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March 10, 2006

Lay-Skilling, Week Six

Fastow12.jpgThe Andy Fastow Week of the criminal trial of former key Enron executives Ken Lay and Jeff Skilling drew to a quiet close on Thursday afternoon, which contrasted sharply with the crispness of his heavily-scripted direct examination and the combative opening cross-examination of Skilling lawyer, Daniel Petrocelli. Thus, the corporate criminal trial of the decade is now through six weeks (prior weeks' summaries here), and the Enron Task Force's case against Lay and Skilling continues to shrink before our eyes.

Fastow's testimony drew the largest crowds of trial spectators to date, who appeared to be drawn to Fastow's appearance in much the same way many fans are drawn to NASCAR events to see the collisions. Fastow really is a train-wreck of a witness, and his gaunt appearance on the stand dramatically contrasted with the ebullient nature of Petrocelli, who clearly has become a jury favorite during his entertaining cross-examinations of Task Force witnesses. Normally, a defeated and somewhat pathetic person such as Fastow would tend to draw sympathy from the jury, but Fastow admitted to doing such despicable things that it is decidedly unclear whether even his repeated apologies could generate much juror empathy. Even grizzled courthouse veterans were shaking their heads in disbelief over Fastow's duplicity.

LaySkilling6D.jpgFastow's brazen conduct in regard to his wife Lea is a case in point. During direct examination, Fastow played the part of a loving and protective husband in resolutely maintaining that his wife was innocent of the tax fraud charges for which she served a year in prison from mid-2004 through mid-2005. However, during the electric opening moments of Petrocelli's cross-examination, it became clear that Fastow had actually hung his wife out to dry while negotiating his own plea deal with the Task Force, and that his gaming of Lea's fate almost certainly contributed to the fact that prosecutors did not believe Fastow's eventual protestations of his wife's innocence. Incredibly, Fastow was apparently so insistent upon negotiating retention of a substantial net worth under his plea deal that he agreed that his and Lea's plea deals would be "cross-collateralized" -- i.e., if Fastow breaches his plea deal, then the Task Force can pursue additional charges against Lea!

Fastow's testimony in regard to his hidden "Global Galactic" memo was almost as bizarre. Fastow testified that the memo outlined a series of secret guaranties that former Enron chief accountant and former Lay-Skilling defendant Richard Causey had supposedly approved with Skilling's alleged blessing. However, Fastow admitted that he had never had Skilling approve the memo directly and that he destroyed the original of the memo soon after he was canned as Enron's CFO. Only after Fastow had cut his plea deal with prosecutors and was attempting to negotiate a better deal for Lea did he come up with a copy of the memo, which Fastow testified that Lea fetched from a safe-deposit box.

However, even that part of Fastow's story was put into question on Thursday when Petrocelli clearly surprised Fastow by showing him that Lea and her attorney -- well-known Houston-based criminal defense attorney, Mike DeGeurin -- had visited the safe-deposit several months earlier and apparently had either not found the copy of the memo in the box or decided not to bring it to Fastow's attention at the time. That bizarre revelation prompted Petrocelli to ask Fastow, "Mr. Degeurin wasn't going to your safe deposit box to retrieve your wife's jewelry, was he?"

So, although Fastow did implicate Skilling in "secret side deals" and undisclosed "bear hug" guaranties, and Lay in supposedly misrepresenting Enron's financial condition after Skilling's resignation, Fastow is such a despicable character that it remains decidedly unclear whether the prosecution gained much of anything with the jury from his testimony. Likewise, it's not a feather in the cap of the Task Force that prosecutors were forced to allow the jury to understand that even they thought the Task Force's most-publicized witness to date was lying to them about his wife's case at the same time while he was cooperating with them in regard to the Lay-Skilling case. However, one thing is absolutely clear from Fastow's testimony -- the prosecution is going to have to put Causey on the witness stand to corroborate Fastow's story on the Global Galactic memo or else the jury is going to sense a massive hole in the prosecution's case.

Moreover, that is not the only problem in the prosecution's case. Through six weeks of its case, the prosecution still has not presented a substantive witness who has not testified under either a plea deal or a non-prosecution agreement. Although that approach is partly the result of the prosecution's strategy in regard to freezing-out testimony that would be exculpatory for Lay and Skilling, the Task Force faces a substantial risk of jury skepticism regarding the prosecution's case if the primary witnesses alleging wrongdoing are doing so under deals in which the are retaining large amounts of money and hedging the risk of a long prison sentence. Perhaps sensing that dynamic, the prosecution plans to call a couple of witnesses next week -- former Enron risk analyst Vince Kaminski and trading analyst David Port -- who apparently will not be testifying under either a plea deal or a non-prosecution agreement with the Task Force.

Consequently, despite the enormous public relations advantage that the Enron Task Force enjoys in this case, my sense continues to be that the Task Force has big problems in making its case in court. Although the Task Force is probably 75% through its case-in-chief, all of the Task Force's substantive witnesses have initially lied to investigators for years until copping a plea in which they bargained for a reduced prison term and a substantial net worth in return for testifying against Lay and Skilling. Virtually none of the testimony from Task Force witnesses has supported a key element of the prosecution's case -- the alleged huge conspiracy within Enron to cover up the wrongdoing at the company -- and documentary evidence that corroborates the allegations of wrongdoing has been practically non-existent. On the other hand, the Lay-Skilling defense has been able to submit mounds of documentary evidence that casts doubt on much of the allegations of wrongdoing by prosecution witnesses and the defense has not even begun what will almost certainly be a vigorous and well-orchestrated case-in-chief.

In short, this does not appear to be the stuff of a clear-cut winner for the prosecution.

Posted by Tom at March 10, 2006 6:21 AM |


Tom K. --

Thanks for another informative post.

It is amazing that the government has presented so little documentary evidence, given that they had years to build their case. The prosecution's case has deteriorated to a "he said, she said" case in which the prosecution is depending heavily on witnesses with plea deals.

If you look at the allegations in the indictment, the claims of the various prosecution witnesses, and the documentary evidence presented so far, you find that the three are not mutually consistent. In fact, simply pointing out this scattershot pattern to the jury on closing could be a good strategy for the defendants if the prosecution does not begin to focus its case.

Posted by: Evan at March 10, 2006 10:36 AM

The Task force should have noticed from the get go that the genesis of much of Enrons downfall falls on the lap of Mr. Fastow.
I am sure the jury of the Nigerian barge trial would have taken pause of the oral promise Mr. Fastow supposedly made to Mr. Bayly if they knew of Mr. Fastow's universal propensity to say one thing to one person and another thing to another. Just to get a deal done and damn the details. I am sure many would have doubts weighing the character of Mr. Fastow against that of Mr. Bayly.
A clearer example of injustice would be hard to find.

Posted by: Edward at March 10, 2006 11:22 AM

Don't you get it? The culture at Enron founded by Skilling and Lay produced Fastow. So your argument about Fastow being despicable helping the defendants fails because the worse Fastow looks the worse do Lay and Skilling.

Posted by: JT at March 10, 2006 7:26 PM

I have never contended that Lay and Skilling do not bear some responsibility for creating a company culture in which a Fastow could thrive. My point is that creating such a culture is not a crime.

Posted by: Tom K at March 10, 2006 9:24 PM

In the military there was a saying - that you could delegate authority but not responsibility. It seems that Lay/Skilling creating and/or allowing this "culture" would definitely be a crime. Didn't these individuals have a duty to be aware of what was going on and to stop it? Didn't the board? When will the leaders of America's public companies be held responsible for their actions (inaction)? America's corporate culture, in my view, seems no longer one of honor, duty or even profit. It seems to be one of greed - perpetuated by ineffective executives, weak board members and a justice system that has forgotten about "fiduciary responsibility." And..a weak prosecution.

Posted by: Mike at March 10, 2006 11:52 PM

Yes, Lay, Skilling and the board had a responsibility to put a stop to Fastow's shenanigans, and each of them will bear that responsibility in the civil suits that sort out each party's respective share of the responsibilty.

But criminalizing what amounts to bad business judgments places far too much power in the state -- which has its own problems with exercising that power responsibly -- and leads to the counterproductive effect of discouraging risk-taking that generates jobs and wealth.

Posted by: Tom K at March 11, 2006 7:15 AM

The phrase "criminalizing what amounts to bad business judgments" can be a "semantic" way of trying to avoid responsibility for the actions of individuals. Anything done under the banner of "business" does not automatically exclude the actions from being criminal. I am sure that the Mafia feel that many of their "business" activities should not be "criminalized".

Like all sectors of life, business actions have to be judged individually as to whether they are criminal or not. The idea of trying to avoid responsibility for these actions by calling them "bad business judgments" is not a good idea. There will be a much more "counterproductive effect of discouraging risk-taking that generates jobs and wealth" if executives are allowed to loot corporations and to destroy those corporations and wipe out thousands of jobs and cause the loss of billions of dollars of investor's money.

Regarding previous postings and comments here with respect to Lay and Skilling foisting a culture at Enron which allowed Fastow to commit his "crimes" and the response that ".... creating such a culture is not a crime", perhaps some additional comments from

"Sir Thomas":
would shed some light on responsibility.

" Suppose I were to take a dagger from my sleeve and make to kill the prisoner with it; and my lordships there, instead of crying out for me to stop, maintained their silence. That would betoken! It would betoken a willingness that I should do it, and under the law, they will be guilty with me. So silence can, according to the circumstances, speak!

Sir Thomas:
"The maxim is "Qui tacet consentiret": the maxim of the law is "Silence gives consent". If therefore you wish to construe what my silence betokened, you must construe that I consented,......"

I think that most people feel that, considering the Enron culture that they created, Lay and Skilling will not be able to "stand upright in the winds" of justice.

One additional point, even for those naive enough to think that Andy Fastow is responsible for the downfall of Enron, the classification of his actions as "shenanigans" would hardly be a realistic description of his activities. Based on the defense's portrayal of Mr. Fastow as the personification of evil, talking about Mr. Fastows "shenanigans" might be akin to talking about Adolph Hitler's "shenanigans".

Posted by: Max at March 11, 2006 10:59 AM

Max, I'm afraid you misinterpret Sir Thomas' point rather badly.

Sir Thomas was accused of treason. The reason was that he declined to take the King's oath in support of the Church of England. Although Sir Thomas conceded that he knew of the oath and the King's requirement that his subjects take it, Sir Thomas remained steadfastly silent as why he refused to take the oath.

Under the common law, Sir Thomas' silence could not be used to prove that he opposed the King's oath. Moreover, Sir Thomas' point to Cromwell in the exchange that you refer to is that, under the principle of Qui tacet consentiret, his silence -- if anything -- must be construed in favor of Sir Thomas. In other words, application of Qui tacet consentiret to Sir Thomas' silence means that Sir Thomas approved of the oath and, thus, was not guilty of treason.

Unlike Sir Thomas' situation with King Henry, Lay and Skilling contend that they did not know of Fastow's wrongoing, and Fastow's testimony certainly confirmed that to a large extent. The principle of Qui tacet consentiret does not mean that Lay and Skilling's silence in regard to crimes that they did not know about -- or even their responsibility for creating a culture in which such crimes are committed -- can be used to prove that they are criminally liable for crimes that they did not commit.

I have never suggested that anything done under the banner of business should not be construed as a crime. Certainly, Fastow's effective embezzlement of money from Enron was a crime and deserves to be punished.

However, neither Lay nor Skilling embezzled a dime from Enron, and the government's case to date has been based largely upon the theory that some of Lay and Skilling's statements about Enron were more optimistic than they should have been, although the government readily concedes that Lay and Skilling also disclosed negative information about Enron, too.

In short, when the state criminalizes the merits of even bad corporate governance, the state runs the risk of effectively penalizing "the choice of seemingly riskier alternatives." Shareholders deserve protection from theft, but not from risk taking. Unfortunately, it's not clear that prosecutors know the difference -- or even care.

Posted by: Tom K at March 11, 2006 5:47 PM

Tom - without belaboring the "artistic interpretation" of Sir Thomas, the point of the discussion that I referenced was that Cromwell proposed a "theoretical crime" of murder and stated if those observing the murder allowed the crime and did not try to stop it they were as guilty as the person who was committing the murder and he stated " and under the law, they will be guilty with me". Sir Thomas' reply, regarding the law in general, not his specific charge of treason, was that " the maxim of the law is "Silence gives consent", thus Sir Thomas in speaking about the law in general, agreed with Cromwell that in a case of murder as described, those "standing by and allowing it to happen" would be as guilty as the person performing the murder. In applying the "general law" to his specific case of treason, sir Thomas then stated "If therefore you wish to construe what my silence betokened, you must construe that I consented, not that I denied". Again, Sir Thomas is affirming the general principal of law that "silence' must be construed as "consented" and he then, as you stated, uses the "consent" principle as evidence that his silence could not mean "denial".

My point regarding Lay and Skilling, is that they, as Cromwell proposed in his murder example, stood by and let the crime of hiding material information from the investing public be "performed" by Fastow, and as Cromwell stated "instead of crying out for me to stop, maintained their silence. That would betoken! It would betoken a willingness that I should do it, and under the law, they will be guilty with me. I am saying that Lay and Skilling are as guilty as Fastow by standing by and allowing it to happen.

Also, Sir Thomas agrees with me. :>)

Posted by: Max at March 11, 2006 8:00 PM

Max, the problem with your analysis is that you leave out the second part of Cromwell's flawed analysis in applying Qui tacet consentiret to Sir Thomas' silence regarding his refusal to take the oath. The consent to which Thomas is referring is his own situation, not the portion of Cromwell's analysis dealing with condoning murder.

Qui tacet consentiret could apply to Lay and Skilling if the government could prove that they knew and condoned Fastow's embezzlement from Enron. However, there is no evidence that they knew about or condoned Fastow's embezzlement, and even Fastow did not contend during his testimony that they did.

And, believe me, Sir Thomas would have never condoned the state's criminalization of not knowing about a subordinate's embezzlement.

Posted by: Tom K. at March 11, 2006 10:49 PM

One final comment.

We have heard a lot about there being no "hard evidence", but there is no absolute need of hard evidence in order to get a conviction. Circumstantial evidence has been the basis of many, many convictions in criminal cases. One of the most "famous" recent cases was the murder conviction of Scott Peterson. There was no real hard evidence, there was no gun, no knife, no blood, no eye witnesses, no indication of any kind of struggle in the Peterson home, and yet the jury returned a guilty verdict primarily based on circumstantial evidence. There have been convictions in murder cases where the "victims" body was not ever found.

A circumstantial evidence case, laid brick by brick, can easily be the basis for a conviction and is no less "real" than a "hard evidence" conviction.

The Enron trial after week six as "probably" seen by a jury of "twelve regular people" not "twelve lawyers".

Skilling: "Plausible deniability" rapidly crumbling. After seven straight high ranking executives testify that Skilling was directly involved in hiding material financial information from the investing public, "normal" people will probably say, I just don't believe that all of them are lying, maybe one or two are stretching the truth, but I just don't think all of them are lying. Bad news for Skilling.

Lay: "Plausible deniability" not yet crumbling but some cracks appearing in the foundation. Most of the prosecution's case has been directed at Skilling so far. I would guess that the "Lay part" of the prosecution's case will come a little later. If the circumstantial evidence against Lay is as strong as it is against Skilling, then I think Lay will also be in big trouble.

As to the characterization that the "ebullient nature of Petrocelli, who clearly has become a jury favorite during his entertaining cross-examinations": Whether the Rodeo Drive Rhinestone Cowboy dressed in his cowboy boots has had quite that effect on the jury is a matter of conjecture. Twelve Texans may have a little different view of Petro, as I recall one of the jurors did not take to his cologne very well - as reported on the Houston Chronicle TrialWatch blog"

Regarding a 5 minute court recess:

"Turns out that five minutes was so Skilling's lawyer Daniel Petrocelli could scrub off his cologne. Apparently a juror in the front row found it overwhelming during his cross-examination of witness Mark Koenig this morning. She said she was gagging from the scent. She felt strongly enough to ask the court for an attorney fragrance correction."

As further reported on the Chronicle blog:

"Skilling defense lawyer Daniel Petrocelli said today that he was mistaken about what cologne he was wearing when a juror asked that he wash it off last week.

"It was, in fact, he says Tabacco by i Profumi di Firenze......."

"The cologne is featured on a perfume and cologne website as "Exceptionally esoteric, like a fine brandy, this woody fragrance evokes the old world glamour of smoking jackets and cocktail gowns. We love how this fragrance seems to melt into your skin, emanating a sexy glow!"

End of Chronicle quote:

Sounds just like the cologne that a lot of the Texans on the jury probably wear. To paraphrase an old Texas saying, the jury may feel that Petro is "All boots and no cattle".

Posted by: Max at March 12, 2006 10:52 AM


My original point about the ENRON culture producing Fastow was not to prove that Skilling and Lay are guilty of these crimes. It was to rebut the point of your article and others, that portraying Fastow as a liar and a thief contributes to the view that Skilling and Lay are innocent.

Also, I am not a lawyer, so I would like to know when does bad business decisions turns into gross and even criminal negligence. If one's business model and basis for compensation is based upon deceiving shareholders, analysts, counsel, employees, etc., and considering the consequences that were likely to happen (ironically, they were in the risk-management business), it doesn't seem fair.

Posted by: JT at March 13, 2006 6:10 PM

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