On several occasions while covering the Lay-Skilling trial, I noted that the Enron Task Force prosecutors were presenting a fundamentally weak case in an effective manner. Quite a few commenters both here and on other blogs took me to task for that view, some of whom suggested that my defense bias rendered me incapable of appreciating the true strength of the Task Force’s case.

So, it was with a small dose of vindication on Sunday that I read Alexei Barrionuevo and Kurt Eichenwald’s NY Times article on the story behind the Enron Task Force’s preparation and prosecution of the case against former Enron chairman, Ken Lay. According to Barrionuevo and Eichenwald’s piece, Enron Task Force prosecutors such as John Hueston agree with me — their case against Lay was so weak they had serious doubts whether they could even make one.

Barrionuevo and Eichenwald’s article provides an interesting peek into the lengths that federal prosecutors will go to make a case against a person who the prosecutors have already concluded is a crook.

But leave it to Larry Ribstein in this post on the Barrionuevo/Eichenwald article to nail the serious implications of the Task Force’s motives and actions toward Lay:

Many people no doubt will get a warm feeling from the job our government servants have done in finally nailing the evil Lay. But as I said at the beginning, there is an alternative narrative.

The prosecutors were out to get Lay, who had already been convicted by public opinion just for being associated so closely with Enron, which of course journalists, filmmakers and other shapers of public opinion had already elevated into the symbol of whatever it was that went pop at the end of the big boom.

The prosecutors and journalists had a willing audience. Stupid and greedy investors, convinced they knew more than the market did and that gravity was suspended just for them, abetted by credulous analysts who didn’t think they had to ask questions, now needed somebody other than themselves to blame.

The prosecutors looked long and hard and finally found Ben Glisan, whom the jury was primed to believe despite his questionable provenance. There were other potential witnesses with other potential stories, but the government was willing neither to free them from the threat of indictment nor grant them immunity.

Read Professor Ribstein’s entire post.

As Barrionuevo and Eichenwald note in their article, the case against Lay boiled down to the testimony of Ben Glisan and Andy Fastow, both of whom testified that they were telling Lay as early as mid-August 2001 immediately after he replaced Skilling that Enron was in far worse financial shape than the company was letting on to investors.

The Task Force prosecutors molded this testimony into the securities fraud charges against Lay, contending that he continued to urge employees and investors to buy Enron stock even though he supposedly knew better.

Of course, Lay testified that neither Glisan nor Fastow said anything of the kind to him. Indeed, Lay contended that they were advising him of exactly the opposite — that the company’s liquidity was as strong as it ever had been — and he had substantial documentary evidence to back up his version of the events, such as Glisan’s October 8, 2001 presentation to the Enron board.

However, the Task Force iced other Enron executives who would have provided exculpatory testimony for Lay, so Lay was forced to go it alone in defending himself against Glisan and Fastow’s allegations.

Thus, the case against Lay came down to an old-fashioned swearing match — Glisan and Fastow, on one hand, and Lay on the other.

That’s why such a large part of the Task Force’s cross-examination of Lay focused on such things as PhotoFete and Lay’s clumsy but legal use of his line of credit with the company. With Glisan and Fastow’s testimony in hand, the Task Force simply had to cast Lay as a liar to the jury and they would win the swearing match.

Interestingly, Eichenwald’s important book on Enron — Conspiracy of Fools (Broadway 2005) — actually suggests that it is Glisan and Fastow who are lying.

On pp. 540-541 of his book, Eichenwald relates an amusing story about Enron’s chief operating officer, Greg Whalley, meeting with Fastow and Glisan around October 20, 2001 when it was becoming clear that the market was turning on Enron after a series of Wall Street Journal articles had exposed Fastow’s shenanigans with certain special purpose entities.

Whalley called the meeting with the two financial officers so that they could apprise him of Enron’s liquidity position in the face of the quickly-unfolding crisis.

Fastow began the meeting by assuring Whalley that the company was in very good liquidity position because it had $3.8 billion in available lines of credit.

But then, under questioning from Whalley, Fastow and Glisan conceded that the company actually had only $1.5 billion in available liquidity.

As Eichenwald relates, the meeting ended rather abruptly:

What the hell? Whalley stood up, disbelief etched on his face.

“You guys are out of your minds!” he said, turning to head out. “I walked in with $3.8 billion in liquidity, and I’m leaving with $1.5 billion.”

[Whalley] shook his head. “I don’t want to ask you another question. I don’t think we can afford it.”

So, how likely is it that Glisan and Fastow were telling Lay that Enron was a house of cards as early as mid-August when they began a meeting with Enron’s chief operating officer on October 20th by assuring him that the company’s liquidity position was in good shape?

As expected, the Conglomerate Enron online symposium last week generated over 15 interesting posts, including ones by the reliably insightful Larry Ribstein (see also here), Ellen Podgor, Don Langevoort, Lisa Fairfax, and Thomas Joo.

However, one of the final posts in the symposium particularly caught my attention. Moderator Gordon Smith passed it along from John Kroger, who served on the Task Force for a year or so in 2002-03, during which time he helped prosecute Arthur Andersen out of business and prepare the odious prosecution that placed four former Merrill Lynch executives in prison for arranging to have Merrill buy an asset from Enron that Enron may have improperly accounted for, although even that has never been proven.

Following his service on the Task Force, Kroger took a job as a law professor in Portland, from where he proceeded to publish a law review article, Enron, Fraud and Securities Reform: An Enron Prosecutor’s Perspective. Kroger’s resume reflects no apparent background in either structured finance or the private finance business sector, but that doesn’t stop him in the article from, among other things, characterizing Enron’s structured finance transactions as wholesale frauds and proposing that such risk-taking should be criminalized.

For a more balanced view from experts in the field of structured finance regarding the economic and financial benefits of such transactions and Enron’s use of them, see Christopher Culp and William Niskanen‘s Corporate Aftershock: The Policy Lessons from Enron and Other Major Corporate Corporations and Culp’s subsequent book, Risk Transfer: Derivatives in Theory and Practice.

With that backdrop, Kroger wrote the following post on the Conglomerate Enron symposium:

“Here’s a Quick Reality Check”

I am shocked at how skeptical most of these blog entries are. Of course, as a former prosecutor in the case, I am certainly biased. That said, here’s a quick reality check. In 2000, 96% of Enron’s reported net income and 105% of its reported funds flow came from accounting manipulation schemes, the vast majority of which clearly violated GAAP. At the same time, Enron managed to keep some $25 billion in company debt off its financial statements, hidden from investors. Lay told his employees to keep buying more Enron stock while he was secretly selling his own. Both men made millions spinning the socks off investors for a company that was, in the end, revealed as an empty shell. The jury heard months of testimony and concluded, quite reasonably, that the defendants knew precisely what was going on. In the United States, we don’t always treat poor criminals and rich criminals alike, but we should. When people commit fraud, they should go to prison.

Using Kroger’s post as a template, my reply is as follows:

I am shocked at how many of the blog entries presume that Lay and Skilling were involved in a massive fraud at Enron. Of course, as a defense attorney in various Enron-related civil actions, I am certainly biased.

That said, here’s a quick reality check.

In 2000, rather than allowing shareholders to suffer loss of value during a difficult post-stock market bubble period, Enron supplemented its net income and reported funds flow through innovative structured finance transactions that effectively hedged the risk of loss in many of its assets for the benefit of investors.

Moreover, when the Enron board induced Lay to return to the Enron CEO position after Skilling’s resignation in August 2001, he put his money where his mouth was — he used the entire board-approved $20 million bonus to invest in more Enron stock.

Indeed, Lay made that bold investment in Enron even though he had already lost an enormous amount of his personal net worth in the first seven months of 2001 due to the decline in Enron’s stock price, losses that he willingly incurred because he insisted that his personal portfolio remain disproportionately invested in Enron stock.

The jury heard months of testimony from primarily cooperating prosecution witnesses who had a substantial incentive to lie by implicating Lay and Skilling in crimes. After the prosecution effectively prevented witnesses with exculpatory testimony for Lay and Skilling from testifying, the jury concluded, quite reasonably, that Lay and Skilling were rich and the company they led went bust, so they must be guilty of some crime.

In the United States, we don’t always treat poor criminals and rich criminals alike, but we should. When business executives are accused of fraud, they should get a fair trial before they are sent to prison for life.

On the heels of last week’s jury verdict in the Enron Task Force’s legacy case against former key Enron executives Ken Lay and Jeff Skilling, Gordon Smith, Christine Hurt and the rest of the blawgers over at the Conglomerate are hosting an online forum of legal scholars today and tomorrow to explore the issues relating to the use of criminal law as a corporate governance mechanism. In addition to Professors Smith and Hurt, Clear Thinkers favorites Larry Ribstein and Ellen Podgor are scheduled to participate, as well as University of Houston law professor and former law school dean, Nancy Rapoport.
Given the participants, this is likely to be a compelling discussion of the often troubling (and costly) implications of the government’s increasingly-aggressive criminalization of corporate agency costs. Be sure to check it out.

Yes, it’s Tuesday, but the Monday morning quarterbacking on the failed defense of Ken Lay is in full swing.
Donald Watkins, an Alabama-based lawyer who headed up the defense team that handled the successful defense of former HealthSouth CEO, Richard Scrushy, says the following about the Lay defense:

In an interview following the Enron trial, Watkins called Lay’s strategy wrong from the start because the former Enron CEO began his defense by hiring a team of big-name trial lawyers. What Lay needed first, Watkins says, was a strategist with a broader view of what was needed to keep such a high-profile defendant out of prison.
“Lawyers are technicians,” Watkins says. “They’re like painters, plumbers and sheet-rockers.”

Continue reading →

Jim Chanos is a well-known investor and investment advisor who specializes in shorting stocks — one of his most famous shorting targets was Enron back in 2001.
Making money by selling stocks short is most often accomplished through the process of borrowing stock, selling it, and then covering the loan of the stock at maturity by purchasing the stock in the market later at a lower price. The process is often criticized by the short seller’s target because it generates profits from misfortune (i.e., when the target company’s stock price goes down) and is counter-intuitive to the usual way folks make money on investments — that is, holding stocks long-term as they appreciate in value. Nevertheless, the practice provides a valuable market purpose in hedging risk and, thus, is a component of any well-structured securities market.
In this Wall Street Journal ($) op-ed, short-seller Chanos provides the following ten lessons (without Chanos’ explanation for each rule that is provided in the article) on the Enron saga:

Continue reading →

In a development that drips with irony on the heels of last week’s jury verdict in the Lay-Skilling trial, Houston-based Kinder Morgan, Inc. announced that its management team — led by Kinder Morgan CEO and former Enron chief operating officer, Richard D. Kinder — is proposing to take the oil-and-gas pipeline powerhouse private in a $13.5 billion deal that would be the largest management-led, leveraged buyout in American business history.

Any further question that the public company model is looking less attractive to private ownership as a means to building owner wealth in the post-Enron era?

Chalk up a good portion of that development as another cost (among the many others, as Larry Ribstein notes) of demonizing Lay and Skilling, as well as everything having to do with Enron. Remind me again — the purported purpose of these prosecutions was to protect investors in public markets?

At any rate, Kinder and other KM executives are planning on contributing $2.8 billion of their existing shares to the newly private company, and private-equity investors Goldman Sachs Capital Partners, American International Group Inc. and the Carlyle Group would contribute another $4.5 billion.

The new private company would take on a total of $14.5 billion in debt, which means that the transaction has a total value of around $22 billion. Kinder and other KM executives are offering $100 a share for the company, which is about an 18% premium on Friday’s New York Stock Exchange closing price of $84.41. The 52-week high for KM shares is $103.75.

The irony of the deal is that KM is largely the result of a combination of Kinder’s talent and Ken Lay’s choice.

Back in 1996, Lay and the Enron board were attempting to choose between Kinder and Jeff Skilling to replace Lay as chief executive in running Enron’s day-to-day operations.

Lay chose Skilling, so Kinder left and began KM with about $40 million in primarily pipeline assets that he bought from Enron as a part of his severance deal.

Under Skilling, Enron embraced a business model based primarily on what became a huge trading operation, while Kinder built a formidable portfolio of stodgier, but increasingly valuable, oil and gas pipeline assets at KM.

KM has been fabulously successful. Since 1999, KM’s share price has increased over 150% through an aggressive expansion of the company’s business in both the U.S. and Canada and the company currently transports more than two million barrels of gasoline a day through 43,000 miles of pipelines, manages over 80 million tons of coal each year, owns huge terminals for distributing oil and gas and oil-sands assets in Alberta, Canada and stores about 75 million barrels of oil and chemicals.

As a result, Kinder has become one of Houston’s wealthiest business executives — his 18% stake in KM is worth around $2.4 billion based on Friday’s closing KM share price.

Thus, KM’s success provides one of the most interesting “what if’s” of the Enron saga.

What if Lay and the Enron Board had chosen Kinder over Skilling and spun off Enron’s trading operation to Skilling in a similar manner to the way in which Enron provided Kinder with the base assets he used in starting KM?

My sense is that Kinder would have steered Enron to success as a KM-type pipeline company, albeit probably not as successful as KM, which was never hindered by Enron’s less-successful business ventures.

Meanwhile, I believe Skilling would have enjoyed the same type of success in building a spin-off trading company that Kinder has enjoyed in building KM.

Indeed, with the benefit of 20-20 hindsight, Skilling seems like the type of fellow who would have been much more fulfilled in building an Enron spin-off into a trading powerhouse than he was in dealing with many of Enron’s far-flung business operations that he neither created nor thought were particularly important to Enron’s success.

Amidst the current demonization of Lay and Skilling, most folks largely overlook the fact that Lay probably would not have been indicted at all if he had declined the Enron Board’s request that he replace Skilling as Enron CEO when Skilling resigned unexpectedly in August, 2001.

What is ignored even more is that the entire Enron saga would almost certainly not have occurred at all had Lay’s choice for Enron CEO been Kinder ten years ago.

Remember that point I made in the previous week summaries about the predisposition of the leaders on the jury determining the outcome of the trial of the corporate criminal case of the decade?

Well, in a strong indication that this trial was already over after the jury was selected, the jury in the Lay-Skilling trial concluded its relatively short deliberation (less than five days) before the long holiday weekend and returned a verdict of guilty on most counts against the two key former Enron executives.

The jury convicted former Enron chairman Ken Lay on all six conspiracy, wire fraud and securities fraud charges, and then U.S. District Judge Sim Lake piled on by finding Lay guilty of four more charges of bank fraud in connection with Lay’s bench trial over his self-admitted violation of Regulation U in using bank lines of credit improperly in buying stock in publicly-owned companies.

Former Enron CEO Jeff Skilling was convicted on 18 counts of conspiracy and securities fraud, but the jury convicted Skilling on only one of ten counts of insider trading, prompting Larry Ribstein to ask “does this mean that the jury thought he didn’t know enough about what was happening to bar him from trading, but that he did know enough to go to jail for fraud?”

Ah, the vicissitudes of criminalizing corporate agency costs.

Most followers of the case agree that the jury’s verdict is not particularly surprising. As noted here many times during the trial, the Enron Task Force prosecutors did an effective job of presenting a fundamentally weak case against Lay and Skilling, emphasizing time and time again the real presumption upon which the Task Force’s entire legacy case was based — that Lay and Skilling are rich and Enron collapsed, so they must be guilty of something in connection with Enron’s descent into bankruptcy.

Despite the transparent nature of that presumption, the harsh reality of defending wealthy business executives is that most jurors are just ordinary folks with nominal experience in complex business matters who readily accept such a presumption.

That presumption — coupled with an overwhelming public bias, particularly in Houston, against anything having to do with Enron — was in the end simply too much for Lay and Skilling to overcome.

Although I did not attend nearly as much of the trial as many other observes, I read the entire trial transcript, so I have a reasonably good understanding of the testimony and the evidence.

It’s always a hard call to say when a case as long and arduous as this one may have turned in favor of the prosecution, particularly given the probability that the leaders on the jury were predisposed in favor of the Task Force’s case from the beginning.

However, my sense is that the Lay-Skilling defense was in reasonably good shape after completion of the Task Force’s case-in-chief — there had been no defining moment during that presentation that would have appeared to compel the jury to convict.

Even as late in the trial as completion of Skilling’s testimony during presentation of the defense’s case, no one incident had occurred that appeared to undermine either side’s position in the trial.

However, if there was a defining moment in the trial that sealed the defendants’ fate, then it likely came in Week Fourteen during Task Force prosecutor John Hueston’s cross-examination of Lay over the use of his company line of credit.

Although Lay’s line of credit was legal and the company disclosed his use of it in accordance with applicable law, Lay’s repayment of the large draws on the line with Enron stock at a time when he was encouraging employees and the market to buy company stock was an apparent contradiction that the jurors could easily grasp.

Similarly, Lay’s decision to draw down $1 million on the line five days before Enron’s bankruptcy was a disastrous decision for the defense.

Although done on advice of counsel, Lay’s last-minute draw as the company was sinking into insolvency looked so bad that reference to that testimony by leaders of the jury during deliberations was probably enough to seal any wavering non-leader juror’s view on whether to convict.

If I’m right on that speculation, then one of the most fascinating “wonder if’s” of this trial is whether Skilling would have done better had Lay’s motion for a separate trial early in the case been granted rather than denied?

More time for reflection is needed before the true impact of this trial on business interests can be properly assessed, but the initial signs are not good.

Beyond the waste involved in such prosecutions, it’s hard to fathom how any CEO of a publicly-owned corporation after Lay-Skilling could feel comfortable about doing anything more than making the most banal public statements about the CEO’s company.

Indeed, little incentive exists for a CEO to say anything publicly about the CEO’s company at this point other than “everything you need to know is in our regulatory filings, so go read those.”

The Lay-Skilling saga will quite likely represent yet another disincentive for business executives running emerging businesses to tap public equity markets, while another quite probable effect is to reduce the supply of innovative business executives who will be willing to take on the increasingly risky CEO position in a publicly-owned company at all.

Given that none of that is good for the health of public equity markets, those are decidedly incongruous results for a prosecution that was supposedly premised on protecting investors in those markets.

Even more troubling for business interests is the disingenuous nature of the Task Force’s theory of the case against Lay and Skilling. The Task Force pitched the case to the jurors as one in which Lay and Skilling misled unsuspecting investors by touting Enron during a period in which it was a much more troubled than they were really letting on.

As Jeff Matthews pointed out during the trial, since when did it become a crime in America for business executives to be overly optimistic about their company?

Any investor who did who did any meaningful investigation of Enron over the final half-decade of its existence easily discovered that the company was a relatively highly-leveraged but innovative business with a low credit rating that was experiencing explosive growth in its trading operation.

As such, it was never anything more than a speculative play for investors and, as such, one that should have been hedged. Jim Johnston of the Heartland Institute noted the same thing recently in this post:

[Investors in Enron stock] should have hedged their risk exposure. If they did not, they were like motorists who have accidents while driving without automobile insurance. We generally do not feel sorry for those people. Moreover, not being hedged is an indicator that those folks did not understand Enronís basic business model and therefore did not deserve the run up in Enronís stock price in 2000 and 2001. They gambled. For a while they won, but eventually lost. This is hardly any different from going to Las Vegas. Except, the federal government is not being asked to prosecute the casinos for fraud.

Stephen Bainbridge noted a similar dynamic in his initial blog post on the verdict:

One of the curious things about this case is the documented evidence that “a number of people were contradicting Enron’s own rosy view of itself long before the middle of 2001.” At what point does a lie by top management cease to matter if the market doesn’t believe it? Presumably the government convinced the jury that people believed the lies Skilling and Lay told, but did the market really do so?

In short, the Task Force presented the jury with the convenient Enron morality play that has become so engrained in the American psyche over the past five years rather than the more nuanced truth. The morality play is easier to tell and understand, but the truth is much more likely to result in justice.

As far as appeal points go, there are a couple of obvious grounds. The first is Judge Lake’s denial of the Lay-Skilling defense team’s repeated motions to change the venue of the trial from Houston.

Although that issue will be determined on appeal under the formidable abuse-of-discretion standard, the Lay-Skilling team will still be able to mount compelling evidence of five years of relentlessly negative local media reporting on Enron, as well as Lay and Skilling. Also, they will be able to show pre-trial polling reflecting a jury pool that was overwhelmingly predisposed to believe that Lay and Skilling must have done something wrong.

Even during the trial, the Houston Chronicle — which did a commendable job of blending traditional news reporting with blogs in providing a trendsetting framework for covering an important news event — featured its lead business columnist on its online Enron news page, who regularly mocked Lay and Skilling in blog posts and columns.

If there ever was a case that begged for a change of venue, then this was it.

But the second obvious appeal point is the most troubling aspect of the entire case — the Task Force’s unprecedented designation of over 100 former Enron executives as unindicted co-conspirators with Lay and Skilling.

Never before has such a wide-ranging conspiracy been alleged in a federal prosecution, and the transparent Task Force motive for doing so became apparent as the prosecution essentially punted on presenting any meaningful case involving a conspiracy of those unindicted co-conspirators during the trial.

The massive unindicted co-conspirator designation was vitally important to the Task Force’s prosecution for two reasons. First, the designation allowed the Task Force to introduce hearsay statements of those unindicted co-conspirators through the testimony of the Task Force’s cooperating witnesses. The Task Force elicited such hearsay statements from its cooperating witnesses frequently during the trial.

But even more importantly, the designation of unindicted co-conspirators effectively precluded dozens of former Enron executives with exculpatory testimony for Lay and Skilling from disputing those hearsay statements or even testifying in the trial because of the threat that a waiver of the Fifth Amendment privilege against self-incrimination would likely lead to criminal charges against such a witness if he or she were to testify contrary to the Task Force’s theory of the case.

The Task Force has used that dubious tactic in each of its Enron-related prosecutions and — as with the other cases — the impact on the Lay-Skilling trial cannot be underestimated.

The Task Force presented the jury with testimony against Lay and Skilling from around 15 or so cooperating witnesses who were former Enron executives. Inasmuch as the Lay-Skilling defense was hamstrung from calling former Enron executives who would have provided exculpatory testimony for the defendants, the jury could have reasonably concluded that the testimony of the former Enron executives who were cooperating with the Task Force was credible because that testimony was not counterbalanced with exculpatory testimony from other Enron executives.

For example, what would the impact have been on this jury if several former Enron executives had testified that key Task Force witness Ben Glisan had repeatedly lied during his testimony? At least one juror in post-trial comments noted that the jury relied heavily on Glisan’s testimony against Lay and Skilling. Would that reliance have been as great had Glisan’s testimony been challenged by not just the defendants, but numerous other — and potentially more credible — former Enron executives?

Reasonable people can differ over the issue of whether criminalizing corporate agency costs is sound public policy. However, there is simply no serious question that the Task Force’s effective preclusion of exculpatory testimony for Lay and Skilling from this trial is a serious affront to the principles of justice and the rule of law upon which our criminal justice system is based.

As Sir Thomas More reminds us, “do you really think you could stand upright in the winds that would blow” if such a prosecution tactic were turned on you?

The parties and their attorneys in this titanic struggle now take a well-deserved breather for a couple of months until the sentencing hearing in early September, a week or so after Labor Day.

Prosecutors Sean Berkowitz, Hueston and Kathy Ruemmler all performed effectively during the trial and carved a path for further success within either the Justice Department or a more lucrative job in private practice.

On the defense side, lead Skilling attorney Daniel Petrocelli and his entire O’Melveny & Myers team were brilliant in defeat, and Lay attorney Mac Secrest did an admirable job under extremely adverse circumstances in picking up a substantial part of the Lay defense when Mike Ramsey was incapacitated by health problems during the trial.

On the bench, Judge Lake was his usual steady presence in handling the unwieldly case and he now becomes the focal point as the case turns to its sentencing phase.

While operating under mandatory sentencing guidelines, Judge Lake was reportedly not pleased with what he considered to be his obligation to sentence former Dynegy mid-level executive Jamie Olis to a draconian 24-year prison sentence.

Shortly thereafter, U.S. District Judge Ewing Werlein rejected Task Force calls for severe 15-year sentences against the four Merrill Lynch executives who were convicted in the currently unraveling Nigerian Barge case, and Judge Lake will almost certainly be confronted with Task Force requests for even longer sentences against the 64-year-old Lay and the 52-year-old Skilling.

Nevertheless, the sentencing guidelines are no longer mandatory, so Judge Lake will have more flexibility in fashioning punishment for the two men than he previously believed that he had in the Olis case. In thinking about what Judge Lake ought to do in this case, I cannot improve on Larry Ribstein’s observation in concluding his post on the Lay-Skilling verdict:

Many people think that there was so much loss associated Enron that the guys at the center of it must have been villains. But they weren’t villains. The jury is saying they weren’t even insider traders, as if that would have made a difference. They lost as much as anybody, and that’s what drove them to lie, if they did lie. This doesn’t make them saints, but it should make even the most hardcore anti-business types queasy with the denouement of this tragedy. Locking these guys up for pretty much the rest of their adult lives for being unable to face the fact that their dream had ended is not the way a civilized society would deal with this case.

Speaking of that supposedly civilized society, amidst the media barrage over the Lay-Skilling verdict, two men and their families in a much different Enron-related case cling to the faint hope that the jury in that case can ignore the rabble and render a fair verdict.

A faint hope indeed.

Week Sixteen of the corporate criminal case of the decade was closing argument week, and the lawyers used the full 12 hours over two and a half days that U.S. District Judge Sim Lake allocated for such argument.

As with opening arguments, lawyers and the mainstream media tend to overestimate the importance of closing arguments, which really are more about reinforcing the views of jurors — particularly the leaders on the jury — rather than actually changing any juror’s opinion about the case.

Having said that, even though cases are rarely won during closing argument, cases can be more easily lost during closing if an attorney gets careless. I wasn’t able to attend the Lay-Skilling closing arguments because of prior commitments, but my sense from reading the transcript is that none of the lawyers who participated in closing arguments came close to losing the case for their client.

Assistant U.S. Attorney Kathy Ruemmler handled the first part of the Enron Task Forceís closing, and — although competently presented — I found reading her argument to be quite tedious.

Indeed, Ruemmler’s delivery was so slow in the initial hour and a half of the presentation that Judge Lake suggested at the lunch break (outside the presence of the jury, of course) that she might want to pick up the pace a bit.

Rather than focusing in on specific allegedly false statements or specific testimony of witnesses, Ruemmler relied more on generalities and provocative words — Lay and Skilling’s statements were “lies,” they were “arrogant,” their testimony was “ludicrous” or “patently absurd” or “outrageous” while favorable testimony of Task Force witnesses was “compelling.”

Given that virtually every factual issue relating to the Task Force charges was hotly-contested during the trial, my sense in reading the transcript was that such outspoken declarations did not mesh particularly well with Ruemmler’s presentation of evidence relating to those contested issues.

A friend who attended Ruemmer’s closing noted that one spectator dozed off in the middle of her presentation and that several of the jurors appeared to be bored stiff.

Probably sensing the chloroforming effect that she was having, Ruemmler after lunch tried to liven things up a bit by punctuating her remarks with hand claps, although one can only wonder whether that might have seem contrived in comparison to the rather bland presentation.

The Financial Times had the best observation about the performance in commenting that “trial-weary jurors” would likely “enjoy a little variety” when Lay lawyer Mike Ramsey delivered his closing argument, noting that Ramsey “missed most of the trial while recovering from heart surgery. It is hard to say whether the jurors or Ramsey have had the more pleasant experience.”

Upon reflection, there may be a couple of valid reasons for Ruemmler’s curious approach.

First, the Task Force may gauge that it’s far ahead with the jurors in what is a fundamentally weak case and thus, a rather bland closing argument reduces the risk of a mistake that could lose that perceived advantage.

Moreover, Ruemmler was the Task Force prosecutor who gave the over-the-top closing argument in the odious 2004 trial of the Nigerian Barge case (which appears to be currently unraveling on appeal) and compounded that dubious performance by absurdly calling for the immediate imprisonment of Merrill Lynch executive Daniel Bayly during his subsequent sentencing hearing. U.S. District Judge Ewing Werlein ignored the Task Force’s proposed sentence.

Inasmuch as certain inflammatory statements made by Ruemmler during closing argument have been raised by the four Merrill Lynch executives in the appeal of their convictions, Ruemmler may have chosen a more vanilla approach in Lay-Skilling to avoid a similar appellate attack.

Despite the restrained nature of the presentation, Ruemmler still hammered on two central themes that the Task Force has emphasized while presenting its case ó (i) the real presumption in the case (“Enron went broke, Lay and Skilling made a lot of money in leading the company, and thus, they must be guilty of some crime”), and (ii) the testimony of the supposedly numerous number of former Enron executives who testified against Lay and Skilling as cooperating witnesses of the Task Force.

As I’ve noted many times during this trial, that latter theme is particularly disingenuous given the Task Force”s icing of dozens of former Enron executives who would have provided exculpatory testimony for Lay and Skilling, including six such witnesses for whom the Task Force specifically declined the Lay-Skilling team”s request for immunity toward the end of the defense’s case.

Reasonable people can differ over whether criminalizing corporate agency costs is sound public policy, but there is no serious question that the Task Force”s effective preclusion of exculpatory testimony for Lay and Skilling from this trial is a serious affront to the principles of justice and the rule of law upon which our criminal justice system is based.

The Task Force prosecutors’ repeated references during closing on the large number of Enron executives/cooperating Task Force witnesses who testified against Lay and Skilling — intimating “how could all these people be lying?” — only underscores the fact that this jury should not have been prevented from hearing from the many former Enron executives who would have provided exculpatory testimony for Lay and Skilling.

The fact that this key issue in the trial has been largely ignored outside a few other blogs is a startling reflection of the fact that a mainstream media that has already convicted Lay and Skilling in the court of public opinion is not ready to confront the grave implications of such prosecutorial abuse, even when such abuse is now regularly emerging in other cases.

As expected, Daniel Petrocelli”s performance on behalf of Skilling was the most entertaining of the closing arguments. Indeed, Petrocelli performance in this trial — win or lose — has cemented his reputation as one of the best trial lawyers in the U.S., and his closing argument reflected that status.

Juggling passion with keen insight and genuine self-deprecation, Petrocelli skillfully challenged the Task Force’s entire theory of the case while using the specific language from the Task Force’s indictment juxtaposed against specific excerpts of testimony from various Task Force and defense witnesses.

The fact that the Task Force attempted to suppress use of the indictment during the trial seemed to empower Petrocelli.

Particularly effective was Petrocelliís dismemberment of the Task Force’s key conspiracy allegation, which the Task Force barely touched on during the trial:

Let me ask you a question, . . . Do you know when this conspiracy started? . . . You’ve heard the whole Government’s case. They’ve given their closing argument. Do you know when [the conspiracy] started? Do you know what happened? What event started it? Was there a meeting? Was there some kind of conversation? Was — what was there? When did it — when did it happen? Where did it happen? Can you answer these questions?

By the way, if you hesitate — if you hesitated, that’s reasonable doubt. Right there. .

. I can’t answer these questions. I probably know this case better than anybody, I will immodestly say. Yes, some of my client’s traits are rubbing off on me. I don’t know when this conspiracy happened. I don’t know who’s in it. I don’t know where it happened. I don’t know how it happened. I can’t tell you the foggiest thing about it. .

. . How can that be? How can that be? How can we have gotten this far? How can we be closing the case and sending it to you and nobody knows where the conspiracy is?

Yet, that conspiracy allegation is the lynchpin upon which the Task Force used extensive hearsay testimony during the trial and kept out exculpatory testimony for Lay and Skilling. But for the Task Force designating those witnesses with exculpatory testimony as unindicted co-conspirators and prompting them to decline to testify on the basis of their Fifth Amendment privilege against self-incrimination, the testimony in this trial would have been dramatically different.

Petrocelli also hammered away at the presumption underlying the Task Forceís case:

Mistakes are not a crime. [Skilling] made a lot of mistakes. He said, “I should have sold those assets off in the international arena. I didn’t do a good job. I miscalculated on broadband. I was a step behind. I should have better anticipated the collapse of the bandwidth market. I trusted Andy Fastow. If I knew now what I knew then, of course, there wouldn’t be an LJM. I made mistakes.”

Mistakes are not a crime. They may lead to liability in a civil case, which it felt like we’ve been in for three months; and God knows, he’s been sued in 200 cases. If he made mistakes and it violates civil laws, then he’ll have to deal with that; but this is a criminal case. Mistakes are not a crime.

Finally, Petrocelli explained why the credibility of the Task Force’s cooperating witnesses is suspect:

[Task Force prosecutors] talked about lies and choices. That’s the theme of their case: lies and choices. Well, the Government, that applies to them, too. They had choices. . . If they really wanted to get the truth out of this case, they didn’t have to use cooperators. That was their choice. If they wanted to use cooperators, they didn’t have to make these deals with them. That was their choice. If they wanted to use cooperators, they didn’t have to put off their sentencing. Not one of them has been sentenced. [. . .]

So Glisan doesn’t make a deal at that time because he’s not prepared to do everything they want him to do until he ended up in the hole in solitary confinement and then in hard prison with two convicts and a single toilet. And then that changed his mind. Then he got a chance to come out on furloughs, see his family, go to a camp. That’s what happens to people. . . . it could happen to anybody, . . . It robs you of your free will. It’s not right. [The prosecution] can do it. You don’t have to accept it, though. You don’t have to believe those witnesses. You can demand a higher quality of proof.

But as entertaining as Petrocelli’s closing was to read, the most surprising development of the closing arguments was the performance of the Lay defense team, which — along with Lay — has come under some heavy criticism in the media and the blogs during the trial. When I heard that Lay and his team had decided to have all four lawyers on the team do a part of the closing argument, I must admit that I first thought that such an unusual approach was a recipe for disaster.

However, I was wrong. Lay attorney Bruce Collins led off with a superb analysis of the charges against Lay, and again used the specific language in the Task Forceís indictment as a guide for the jury in comparing the actual charges against the testimony and the evidence. Collins is not blessed with Petrocelli’s panache (few are), but his closing was a clinically effective breakdown of the Task Force’s entire case against Lay.

Mac Secrest — who performed admirably when forced at mid-trial to take on the lion share of the Lay defense when Ramsey was disabled by surgery — followed with an astute analysis of the Task Force’s cooperating witnesses, pointing out how their credibility is undermined by the very terms of their plea agreements and the substantial amount of time that the Task Force expended in rehearsing their testimony.

Following Secrest, Chip Lewis gave his short, verbal assault on Task Force prosecutor John Hueston (“Don’t come to Houston, Texas and lie to us”), which seemed a bit over-the-top in reading it, but then the folksy Ramsey followed Lewis with a relatively short (12 minutes) and measured commentary on the nature of reasonable doubt and reminding the jurors that they, not the Task Force, are really who represent the United States in the courtroom.

Finally, Task Force director Sean Berkowitz finished the closing arguments on Wednesday morning with a fast-dash rehash of many of the same points that Ruemmler hit on Monday.

Berkowitz’s performance was workmanlike, but he has never seemed particularly enthralled with the Lay-Skilling indictment, which was prepared well before he joined the Task Force. During the trial, Berkowitz did not fare particularly well during the cross-examination of Skilling and seemed to struggle at times with some of the arcane business principles and practices that were involved in the case.

Consequently, it’s really not surprising that he closed with the following analysis of what he thinks the case is about:

You [jurors] get the final word in this historic case. You get to decide whether [Lay and Skilling] told truths or whether they told lies. Black and white. I submit, ladies and gentlemen, that, when you consider all of the evidence, you will conclude beyond a reasonable doubt that these men lied. They withheld the truth. They put themselves in front of their investors. And I’m asking you to send them a message that it’s not all right. You can’t buy justice. You have to earn it.

Or were Lay and Skilling simply struggling on behalf of shareholders to put the best face possible on an innovative but admittedly highly-leveraged company with a booming and profitable trading operation that found itself in a fatal credit crunch when the commercial paper market dried up in response to public disclosure of Fastow’s financial shenanigans, the company’s relatively low credit rating, a falling stock price, and the uncertainty of an anxious post-9/11 stock market?

Those two starkly different frameworks are essentially what the parties have presented to the jury during this trial. Which one the jurors choose to adopt will ultimately determine the outcome.

So, where does that leave us? The jury went home for the weekend after deliberating for a day and a half without any communication to Judge Lake.

The betting markets continue to predict convictions of both men at around a 70% probability, although the bet on a Skilling conviction has not increased during the trial while the bet on a Lay conviction has risen markedly. The betting market is probably a reasonably good measure of the public’s attitude about the case after being deluged with mostly anti-Enron media reports for over five years now.

However, I continue to believe that that this jury’s verdict will depend largely on the leaders of the panel.

If those leaders were predisposed to convict Lay and Skilling from the outset of the trial, nothing in this four month slog is likely to have changed their position.

But if even one of those leaders is skeptical of the Task Force’s methods or case, then the Task Force has not presented nearly a strong enough case to ensure convictions by any stretch of the imagination. If the leaders have doubts, then my sense is that a mix of acquittals and a hung jury on some counts ó similar to what occurred in the first Enron Broadband trial is a distinct possibility.

The jury returns on Monday to deliberate and will do so through Thursday of each week until a verdict is reached.

In the meantime, the Task Force and the Lay team began the trial yesterday of Lay on the charges relating to Reg U, which prompted Ramsey to comment awhile back “I thought Reg U was a tomato sauce.”

That case is being tried to Judge Lake without a jury and will likely conclude early next week. Judge Lake has already stated that he will not announce a verdict in that case until after the Lay-Skilling jury comes back with its verdict.

By the way, speaking of the Enron Broadband case, the first re-trial of that case is expected to go to the jury next week.

Wouldn’t it be ironic if the jury in that trial decides the core issues relating to Enron’s Broadband unit differently from the way the Lay-Skilling jury decides those same issues?

In the wacky world of criminalizing corporate agency costs, it could happen.

Week 15 of the corporate criminal case of the decade was the relative calm before the final battle of closing arguments next week.

Although there was a skirmish over the Ostrich jury instruction, the lull in the trial provides an opportunity to step back and survey the massive landscape of this important case and attempt to place what has occurred during the trial in a reasonable framework for evaluating closing arguments.

As noted previously, the Enron Task Force has done a much better job in this trial of presenting its case than in the trials of the three previous Task Force prosecutions, the Arthur Anderson case, the Nigerian Barge case and the Enron Broadband case.

Nevertheless, as was the case in all three previous trials, the Task Force has presented a fundamentally weak case against the defendants in this trial.

That the Task Force has made a weak case certainly does not mean that the prosecution cannot win it. Indeed, given the societal bias against anything related to Enron, the betting markets have lined up solidly in favor of conviction of both defendants.

But that does not alter the fact that the Task Force’s case is tenuous, perhaps best reflected by the fact that the Task Force believed it necessary to protect its heavily-scripted case by taking the unprecedented step of effectively precluding dozens of former Enron executives with exculpatory testimony for Ken Lay and Jeff Skilling from testifying in the trial. If the Task Force were confident in the strength of its case, then why would it be necessary to prevent the jury from hearing such relevant testimony?

In the event that Lay and/or Skilling is convicted, you can make a good bet by wagering that this Task Force tactic will be a front-and-center issue of any appeal.

Another reflection of the weakness of the Task Forceís case is the degree to which the Task Force’s theory of the case changed since the original indictment against Skilling and Lay over two years ago.

In fact, the Task Force’s indictment ended up being such a mess that the prosecution attempted to prevent Lay and Skilling from using it in questioning certain witnesses during the trial because the prosecution conceded that it was too confusing.

About the only thing that has been consistent about each transformation in the Task Force’s theory of the case is the unstated but nevertheless omnipresent presumption that underlies this entire prosecution — i.e., that Enron went bust and Lay and Skilling became rich while leading the company, so they must be guilty of some crime in connection with the company’s meltdown.

Initially, the prosecution alleged that Lay and Skilling presided over a house of cards at Enron that was hidden from the investing public by the fraudulent behavior of Enron management and its conspiring auditor, Arthur Andersen.

Then, after a unanimous Supreme Court rebuked the Task Force for prosecuting Andersen out of business, the Task Force modified its original story to allege that Lay and Skilling had also fooled Andersen about Enron’s true nature.

After the plea bargain of former Enron chief accountant and former Lay-Skilling defendant Richard Causey about a month before the trial, the Task Force’s case evolved into a fairly standard “pump and dump” theory based on Lay and Skilling’s alleged non-disclosure of material information.

As an aside, one of the many daunting messages that this prosecution is sending to the business community is that an executive of any publicly-owned corporation better disclose every bit of bad news about their company. Otherwise, that executive will risk prosecution — under the sharp lens of hindsight bias — for misleading the investing public about the true health of the company.

If the Task Force’s approach is successful against Lay and Skilling, then one has to wonder why any executive of a publicly-owned corporation would risk saying anything to analysts and the investing public other than “go read the financial statements in our regulatory filings. It’s all there.”

In fact, in this insightful post, Jeff Matthews asks the salient question: Since when did corporate spin-doctoring in America become a crime?

Once the Task Force finally fixed on its theory of the case, the prosecution presented a case during the trial that largely relied on a complex jumble of innuendo and opinion from plea-bargained prosecution witnesses that requires the jury to connect the dots of many amorphous points in finding a crime.

For example, the Task Force does not contend that either Lay or Skilling was involved in approving fraudulent accounting, but rather that mainly Skilling engineered a reorganization of a poorly-performing Enron business unit in a manner that hid losses of that unit underneath the blanket of high profits of Enron’s trading unit.

The Task Force theorizes that the hiding of these losses — along with over-reserving to hide excess profits of the trading unit — allowed Skilling and Lay to misrepresent Enron to the investing public as a stable logistics company rather than the more volatile trading company that prosecutors allege it had become.

Stated simply, the Task Force contends that Enron was a successful but volatile trading company that was having severe financial problems in other parts of its business empire, and the greedy Skilling and Lay covered up the real condition of the company so that they could unload their Enron stock at higher prices than what they would have gotten had they disclosed the true financial condition of the company to the investing public.

However, the premise for the Task Force’s theory seems particularly flimsy.

Did Lay and Skilling really orchestrate this alleged massive fraud simply because they are greedy men? During his testimony, Skilling did not come across as a greedy man at all.

Similarly, even though the Task Force humiliated Lay during cross-examination regarding his legal use of a company line of credit and his family’s lavish lifestyle, he did not appear to be a particularly greedy man, either.

As Lay lawyer Mike Ramsey foreshadowed during opening argument:

“When you don’t have a case, you talk about something else, and that’s what [the prosecution is] doing when they are trying to make Ken Lay look greedy and when they start talking about him selling stock based on inside information.”

Meanwhile, almost all of the incriminating testimony against Lay and Skilling came from former Enron executives who are cooperating with the Task Force, and there are considerable problems for the Task Force with regard to each one of those witnesses.

For example, former Enron investor relations executives Mark Koenig and Paula Rieker claimed that they believed that Skilling and Lay misled the investment community in various ways, but they admitted that their knowledge of Enronís finances was a mile wide and an inch deep, and that they didn’t really know the mechanics of how Enron’s earnings estimates were finalized.

On the other hand, former Enron Broadband executive Ken Rice asserted that Skilling misled the investment community on the prospects of Enron’s broadband unit, but conceded on cross-examination that he also believed the unit had great long-term potential.

Similarly, the prosecution went for a cheap score with former Enron Broadband executive Kevin Hannon by eliciting from him that Skilling had supposedly admitted during a May 2001 meeting with a group of other Enron executives that “they’re on to us” after a small analyst firm had produced a research note critical of some Enron transactions.

However, when you think about it, Hannon’s testimony really undermines the Task Force’s core case.

The report that supposedly prompted Skilling’s remark was based on negative information about Enron that the company had made available to the efficient securities market. The report was not a particularly novel analysis of Enron; it came a couple of months after Bethany McLean’s much-ballyhooed Fortune article in early 2001 that suggested that Enron stock was overpriced.

How does the Enron Task Force square publication of the report’s negative evaluation based upon information that Enron disclosed to the efficient securities markets with its core allegation that Skilling withheld such information from the markets?

Another risk to the Task Force is how the jury assimilates the highly-publicized and sometimes bizarre testimony of former Enron CFO, Andy Fastow, and his former sidekick, Ben Glisan.

Although Fastow implicated Skilling in “secret side deals” and undisclosed “bear hug” guaranties, Fastow is such a despicable character that it remains decidedly unclear whether the prosecution gained much of anything with the jury from his testimony.

Moreover, the prosecution’s emphasis with Fastow in regard to the Global Galactic memo creates a huge hole in its case given that the Task Force chose not to risk attempting to corroborate Fastow’s testimony on that key issue with the testimony of former Enron chief accountant, Richard Causey.

Likewise, former treasurer Glisan — whose heavy-handed treatment by the Task Force had to have made an impression on the jury — contended that he had been advising Lay and others of Enron’s dire financial condition since mid-August of 2001 immediately after Skilling’s resignation. However, he had no meaningful documentary evidence to support his testimony on that issue.

In contrast, Lay’s attorneys on cross-examination introduced Glisan’s own reports from September and October, 2001 detailing Enron’s improving finances, which included one presentation dated October 8 in which Glisan informed Enron’s directors that the company was “on target” to meet its year-end liquidity goals, that it would hold onto its investment-grade credit rating and calling a lowered outlook the “most likely worst-rating outcome” from its third-quarter earnings report. Ten days later, Glisan transmitted an October 17 Deutsche Bank credit analysts’ report to Mr. Lay and others that noted Enron’s “liquidity remains solid.”

Thus, the Task Force’s case relies heavily on testimony from cooperating witnesses who initially lied to investigators — sometimes for years — until finally copping a plea in which they bargained for a reduced prison term and usually a substantial net worth in return for testifying against Lay and Skilling.

Despite alleging now that Lay and Skilling were involved in lying about Enron to the investment community years ago, none of the Task Force witnesses produced any meaningful corroborating documentary evidence that they had any reservations at the time about the statements that Lay and Skilling were making.

None of the witnesses testified that Lay or Skilling at the time ever admitted that they thought they were making misleading statements.

None of the Task Force witnesses provided meaningful testimony in regard to the alleged huge conspiracy within Enron to cover up the alleged wrongdoing at the company.

In short, the Task Force would have the Lay-Skilling jury believe that the biggest corporate conspiracy in American history was hidden from everyone except Lay, Skilling and these relative few Enron executives who have copped pleas, struck deals while in prison or entered into non-prosecution agreements.

That’s not a compelling case in my book.

What is particularly interesting to note while reading through the posts on the Lay-Skilling trial is how the focus of the Task Force’s case subtly shifted during presentation of the defense’s case.

Rather than attempting to challenge Skilling and Lay on the core business fraud charges, the Task Force during the defense case emphasized marginal but easy-to-understand matters such as PhotoFete and Layís personal finances.

By the time Lay’s testimony was completed, the Task Force prosecutors had asked Lay and Skilling several hundred questions over PhotoFete and Lay’s handling of his personal finances while asking precisely zero questions on such issues as the alleged Global Galactic agreement and the alleged huge conspiracy at Enron.

Yet another indictation that this is simply not a strong prosecution case.

So, on Monday, U.S. District Judge Sim Lake will read the 40 plus page charge to the jury and then Prosecutor Kathy Ruemmler will give 3-4 hours of closing argument for the Task Force.

On Tuesday, Dan Petrocelli will give about 3 hours of argument on behalf of Skilling and Mac Secrest and Mike Ramsey will provide about 2 hours of argument on behalf of Lay.

Task Force director Sean Berkowitz will close with a couple of hours on Wednesday morning and then Judge Lake will give the corporate criminal case of the decade to the jury.

My experience with closing arguments is that they are mostly about reinforcement of beliefs that have developed during the trial and rarely about persuading jurors about changing their position. Consequently, there is a good chance that the Lay-Skilling jurors have already made up their minds about the case and, given the enormous pre-trial publicity in this case, they may have done so even before the trial began.

If the jurors have already made their decision before the trial began, then that would not only be an injustice for the defendants, but also an unfortunate ending to this chapter of the Enron saga.

Despite the fact that the Task Force has prevented many witnesses with exculpatory testimony from testifying on behalf of Lay and Skilling, much of what has been presented during the trial conflicts with the presumptions and biases of the numerous societal forces that adhere to the now familiar Enron morality play that rejects any notion of ambiguity or fair-minded analysis in determining the truth of what really happened at the company.

Twelve citizens of Houston have an opportunity to evaluate the evidence presented during the Lay-Skilling trial objectively without the veneer of that Enron morality play.

For the sake of justice, the rule of law and our criminal justice system, here’s hoping they do.