opening dust-up in the presentation of the defense case has evaporated into tedious examination and cross-examination of the three defendants who have testified to date — Mr. Hirko, Scott Yeager, and Rex Shelby. Given the prosecution’s emphasis on its insider trading and money laundering charges against those three and the relative paucity of the prosecution case against Messrs. Howard and Krautz (who are not subject to those charges), it remains unclear whether the latter two defendants will testify, although my sense is that they will.

Although its problematic predicting how all of this plays with the jury, it’s clear from Ms. Flood and John Roper’s reports from the trial that the three defendants who have testified to date have acquitted themselves reasonably well on the stand. As Ms. Flood’s latest report on Mr. Hirko’s testimony reflects, Mr. Hirko is defending himself effectively during the prosecution’s cross-examination over the key question of whether he and Messrs. Shelby and Yeager overhyped the EBS technology in news releases and at a 2000 stock analysts’ conference in order to boost Enron’s stock price and cash-in by selling their stock.

Inasmuch as the defense probably wins the trial if they can establish reasonable doubt in the jurors’ minds on that issue, the fact that the prosecution has not scored a knockout blow on any of the three defendants who are being prosecuted on the insider trading charges bodes well for the defense. Moreover, even if the “elephant in the courtroom” — that is, the huge amount of money in Enron stock sales that those three defendants made — is too much for Messrs. Hirko, Yeager and Shelby to overcome, the prosecution appears to have real problems in its case against Messrs. Howard and Krautz, who have been largely ignored for most of the trial.

Consequently, in a case that looked like a tap-in for the prosecution at the beginning of the trial, the Enron Task Force has to be nervous. Despite the Task Force’s effective public relations campaign to equate the name “Enron” with “business corruption,” the Task Force still has not actually done much in court to prove that proposition.

Of the 33 indictments so far in connection with the Enron scandal, 15 defendants have pled guilty and only six (including just one former Enron executive) have been convicted — five defendants in the controversial Nigerian Barge case and Arthur Andersen, whose conviction was overturned by the U.S. Supreme Court.

If some or all of the Enron Broadband defendants are acquitted, then that result will confirm that the federal government’s questionable policy of criminalizing agency costs is not nearly as effective as its campaign to destroy reputations.

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