Alexei Barrionuevo, who has done an excellent job covering the Lay-Skilling trial for the NY Times, weighs in today with this article reporting on U.S. District Judge Sim Lake’s decision to include in the jury charge an instruction relating to the “conscious avoidance” or “deliberate ignorance” for both Skilling and Lay, which is a lower standard for finding the men guilty of conspiracy and fraud related to the company’s collapse in December 2001. In short, such an instruction allows the jury to convict the defendants of crimes if it concludes that the former executives put their heads in the ground (thus, the instruction is nicknamed “the Ostrich instruction”) to avoid finding out about criminal activity at the company.
The instruction is important from a legal standpoint, particularly given that the U.S. Supreme Court reversed the conviction of Arthur Andersen in an earlier Enron Task Force prosecution because of a faulty jury instruction. Inasmuch as neither Skilling nor Lay contended in their defense that they were detached from running Enron during the time in which the Task Force alleges that they committed crimes, and the Task Force has prosecuted the case as a fairly typical “pump and dump” case, there is a good argument that inclusion of the instruction in the charge is reversible error if either or both men are convicted. Barrionuevo quotes my old friend, Houston-based criminal defense lawyer, Joel Androphy:

“The government can’t argue a theory, offer evidence on a theory and then do a 180 and argue for an instruction on an alternate theory. That’s not permissible.”

Although important from a legal issue standpoint, my sense is that the Ostrich instruction in this special case is probably not all that important from a practical standpoint. Because of the almost unprecedented negative media coverage relating to Lay, Skilling and Enron prior to this trial, the much more important issue is whether the jury was truly impartial at the outset of the case. If they were not, then Lay and Skilling’s fate was sealed from the beginning and the Ostrich instruction is not going to affect the jury’s decision in the slightest. On the other hand, if the jurors are truly impartial — particularly the leaders on the jury who will guide the panel to a decision once deliberations begin — then my sense is that the jurors are unlikely to rely on something as amorphous as the Ostrich instruction to convict these men in a case of this nature.
In short, if the jury is truly impartial — the key issue in the trial — then they are likely going to want more meat than merely Lay and Skilling “should have known” to send these men to the slammer for the rest of their lives.

As noted yesterday, the Enron Task Force refused Ken Lay and Jeff Skilling’s request to have the prosecution recommend to U.S. District Judge Sim Lake that half-a-dozen former high-level Enron executives who have declined to testify during the trial on Fifth Amendment grounds be granted immunity from having their testimony used against them in a subsequent prosecution.

Those witnesses — several of whom have been mentioned prominently in testimony during the trial — would likely provide exculpatory testimony for Lay and Skilling if they were to testify.

The Lay-Skilling defense team limited their immunity request to those six witnesses even though the Task Force fingered the unprecedented number of the Task Force identified over 100 former Enron executives as unindicted co-conspirators for the transparent purpose of preventing the jury from hearing the full story of what happened at Enron.

Now, according to this Mary Flood/Houston Chronicle article, the Task Force is requesting that Judge Lake go even further and instruct the Lay-Skilling defense team not to inform the jury during closing arguments of the Task Force’s decision not to allow the jury to hear all the witnesses with relevant testimony about the charges against Lay and Skilling.

In short, the Task Force’s position is “we don’t want the jury to hear all the relevant evidence, but we also don’t want the other side telling the jury that we don’t want them to hear all the relevant evidence.”

In the meantime, you can bet that the Task Force will tell the jury during closing argument that the testimony of the dozen or so former Enron executives who testified against Lay and Skilling under plea deals with the Task Force is pervasive evidence of Lay and Skilling’s guilt.

The destroyed lives, careers and economic wealth that lies in the wake of the Task Force’s previous Enron-related prosecutions is a foreboding legacy of this abominable Task Force tactic that ensures that juries will never hear exculpatory testimony for the defense.

During those earlier trials — the Arthur Anderson case, the Nigerian Barge case and the Enron Broadband case — the Task Force identified dozens of former Enron executives as either targets of the Enron criminal investigation or unindicted co-conspirators of the defendants. As a result, the Task Force effectively prevented many witnesses with exculpatory testimony for the defendants in those cases from testifying because of the threat that the witnesses’ waiver of their Fifth Amendment privilege would likely lead to criminal charges against them if they chose to testify contrary to the Task Force’s position in those cases.

The huge impact of this Task Force tactic was brought into full focus during the first trial of the Enron Broadband case last year. That trial initially appeared to be a sure-thing for the prosecution, but the Task Force’s case unraveled quickly as witnesses Lawrence Ciscon and Beth Stier both testified to a riveted jury about the Task Force’s threats of prosecution against them if they provided exculpatory testimony on behalf of the former Enron executives on trial in that case. That trial ended in a disastrous mix of acquittals and jury deadlock on the Task Force’s charges.

Arthur Andersen and the defendants in the Nigerian Barge trial were not so fortunate. In Andersen, the Task Force used the tactic in maliciously destroying a fine American company that had contributed to orderly commerce and the preservation of wealth in the U.S. for over eight decades. Likewise, in the Nigerian Barge case, dozens of witnesses from Enron and Merrill Lynch with exculpatory testimony for the defendants declined to testify because of the threat to Task Force retribution. The result was an an unspeakable injustice for the four Merrill Lynch executives convicted in that case.

Thus, our “Justice” Department is not really about “justice” at all. Rather than having a jury fairly evaluate all evidence relating to its charges against unpopular defendants or allowing defendants access to funds necessary to defend themselves effectively, our Justice Department is much more interested in indulging public bias against those defendants.

Indeed, that bias is so pervasive with regard to the Lay-Skilling case that the Houston Chronicle runs vile columns and blog posts on almost a daily basis embracing the prosecution’s calls for conviction of the defendants without so much as a mention — much less meaningful analysis — of the serious implications to justice and the rule of law arising from the government effectively preventing witnesses with exculpatory testimony for the defense from testifying in the case.

Something is seriously wrong with the administration of justice in America when the judiciary and the media blithely accept the government preventing a jury from hearing favorable testimony for defendants who are facing the overwhelming governmental power to imprison them for most of the rest of their lives.

Week 14 of the corporate criminal case of the decade is in the books and the biggest news is that U.S. District Judge Sim Lake has issued an edict that he does not want the case to go beyond Week 16.

So, it presently looks as if the Lay-Skilling defense will wrap up its case-in-chief next early next week, the Enron Task Force will present a short rebuttal case, and then the reading of the jury charge and the closing arguments will begin on Monday, May 15th with the jury to get the case on Wednesday, May 17th.

So, yes, it does appear that this long slog is really coming come to an end.

The first part of Week 14 was the last chapter of the Ken Lay phase of the trial, and the cross-examination of Lay this week was not much different from last week’s.

Prosecutor John Hueston wasted little time addressing the actual business fraud charges against Lay, choosing again to spend far more time attempting to equate humiliation with guilt in hammering Lay over his personal financial affairs.

Although not particularly persuasive substantively, Hueston’s approach was at least consistent with the Task Force’s strategy of masking a fundamentally weak case through reliance on the real presumption that underlies the Task Force’s theory of the case — i.e., that Enron went bust and Lay and Skilling are rich, so Lay and Skilling must be guilty of some crime.

No corporate criminal trial in recent memory (perhaps ever) has had the extensive media coverage of the Lay-Skilling trial. Multiple blogs and major newspapers cover the trial daily, and the coverage is generally helpful in attempting to keep up with whatís going on in the trial.

However, just as the media coverage generally of Enron from the beginning has been overwhelmingly slanted against the company and its executives, the media coverage of the Lay-Skilling trial has not been particularly insightful in the depth of its analysis of the substance of the Task Forceís business fraud case against the two former executives.

Interestingly, a good dose of the vacuity that passes for analysis of the Lay-Skilling trial comes from the media’s various legal “experts,” some of whom have little or no experience in complex business cases and who appear to be competing with each other to have the most colorful comment of each day.

One such expert even pulled out the Watergate card this week by comparing Lay to the late former president, Richard Nixon.

Really penetrating analysis, eh?

Meanwhile, the media reported breathlessly this week on Hueston’s questioning of Lay regarding his relatively lavish lifestyle and use of Enron stock to pay his company line of credit while attempting to reassure employees and the market that Enron was still a fundamentally strong company.

During and after that testimony, the media covering the trial reached a virtually unanimous consensus that Lay and his defense team had performed poorly.

However, none of the media reports or legal experts raised a key fact relating to the Task Force’s focus on Lay’s personal finances — i.e., that the Task Force has not charged Lay with any crime relating to either his use of Enron stock to pay his company line of credit or his lavish lifestyle.

Sort of an important point, don’t you think?

In reality, the entire line of credit issue smacks of a red herring.

Lay traditionally took a substantial part of his compensation from Enron in stock, which was a good thing for both the company and him. As an accommodation to Lay, Enron’s board approved a line of credit — eventually reaching $7.5 million — that allowed Lay to monetize the stock efficiently by borrowing on the line and then repaying it with his Enron stock.

Each year, Lay and Enron complied with the requirement under S.E.C. rules and regulations to disclose Lay’s use of stock to pay the line.

That arrangement probably wouldn’t have made any difference in this trial except that Lay made what turned out to be a bad financial decision in regard to his personal financial affairs well before the time that the Task Force contends he was involved in wrongdoing at Enron.

Because his $300 million-plus net worth was almost entirely invested in Enron stock, Lay and his financial advisers decided that he should diversify his portfolio.

However, Lay continued to believe that Enron stock was the best value in his portfolio, so rather than selling the stock and using the proceeds to buy other securities, Lay borrowed $100 million from third party financial institutions, pledged his Enron stock as collateral and began buying other assets with the loan proceeds.

In so doing, Lay was exhibiting an optimism and confidence in the underlying value of Enron, a fact that the Task Force conveniently ignores in blithely alleging that Lay knew that Enron was a sinking ship.

Unfortunately for Lay, the steady decline in Enron stock price during 2001 undermined the value of the Enron stock collateral for the $100 million in personal loans that he had used to diversify his portfolio.

Thus, as the collateral value fell and margin calls resulted, Lay used the most efficient facility at his disposal to repay about $70 million of debt in 2001 — i.e., the proceeds from draws on his company line of credit, which he repaid with his Enron stock.

Despite the straightforward nature of the Lay’s line of credit arrangement, the Task Force spent more time on Lay’s handling of it than any other subject during his cross-examination.

Hueston hammered Lay relentlessly over the fact that Lay did not disclose to Enron employees in late October, 2001 that he was using Enron stock to repay the line of credit, on one hand, while advising the employees at the same time that he was purchasing Enron stock and that the stock remained a good value, on the other.

Similarly, Hueston skewered Lay for his draw of a final $1 million on the line of credit roughly five days before Enron filed its bankruptcy case and Lay’s application of those proceeds to pay the remaining balance on the mortgage on his multi-million dollar homestead at the tony Huntington condominiums near River Oaks.

Although the Task Force has not charged Lay with any crime regarding his handling of the line of credit, Hueston repeatedly asserted that Lay’s conduct in regard to it reflects that he is a hypocrite who lacks credibility on other issues.

Lay’s eve-of-bankruptcy draw on the line of credit was clearly ill-advised, but the Task Force is simply wrong in its contention that Lay was largely dumping Enron stock at a time when he was advising employees and the market that it was a good value.

For example, in September, 2001, Lay accepted $10 million in cash and another $10 million in Enron stock when he agreed to step back into the CEO role after Skilling resigned, and Lay used the $10 million in cash to repay a portion of his margin loans.

In so doing, Lay effectively bought $10 million in Enron stock, meaning that Lay acquired over $20 million in Enron stock roughly a month before he made the statements to Enron employees of which the Task Force complains.

Consequently, even though Lay was also paying his line of credit with Enron stock at the same time, his acquisition of another $20 million in Enron stock is consistent with the optimistic view about Enron that Lay was communicating to employees and the public.

In its quest to demonize Lay, the Task Force simply ignores that salient fact.

In view of the Task Forceís emphasis on Lay’s handling of his line of credit, I suspect that the prosecution may attempt to morph Lay’s non-disclosure regarding his use of Enron stock to pay the line of credit into an alleged basis for either a wire fraud or securities fraud charge against Lay.

As noted above, there is nothing in the indictment about any of this being the basis of criminal charges against Lay, so it will be interesting to see how Judge Lake deals with that issue if the Task Force indeed seeks to make such a case to the jury.

However, the underlying weakness of the Task Force’s business fraud case against Lay and Skilling is perhaps best reflected by comparing the number of questions that the Task Force prosecutors asked Lay and Skilling over such titillating issues as PhotoFete and Lay’s handling of his personal finances (literally hundreds) versus the number of questions that the prosecution asked on such core business fraud issues as the alleged Global Galactic agreement and the alleged huge conspiracy at Enron (zero).

Just to underscore the weakness of the prosecution’s case on those points, the Task Force announced on Thursday that it was not going to call former Enron chief accountant and Lay-Skilling co-defendant Richard Causey as a rebuttal witness. So much for the Global Galactic and conspiracy issues.

Accordingly, at the Week 14 pole, the corporate criminal case of the decade appears to be boiling down to PhotoFete and whether Lay should have disclosed that he was using Enron stock to pay his company line of credit while he was touting Enron.

Despite the media’s fixation on Hueston’s hammering Lay regarding his personal finances, Lay actually acquitted himself reasonably well on cross-examination regarding the issues relating to the Task Force’s core business fraud charges.

Moreover, as most of the media fled the courtroom as Lay’s testimony on the lives of the rich and famous ended, a series of expert witnesses continued to poke holes in the foundation of the Task Force’s business fraud charges over the latter part of the week.

For example, I was able to sit in for a couple of hours during Wednesday afternoonís testimony as Skilling accounting expert Walter K. Rush schooled Task Force chief Sean Berkowitz — who does not let a disadvantage in specialized knowledge deter him from lengthy cross-examination — on the validity of Enron’s accounting for its reserves and the resegmentation of the EES retail unit.

Rush was clear and convincing, and explained application of relevant accounting principles to the jury in a clearer manner than any witness to date. Berkowitz was no match for him.

How all of this is going over with the jury is anyone’s guess.

Could a jury convict either or both of the defendants based on such a weak case? Sure, it happens all the time.

However, Skilling and Lay have presented — under extraordinarily adverse circumstances — a compelling defense that they were not involved in any criminal wrongdoing at Enron and that the company’s failure was, at worst, the result of business misjudgments, such as maintaining too low a credit rating and too much leverage for a company with a huge trading operation to endure the post-bubble and post-9/11 market’s reaction to the negative Fastow/Kopper-fraud disclosures during the fall of 2001.

Can a jury immersed in anti-Enron publicity for the past five years see through beguiling theories of massive frauds, conspiracies and high lifestyles to grasp that simple truth?

That’s the key question still to be answered in Houston as the corporate criminal case of the decade enters its final two weeks.

Week Thirteen of the corporate criminal case of the decade was the Ken Lay week and, based on the media reports, it was alternately either the most boring or the most entertaining week of testimony in the trial to date.

However, from my vantage point of reading the transcript of each day’s proceedings and sitting in occasionally on the trial when I can, Lay’s testimony underscored what the Enron Task Force’s strategy has become in this case — a show trial to degrade Lay and Skilling for denying the presumption that underlies Task Force”s case.

In so doing, the Task Force is hoping that the jury equates humiliation with guilt rather than noticing the gaping holes that have emerged in the Task Force’s case.

Before addressing Lay’s testimony, it’s helpful to step back and review how we got here.

Since shortly after the Enron saga began in late 2001, the Task Force and a large number of media outlets have promoted the now common theme that Enron was merely a house of cards and that the company’s intrinsic instability was hidden from the investing public by a deceitful management team that Lay and Skilling led.

That view has been readily embraced by a wide-range of societal forces, such as publicity-seeking politicians who don’t allow facts to get in the way of demonizing unpopular entrepreneurs for political gain, government prosecutors who improperly expand the reach of criminal laws to further their careers, competing businesspeople and business plaintiff’s lawyers seeking to profit from Enron’s demise and a pliable public that finds it easy to resent wealthy businesspeople, particularly after the bursting of a stock market bubble.

As reflected by this discussion over the gross injustice of what happened to the four Merrill Lynch executives in the Nigerian Barge case (one that hopefully is in the process of being righted), these societal forces believe that they understand the Enron morality play so thoroughly that otherwise thoughtful and intelligent people lose the capacity for independent thought regarding Enron and reject any notion of ambiguity or fair-minded analysis in ferreting out the truth of what really happened at Enron.

This common view of Enron ignores the more nuanced view that has arisen during the Lay-Skilling trial.

In many ways, Enron was an innovative firm, both in its primary business activities and in the ways in which it raised money. Experts in structured finance and derivatives recognize this and have already written extensively about Enron’s innovation in that regard (see, for example, 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).

Even Enron’s original purpose in using special purpose entities (“SPE’s”) was sound and creative, at least before former Enron CFO Andrew Fastow and henchman Michael Kopper hijacked a couple of them. With equity owned primarily by investment banks and other financial institutions, the SPE’s were initially intended to be private equity funds with completely separate management from Enron.

The main attraction of the SPE’s for investors was the funds’ preferred right to invest in Enron assets, which benefitted Enron by allowing the company to preserve liquidity and hedge risk.

Thus, the picture that has emerged during Skilling and Lay’s testimony is that Enron was engaged in mostly legitimate and beneficial financial activities, including energy trading, structured finance and other financing transactions that had literally never been attempted before, and certainly never on the scale that Enron generated them.

As a result, it is critically important in determining the truth of what happened at Enron ó particularly when the futures of two men and their families are at risk — to distinguish between Enron’s role as a legitimate, innovative company and the fraud that Fastow and Kopper engineered.

Unfortunately, the Enron Task Force has utterly dispensed with any notion of truth and fairness in pursuing convictions of Lay and Skilling.

A case in point is Enron Task Force prosecutor John Hueston’s first questions out of the box to Lay, which I witnessed on Wednesday afternoon. Toward the end of direct examination, Lay and his counsel, Mac Secrest, discussed Lay’s attempts to repay $7.5 million that he still owes Enron, a point that Hueston railed about during opening argument in the case. After the now-insolvent Lay recounted how he and the Enron Creditor’s Committee had worked out a settlement in 2004 under which he would repay the debt, Secrest asked Lay whether the deal had been consummated. The following exchange ensued:

Q. Did you actually execute the document, along with your wife?

A. I — Linda and I — I think it was early July 2004 ñ did execute this agreement, and a lawyer representing the creditors committee also executed it. [. . .]

Q. Okay. Was that agreement actually finalized?

A. It was not finalized. And it was not finalized because John Hueston blocked that deal.

MR. HUESTON: Objection. That is just outrageous.

THE COURT: I sustain the objection.

MR. HUESTON: I wish I had such power.

THE COURT: The jury will disregard the last answer.

Well, that’s certainly a little detail that Hueston conveniently left out during opening argument in disparaging Lay about the non-payment of the debt. With that backdrop, the following is Hueston’s opening cross-examination of Lay:

Q. I’d like to start by just writing something up here. Mr. Lay, your attorney, in opening statement, said the following: “By our deeds we are known.” You’d agree with that; right?

A. Yes. Yes, at least in part.

Q. Okay. So you’re backing way from that? From the statement of your attorney? Maybe? Sometimes?

A. No. Our deeds are more important. Life is a little more complicated than that, though.

Q. Okay. Well, let’s elaborate. We’re going to come back to that $7.5 million. But just to make it clear, as of today, you have not repaid one dollar of the principal owing on that $7.5 million from Enron as of the end of 2001; correct?

A. We tried to, and you blocked it.

Q. Sir, have you repaid even a single dollar of the principal from November 27th, 2001 until today? It’s a simple question.

A. We have not because you blocked it.

Q. Did the Task Force block you from doing that in January of 2002?

A. Mr. Hueston —

Q. It’s a simple question.

A. — you know you blocked it.

Q. Sir, did the Task Force block it in January of 2002?

A. It was not due in January of 2002.

Q. So you didn’t repay it in January of 2002?

A. We tried to repay it in 2003, 2004, and you blocked it.

Q. Simple — simple question.

A. And simple answer.

Q. Zero is the right response for the principal; correct?

A. It’s not the right response, but you can write it down.

Q. All right. Is that incorrect? Is there more than a dollar? Have you paid more than zero principal balance?

A. Mr. Hueston, when I was sworn in here, I was sworn in to tell the truth and the whole truth, not partial truths.

Q. Okay. I’m going to try to ask simple questions and —

A. Good.

Q. — and so, that one again, once more: No principal paid; correct?

A. No principal paid because you blocked the settlement.

Q. We’ll get to that later. Let’s go to another item.

So, let’s see here.In the corporate criminal case of the decade and the Enron Task Force’s legacy case, the first subject of the Task Force’s cross-examination of the former chairman and CEO of Enron is his failure to repay a $7.5 million debt to Enron that is not even a part of the criminal charges against him and that the Task Force blocked him from repaying, to boot.

Hueston followed that dubious initial line of questioning with the following subjects, which were not any more substantive:

Making the absurd suggestion that Lay was witness tampering by attempting to make contact with a couple of prospective witnesses in the trial. Since when is it wrong to attempt to talk with potential witnesses in a trial? Only in the Lay-Skilling case, where the Task Force has effectively precluded dozens of important witnesses with exculpatory testimony for Lay and Skilling from testifying at trial by designating those witnesses as unindicted co-conspirators in a conspiracy that the Task Force has not come close to proving during the trial.

Chastising Lay for his attorney Mike Ramsey calling key Task Force witness Ben Glisan a “monkey” to media reporters after Glisan’s testimony several weeks ago. Frankly, Ramsey’s characterization of Glisan was mild in comparison to how Task Force and government representatives have referred to Lay in the media. For good measure, Hueston then bizarrely criticized Lay for approaching Glisan during a courtroom break and expressing his sorrow for what Glisan and his family had been put through by the Task Force.

Paralleling a major cross-examination point with Skilling, criticizing Lay for not following Enron’s Code of Ethics regarding disclosure to the Enron board of his investment PhotoFete, a small Enron vendor operated by a former girlfriend of Skilling. It is one of the more revealing indications of the fundamental weakness of the Task Force’s case that the prosecution has asked dozens — maybe hundreds — of questions to Lay and Skilling over the past two weeks about PhotoFete and none to date about such key issues as the alleged Global Galactic agreement and the alleged huge conspiracy that Lay and Skilling supposedly orchestrated at Enron.

On Thursday morning, Hueston made a big deal out of the fact that Lay’s son had shorted Enron stock in 2001. Apparently, Hueston was attempting to cast aspersions on Lay’s earlier testimony that short sellers had contributed to the market panic that prompted Enron’s collapse in late 2001, but Hueston’s questioning was typically disingenuous. Neither Lay nor Skilling have ever blamed legitimate short-sellers as being a material cause of the market panic that doomed Enron. Rather, Lay and Skilling have testified that certain short-sellers’ planting of false and misleading information about Enron in the financial media fanned the flames of the market panic. Not surprisingly, Hueston did not ask Lay if he thought his son had planted any false information about Enron with the media.

Is there any question about what is really going on here? As Larry Ribstein noted last week in regard to the similarly vacuous cross-examination of Skilling, the Task Force is betting that guilt in this case will not be determined by the sometimes messy and difficult process of sorting out the truth, but on ephemeral matters to the charges that the jury can easily understand.

Lay’s sales of stock to meet margin calls and use of his line of credit with Enron is another case in point. The Task Force has not charged Lay with insider trading for selling his Enron stock or that Lay did anything illegal with regard to using the board-approved line of credit, but that has not stopped the prosecution from hammering Lay with regard to the sales, which approximated $70 million in 2001. The Task Force’s theory is that Lay’s entirely legal decision not to advertise his sales of stock back to the company publicly is evidence that Lay was hiding other bad news about Enron from the markets.

“If the market had found out you had sold $70 million of stock in that time, that actually would have caused the stock to tumble?” asked Hueston about the stock sales.

“It depends, Mr. Hueston,” responded Lay, who went on explain that using cash from internal stock sales to Enron to preserve his Enron stock as collateral for private loans was a sign that he had faith in Enron stock. Lay shot back at Hueston: “There was no requirement that I disclose any of that. You’re trying to mislead the jury as to somehow I was doing something illegal, and I was not.”

When the Task Force did dip into the evidence relating to the substance of its charges against Lay — such as the resegmentation of the retail unit or the international division’s water unit (Wessex) — the dubious nature of its actual charges quickly becomes evident. On Thursday afternoon, Lay calmly but firmly refuted each area that Hueston addressed and — although one might disagree with Lay’s business judgment — none of his answers came close to indicating that this was a man who was desperately conspiring to cover up a massive fraud so that he could dump more Enron stock.

Finally, late in the day, Lay observed to Hueston: “You can go where you want with this, but I think this is a real waste of the juryís time.” Judge Sim Lake agreed with Lay and made the following observation upon ending the week a half-hour early: “Any jury that has sat through two-and-a-half hours of alleged Wessex impairment deserves the right to leave early.” Although courtroom observers related to me that the jurors, lawyers and courtroom spectators cracked up over Judge Lake’s dry wit, Hueston — who is wound pretty tight — was apparently not amused.

Of course, who knows how all of this is playing out with the jury? On Wednesday afternoon, my sense was that the jurors — whose apparent leaders appear to be closer in age to the 64 year-old Lay than Hueston, who is about 40 — appeared put off with Hueston’s initial cross-examination, much in the same way that I perceived them to be in regard to Huestonís similarly misguided cross-examination of former Enron general counsel Jim Derrick during Week Ten of the trial. Peter Lattman of the WSJ Law Blog noted the same dynamic, although most others in the media simply breathlessly reported that Hueston was having his way with a beleaguered Lay. It’s anyone’s guess what the jurors are really thinking.

As for Lay’s direct examination, it was definitely interesting, although perhaps more so reading it than sitting through it. Almost lost amidst the Task Force’s blather is that all of the charges against Lay in this case relate to the period after which he replaced Skilling as Enron’s CEO in mid-August 2001. Lay denied Fastow and Glisanís testimony that they were telling him as early as mid-August, 2001 that Enron had serious financial problems, and Lay’s testimony is buttressed by numerous documents and an early October board presentation in which Glisan and Fastow reported that Enronís liquidity position was strong.

Lay’s testimony was particularly riveting regarding the accelerating crisis in Enron’s credit and equity markets after the series of Wall Street Journal articles beginning on October 17, 2001 that revealed Fastow’s shenanigans with certain SPE’s to the markets.

Enron’s fate was literally sealed within three weeks, maybe even less time, and Lay’s testimony provides fascinating insight into the conflicting issues and pressures that he was confronting on a daily basis as unsettled markets were quickly souring on the company.

Lay is clearly a proud man who desperately wants to tell his side of the story, and it is quite a story.

Born and raised in a family with little money, Lay worked his way through college and graduate school, landed his first job with Houston-based Humble Oil (the predecessor to ExxonMobil), and then served his country admirably as a Naval officer and Deputy Undersecretary of Interior for Energy for six years during the Vietnam War.

After his governmental service, Lay rose quickly through the executive ranks of a couple of gas pipeline companies before assuming the chairman and CEO position of the company that eventually became Enron in 1985.

From that perch, Lay accumulated a personal net worth of about $350 million as of 2000 as he oversaw the growth of Enron into one of the largest publicly-owned companies in the U.S., and then saw that net worth evaporate over the past four-plus years since Enron’s collapse into bankruptcy.

But as difficult as that fall must have been, Lay does not appear to be the type of man who is bothered all that much by the loss of wealth, and certainly not nearly as much as he is aggravated by the Task Force and media’s ravaging of his reputation over the past five years.

According to media reports, Lay and Secrest struggled somewhat during the early stages of Lay’s direct examination, and my sense is that their struggles were attributable largely to Lay’s frustration with not being able to explain to the jurors directly — without the limiting framework of a trial — the utter contradiction between his life story and the nature of the criminal charges against him.

Lay will remain on the stand through at least Monday of next week, and probably into a part of Tuesday. Several character witnesses for the defendants will follow Lay, and the Skilling team still has an impressive group of expert witnesses prepared to testify regarding the Task Force’s allegations that Enron’s business practices were outside the ordinary and customary standards of similarly-situated U.S. public companies.

Thus, my sense is that the defense probably has at least two more weeks of testimony, and the Task Force will present another week’s worth of rebuttal testimony. My best guess at this point is that the close of evidence will take place around mid-May as the corporate criminal case of the decade turns toward what will likely be a very entertaining home stretch.

Although the key presumption in the criminal trial of former key Enron executives Ken Lay and Jeff Skilling is supposed to be that the men are innocent of the charges levied against them, a far different presumption is turning out to be the key one in the trial.

The Enron Task Force’s case against Lay and Skilling heavily relies on an unstated presumption — that Lay and Skilling are rich and Enron collapsed, so they must be guilty of something in connection with Enron’s descent into bankruptcy. Although the presumption is superficially appealing because of the human instinct to find scapegoats for failure, it is insidious because it is not true.

Yesterday, during his initial direct examination, Lay challenged that presumption by testifying that Enron’s meltdown was the result of an unfortunate series of events that coalesced in undermining the market’s trust in the company.

As regular readers of this blog know, I have studied the Enron case and come to much the same conclusion as Lay. Enron was a “trust-based” business — that is, Enron’s business model required that its customers rely on the company’s financial integrity and not necessarily its net worth. Accordingly, when customer confidence in a company such as Enron is undermined, participants in that company’s markets become less willing to engage in the purchase or sale of long-term contracts that might not be fulfilled.

Consequently, as the “bid-ask” spreads on trading contracts in Enron’s trading business diverged in late 2001, Enron’s markets unraveled, Enron’s formerly profitable trading business collapsed and the company melted down into bankruptcy.

A typical reaction of the media reporters covering the Lay-Skilling trial have labeled the “run on the bank” explanation of what happened to Enron as audacious, but it’s really not. Although the bankruptcy of a company as large Enron is unusual, Enronesque experiences for even the largest trust-based companies are not. In fact, over the past couple of years, two of the largest companies in the U.S. — American International Group and General Motors — each have had their own Enronesque experience. AIG survived its Enronesque experience; it remains to be seen whether GM will.

Although AIG and GM are trust-based businesses, they are different companies than Enron was, and the market forces that AIG faced and that GM continues to face are different — and in many ways, more favorable — than the dicey market conditions that Enron confronted after the September 11 attacks in 2001.

However, the point remains that, if any trust-based company loses the trust of the market, then the same thing that happened to Enron could happen to any such company, and such a breach of trust is not necessarily the result of the criminal wrongdoing of its leaders.

That’s an important point to remember as the Enron Task Force continues to rely on its dubious presumption to prop up a fundamentally weak and flawed case in attempting to place Lay and Skilling in prison for most of the remainder of their lives.

As former Enron chairman and CEO Ken Lay prepares to take the stand today in Week Thirteen of the corporate criminal case of the decade, I wanted to pass along an interesting exchange of posts from this past week.
This previous post noted this Jim Johnston/Paul Fisher Heartland Institute article that questions the demonization of Enron generally and the validity of the Lay-Skilling prosecution, in particular.
Chronicle business columnist Loren Steffy, who has believed for a long time that the book should be thrown at Lay and Skilling, responded to the Johnston-Fisher piece in this blog post.
In this follow-up post on the Heartland blog, Johnston replies to Steffy’s post and concludes by making the point that the type of innovative risk taking that Enron engaged in is often necessary for the creation of new markets, wealth and jobs:

I am glad to hear that the establishment of a once vibrant risk management system for natural gas is not just chopped liver in Mr. Steffyís opinion. The failed attempts with broadband, water and more importantly electricity, were good attempts and much was learned from the efforts. Maybe someday markets will be established in broadband and water. Electricity markets are even now recovering. It will take entrepreneurial companies with sizable assets to reestablish these markets. These companies will also have to watch out for the politicians.

These companies will need to watch out for the prosecutors, too!

The Jeff Skilling segment of the corporate criminal trial of the decade concluded during Week Twelve as the former Enron CEO testified for a bit over three days on cross-examination from Enron Task Force director Sean Berkowitz and on re-direct from Skilling attorney, Daniel Petrocelli.

As has been my custom during the Lay-Skilling trial, I continue to read each day’s transcript of the trial and pop into the courtroom whenever I am in the federal courthouse on other matters and have an hour or two to spare.

This week, I was able to sit it on the final two hours of Berkowitz’s cross-examination of Skilling, and that experience reinforced my overall opinion of the trial to date — the Task Force is presenting a fundamentally flawed and weak case against Skilling and Lay.

Given the societal bias against anything having to do with Enron, it is helpful to review from time to time the case that the Task Force has actually presented in court to date. In short, the Task Force has presented a “pump and dump” case that, to a large extent, relies on a complex jumble of innuendo and opinion.

According to the Task Force, Enron was so successful in making money in its trading operations that it allowed Skilling and Lay to soft-pedal to the markets the losses that Enron was incurring in several of the company’s less successful units.

Mind you, the Task Force is careful not to contend that either Lay or Skilling was involved in fraudulent accounting. Rather, the Task Force asserts that mainly Skilling understated to the market the losses of a couple of poorly-performing Enron business units, including allegedly hiding one unit’s losses underneath the blanket of the trading unit’s high profits.

The Task Force contends that the alleged hiding of these losses — along with alleged over-reserving of excess profits in 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 that Enron had become.

As noted in this earlier post at the beginning of the trial, the Task Force’s theory of the case relies on its unstated, but nevertheless key, presumption — i.e., that Lay and Skilling are rich and Enron collapsed, so they must be guilty of something as a result of Enron’s failure.

Berkowitz’s entire cross-examination of Skilling played heavily on that presumption. Given that dubious premise, it’s not particularly surprising that Berkowitz’s cross-examination was long on style but noticeably short on substance.

Relying on word games and satirical indignation, Berkowitz often gave Skilling little time to answer questions and frequently cut him off during his answers. Meanwhile, Berkowitz failed to pursue most substantive areas of inquiry related to the 28 charges against Skilling in favor of spending an inordinate amount time on relatively superficial matters that have little to do with the charges.

For example, early in the cross-examination, Berkowitz brought up that Skilling was using a jury consultant to assist him in preparing his defense and even showed the jurors the consultant’s webpage on the courtroom’s exhibit screen.

Given the vacuous nature of the entire line of inquiry, it was a credit to Petrocelli’s trial instincts that he didn’t bother to object. Since when is working with a jury consultant to help establish one’s innocence a sign of guilt?

Similarly, Berkowitz spent a substantial amount of time questioning Skilling about his earlier SEC testimony regarding Skilling’s investment in Photofete, a former girlfriend’s photography business. The investment was clearly small potatoes, but Berkowitz suggested to the jury that Skilling’s mistaken earlier SEC testimony about the size of his investment, possible backdating of an investment check and his failure to disclose to the Enron board that he had invested in a small vendor of Enron was definitive evidence of Skilling’s lack of credibility.

Maybe so, but what about those 28 charges against Skilling? Larry Ribstein summed it up well in this post:

So the biggest fraud of the century is going to come down to Photofete? As I’ve pointed out in the post linked above, this is all part of what I’ve called the “corporate crime lottery,” where guilt depends on such things as what juries will understand rather than on the essential wrongfulness of the misconduct.

Despite widespread speculation that Skilling would come unhinged under the pressure of cross-examination, he did not.

The only time that Skilling flashed anger was during the second day of cross-examination when Berkowitz suggested in a line of questioning that changing the classification of a public company’s preliminary earnings estimates in the company’s later published financial results was conclusive evidence of accounting fraud.

Under Berkowitz’s way of thinking, if a company’s initial estimates later change in the company’s actual published results, it’s prima facie evidence of fraud, which would make virtually every public company in the United States subject to being indicted for fraud.

After Berkowitz persisted in such nonsense during a protracted series of questions, Skilling finally lost his temper for a moment and chastised Berkowitz’s mendacity.

However, from my vantage point, it seemed clear from the exchange that Berkowitz either did not understand what he was talking about or was disingenuously suggesting that a common practice of most large public companies is a crime.

But if the first two days of Berkowitz’s cross-examination were somewhat odd for the failure to address substantive issues related to most of the actual charges against Skilling, the final day of cross-examination was downright bizarre.

During the morning session that I attended on Wednesday, Berkowitz quizzed Skilling over a substantive area — i.e., Enron’s trading business and the company’s disclosures related to it.

Berkowitz continually asked Skilling spurious questions about Enron’s trading business, while Skilling patiently explained to Berkowitz how the questions reflected either his misunderstanding or mischaracterization of the business. As one old local lawyer sitting next to me commented right before the lunch break:

“This is not a fair fight. Skilling is schooling him.”

Then, after the lunch break, Berkowitz changed directions and began to question Skilling regarding the reasons that he decided to resign as Enron’s CEO in mid-August, 2001. After about 45 minutes of meandering and innocuous questioning, the elderly lawyer sitting next to me leaned over and cracked:

“I think Berkowitz really just wants to have a beer with Skilling and talk things over.”

About an hour into his post-lunch break questioning, Berkowitz finally suggested that Skilling had told a former McKinsey & Co. partner shortly after his resignation from Enron that he would consider the CEO job at Lucent. When Skilling denied the allegation, Berkowitz snidely retorted to Skilling “[t]hat’s another person you disagree with?” and abruptly ended the cross-examination.

Thus, rather than ending cross-examination with a bang, Berkowitz ended it with a whimper.

How all of this is playing with the jury is one of the fascinating imponderables of trial law. Certainly, given the government and much of the media’s demonization of both Skilling and Lay, the Task Force may not need anything more than a weak case to obtain convictions.

Peter Lattman of the popular WSJ Law Blog attended Skilling’s direct testimony and the first part of the cross-examination, and he thought that the jurors responded negatively to Skilling in regard to the Photofete testimony.

During my visit at the closing of cross-examination on Wednesday, the jurors appeared bored with Berkowitz’s morning questioning over the trading business and somewhat befuddled by his aimless post-lunch break questioning.

For what it’s worth, the Tradesports contracts predicting a Skilling conviction did not move a lick during the cross-examination, which at least reflects a perception in that market that cross did not go well for the prosecution.

Although I do not have as good a basis for evaluating the jury as those who are in the courtroom on a daily basis, my approach of reading the transcript, writing weekly summaries and occasionally popping into the courtroom does allow me to reflect on the proceedings a bit more than the folks who are under the pressure of reporting on each day’s developments.

In that regard, none of the pervasive media reports on the trial picked up on the fact that Berkowitz failed to address two key allegations in its case during Skilling’s cross-examination — (i) the alleged Global Galactic agreement that former CFO Andy Fastow testified that he entered into with former Enron chief accountant and former Lay-Skilling co-defendant, Richard Causey, and (ii) the alleged huge conspiracy at Enron.

It doesn’t say much about the strength or validity of the Task Force’s case that arguably the key issue in its case-in-chief is not even addressed during cross-examination of the defendant against whom the issue was directed.

Similarly, Berkowitz’s failure to question Skilling about the alleged conspiracy within Enron is equally baffling, but at least consistent with the Task Force’s paltry presentation of evidence related to its conspiracy charges throughout its case-in-chief.

The Task Force’s ducking of the conspiracy issue brings into sharp focus the true reason why the Task Force made the conspiracy allegations against Skilling and Lay in the first place — to make sure that key witnesses with exculpatory testimony for Lay and Skilling do not testify during the trial.

In short, the Task Force is getting away with keeping exculpatory testimony for Lay and Skilling out of this trial by designating key potential witnesses as unindicted participants in a conspiracy that the Task Force has not come close to proving.

Although reasonable people can differ over whether criminalizing corporate agency costs is sound public policy, there is no serious question that the government’s effective preclusion of exculpatory testimony for Lay and Skilling from this trial is a serious violation of the principles of justice and the rule of law upon which our criminal justice system is based.

Berkowitz’s cheap comment made at the end of Skilling’s cross-examination (“That’s another person you disagree with?”) only underscores that this jury should be allowed to hear from the dozens of former Enron executives who agree with Skilling, and not just the relative few who cut plea deals with the Task Force and testified now that they disagree with him.

As discussions of the Lay-Skilling trial reflect on this blog and others, many otherwise thoughtful and intelligent people believe that they understand the Enron morality play so thoroughly that they seemingly lose the capacity for independent thought regarding Enron and reject any notion of ambiguity or fair-minded analysis in ferreting out the truth of what really happened at the company.

However, against that daunting societal bias, Skilling admirably told his side of the Enron story for over 40 hours on the stand and did not back off from attempting to answer any question posed to him.

Regardless of the outcome of this trial, Skilling’s performance was both impressive and a daunting reminder of the increasing hazards involved for businesspersons in taking cutting-edge risks to create jobs and build wealth in the current U.S regulatory environment.

When the trial resumes on Monday, Lay will take the stand and my sense is that his testimony will take the remainder of the week. Lay’s testimony will be even more focused than Skilling’s on the conflicting considerations and pressures that surrounded the process of making tough business judgments for Enron in an unsettled market that was quickly souring on the company.

Thus, stay tuned for yet another highly interesting week of testimony as the corporate criminal trial of the decade heads toward conclusion.

Week Eleven of the corporate criminal case of the decade was the Jeff Skilling Week, and the former Enron CEO did not disappoint.

In over three and a half days of direct examination (of which I was able to sit in for a couple of hours on Wednesday and Thursday afternoons), Skilling provided a clear, thorough, passionate and at times riveting account of Enron’s business and the wide array of issues and considerations that he confronted on a daily basis in helping build the company into one of the largest U.S. companies.

In so doing, Skilling’s testimony underscored plainly what the Lay-Skilling case has become — the purest instance of criminalizing corporate agency costs in recent American history.

Skilling’s testimony on direct disputed head-on the presumption on which the Enron Task Force’s entire case is based — i.e., that Enron melted down and, thus, Skilling and Lay must be guilty of some crime — and included the following points:

In educating the jury about Enron’s business, Skilling analogized Enron’s gas bank — the creative model for buying and selling natural gas that Skilling devised while working as an Enron consultant for McKinsey & Co. — to a slaughterhouse.

The gas bank was like a cow in that some folks want steak and are willing to pay more for it, while some people want hamburger, and others want waste items such as hooves. Enron got all the cows together, cut’em up and organized them into their various pieces, and then delivered them to customers that distributed them to the public.

In so doing, Enron turned itself into an aggregator of natural gas and an intermediary between gas drillers and distributors.

In short, Skilling noted that Enron sold “reliable delivery and predictable prices” of natural gas and electricity.

Described the complexity of Enron and the extensive planning and reviews that went into management of the company’s business decisions. Skilling’s portrayal of the way the company operated was in sharp contrast to the prosecution witnesses who testified under plea deals that many of Enron’s key business activities were based upon misrepresentations to the market or secret side deals.

In disputing the Task Force’s allegations of wrongdoing regarding Enron’s earning-per-share estimates, explained the internal process of continually updated financial information from Enron’s various business units after the end of each quarter in explaining how an earnings-per-share estimate could move from 30 cents to 31 cents in one day.

Skilling noted that it was not unusual at all for such earnings estimates to change on a daily basis because of the torrent of information that management absorbed from its various business units following the end of a quarter and that such changes occurred systematically within the company.

Defended the purpose and validity of Enron’s special purpose entities — including LJM and the other SPE’s involved in the Raptor structures — as providing valuable hedging and related financial benefits for Enron that were thoroughly reviewed and approved by scores of professionals both within Enron and outside the company.

Denied that he ever pressured former Enron CFO Andrew Fastow to unload any Enron assets into the SPE’s in order to hit Wall Street earnings targets and denied ever guaranteeing Fastow that an SPE would not lose money on a transaction with Enron.

Explained the valid business purposes for the reorganization of Enron’s EES trading operation into Enron’s wholesale unit, and denied the Task Force’s allegation that hiding losses of EES in the more profitable wholesale unit was any motivation at all for the reorganization.

Explained his purpose in selling less than half of his Enron stock on the first day that the stock market reopened after the 9/11 attacks and why he simply forgot in prior SEC testimony about his attempt to sell a smaller amount of Enron stock five days before 9/11.

Conceded that Enron’s broadband unit turned out to be a mistake, but that nothing about it was criminal in nature. Although ultimately a failed investment of about $1 billion, Skilling noted that — if Enron’s bet on broadband had been correct — the unit could have been worth as much as $30 billion. That’s precisely the type of reasoned bets that companies need to be taking to build wealth for their shareholders, contended Skilling.

Moreover, Skilling noted the fallacious nature of the Task Force’s allegation that Enron’s sales of “dark fiber” and structured finance transactions in its broadband unit were used to cover up how badly the unit was really performing. In fact, Skilling noted that those sales and structured finance transactions were always viable alternatives under the unit’s business plan to hit earnings targets.

Reviewed how Enron was in outstanding financial shape when he resigned as CEO in August 2001, even with the shattered telecom industry affecting the broadband business and his failure to sell overvalued international assets sooner.

Moreover, while noting that short selling was a legitimate market tool, Skilling blamed the market panic in regard to Enron that occurred two months later on inflammatory and often untrue media reports on Enron that were improperly planted and promoted by short sellers of Enron stock.

Contended that the Enron Task Force intentionally misrepresented Enron’s business practices and purposely failed to consider exculpatory evidence in its effort to make a case against him and Lay.

Not only was the substance of Skilling’s passionate performance impressive, the method that he and defense attorney Daniel Petrocelli used in presenting it to the jury was equally effective.

Inasmuch as the method of the Task Force’s presentation of its case-in-chief against Skilling and Lay was essentially to throw as much mud as possible against the wall to see how much might stick, Petrocelli navigated Skilling through direct examination by having Skilling respond to the actual language of each charge in the Task Force’s indictment against Skilling, something that the Task Force had sought to prevent.

In so doing, Petrocelli brought structure to Skilling’s defense and provided the jury with a handy framework in which to consider Skilling’s defense to the Task Force’s charges.

Keeping the jury interested in a key witness over a long direct examination is not easy, but my sense is that Petrocelli’s method of juxtaposing heavily-scripted questioning on key points with frequent periods where he simply allowed Skilling to defend himself with passionate and knowledgeable explanations to the jury was a particularly effective way to present Skilling’s case.

The fact that Petrocelli and Skilling seem to have an easy and genuinely-friendly relationship with each other also facilitated the presentation.

By the way, the effervescent Petrocelli and the witty Judge Lake are clearly the jury’s favorite lawyers in the trial, and the two of them have developed an engaging relationship through this long case.

Yesterday, after the second afternoon break and as a long week of tiring testimony was drawing to a close, Petrocelli used a baseball analogy in advising Judge Lake that he was almost finished and in “the bottom of the ninth.” Judge Lake responded with a wry smile: “With two out.” Petrocelli, Skilling, the jury and the spectators in the courtroom cracked up.

Although reading a jury is highly speculative business, my sense is that Skilling’s direct examination resonated well. The reports early in the week from the major news reporters who are attending the trial daily (Barrionuevo-NY Times; Carrie Johnson/WaPo; Emshwiller-McWilliams/WSJ($); and Mary Flood/Houston Chronicle) described the jurors as responding somewhat coldly toward Skilling during the first stages of his testimony, but by yesterday afternoon the jurors — particularly the ones who I perceive to be the leaders — appeared to me as being fully engaged and warming considerably toward Skilling.

By the time Skilling noted late yesterday afternoon that he enjoyed working on cars as a hobby and that the reason he owned two Range Rovers was because “they’re English cars, so they don’t work” and thus, “there’s always something to work on,” the jurors were laughing heartily and looking as if they were genuinely enjoying Skilling’s observations.

So, on the Monday after Easter Sunday, the next key stage of the Lay-Skilling trial takes place as the Task Force begins the difficult task of cross-examining Skilling.

Although the conventional wisdom is that the Task Force will attempt to goad Skilling into becoming unattractively angry and self-righteous on the stand, my bet is that Skilling will not take that bait.

Moreover, a particularly daunting problem for the Task Force is that Skilling understands Enron’s business so much better than the prosecutors could ever hope to that they run the risk of actually allowing Skilling to help himself during cross-examination if they delve too deeply into the nuts and bolts of Enron’s business practices.

My sense is that cross-examination and re-direct of Skillling will take most of next week, and then the Skilling team has only a few additional witnesses before they will turnover the defense to the Lay team, probably sometime in Week Thirteen.

Accordingly, stay tuned as the corporate criminal case of the decade turns toward home in what will likely be as fascinating a finish as this remarkable trial has proven to be to date.

As I look forward to sitting in for a couple of hours this afternoon during the direct examination of former Enron CEO Jeff Skilling in Houston federal court, attorney Paul Fisher and former Amoco economist Jim Johnston provide this interesting Heartland Institute article (hat tip Professor Bainbridge) that defends Skilling and Enron, and hits on many of the same points that I have made over the past two years (here, here, here, here, and here, to cite just a few) about the misguided nature of the Enron-related prosecutions. Fisher and Johnston’s thoughtful piece concludes with the following observation:

The Enron story is reminiscent of an earlier political attack on an energy company during the Great Depression of the 1930s. New York Governor Franklin D. Roosevelt was making a political issue out of Samuel Insull, the CEO of Commonwealth Edison in Chicago. The matter helped get FDR elected president in 1932 but forced the ComEd holding company into bankruptcy, even though Insull and his associates were subsequently acquitted of all charges.
We hope the Enron jury will show the same wisdom as the jury in the Samuel Insull case and reject the politically inspired attack on energy risk management. Maybe in time efficient risk management will return to the natural gas and electricity industries. Energy consumers will be the prime beneficiaries.

After only one week of the defense’s case and the tenth week of trial, it has become clearer than ever that the Enron Task Force’s prosecution of former key Enron executives Ken Lay and Jeff Skilling has become the purest attempt to criminalize corporate agency costs of any prosecution since the bursting of the stock-market bubble of the late 1990’s.

After a friend of prosecution witness and former Enron investor relations chief Mark Koenig kicked off the defense case by testifying that Koenig had told her that he lied about wrongdoing at Enron in order to cop a plea deal with the Enron Task Force, the Lay-Skilling defense presented a series of former Enron executives who disputed the testimony of prosecution witnesses on a number of key prosecution allegations, including the following:

That Skilling authorized former Enron CFO Andy Fastow to operate Enron’s special purpose entities as parking lots for Enron’s underperforming assets while running roughshod over other Enron executives in negotiations;

That Enron had no internal controls regarding Fastow’s conflict of interest in managing certain of Enron’s SPE’s while acting as Enron’s chief financial officer;

That there was any wide-ranging criminal conspiracy within Enron;

That Skilling had misrespresented to the marketplace layoffs in Enron’s broadband unit as redeployments;

That Skilling had misrepresented to the marketplace the true purpose of a restructuring of Enron’s EES business unit and the nature of problems within that unit;

That former finance executives Fastow and Ben Glisan had ever informed Lay that the Dhabol Power Plant in India was highly overvalued; and

That Vinson & Elkins’ investigation into the allegations contained in Sherron Watkins’ memo was a sham by Lay to cover-up Enron’s shaky finances

Business decisions necessarily involve judgments over various possible alternatives, and the nature of business risk means that a number of those decisions will ultimately turn out badly, as certainly occurred at Enron.

But rather than allowing the civil justice system to sort out responsibility for such a loss, the Enron Task Force’s mindset is to criminalize the loss by appealing to the jurors’ hindsight bias and urging them to convict Lay and Skilling of making “the choice of seemingly riskier alternatives.”

As corporate law experts Stephen Bainbridge and Larry Ribstein have long maintained, shareholders deserve protection from theft, but not from risk taking, and it’s not clear that government prosecutors know — or even care about — the difference.

Thus, while the Task Force has properly obtained guilty pleas from Fastow, Glisan and the relative few of their cohorts who truly committed crimes by effectively embezzling money from Enron, the Task Force continues to spend an enormous amount of resources criminalizing business judgments that Lay, Skilling and others made in regard to Enron that simply do not involve the black-and-white circumstances of theft or embezzlement.

As a result, the Task Force has been forced to engage in a number of highly questionable tactics in order to attempt to pull off a win in such cases. The Task Force’s record in the three previous Enron-related prosecutions that have actually gone to trial — the Andersen case, the Enron Broadband case, and the unraveling Nigerian Barge case — reflects that even those dubious tactics cannot pull the wool over the specious nature of such prosecutions.

The cross-examination of former Enron general counsel James Derrick Thursday afternoon was a case in point.

Derrick — who is a quietly forceful, competent and genuinely nice man — made the following insight Thursday afternoon when Task Force prosecutor John Hueston accused him of trying to shield himself from civil liability by denying wrongdoing in connection with his involvement in retaining Vinson & Elkins to conduct the investigation into allegations contained in the Watkins’ memo:

A. I think it is fair for people to question [Derrick’s involvement in the decision to retain V&E], but the reason I haven’t admitted to [wrongdoing] is because I am personally confident that I have discharged, and did discharge, my obligation in good faith to the company. It’s perfectly proper to challenge my judgment, but in terms of whether I exercised it in good faith in a way that I thought was in the best interest of the company, I have no doubt that I did that. [. . .]

Q. Sir, it certainly helps you claim that you did everything proper by denying ever receiving a memo in that same time from your own internal legal counsel which would corroborate those Watkins allegations; right?

A. I think it serves my interest to tell the truth.

Derrick’s analysis is spot on. Sure, his and Lay’s decision to retain V&E to handle the investigation over the Watkins’ memo is subject to legitimate question. But there is little doubt that the decision was a reasonable business judgment that these two men made after careful consideration of the difficult circumstances and issues that their company faced at the time of the decision.

Whether management makes such judgments correctly is a fundamental risk of business ownership, and criminalizing that risk — through the prism of hindsight bias — will simply make executives in the future less likely to take the risks necessary to build wealth and create jobs while not deterring in the slightest the Fastows of the world from embezzling money.

How all of this is affecting the Lay-Skilling jury remains decidedly unclear. As Professor Bainbridge pointed out earlier in the week, the betting markets are lining up in favor of conviction, which mirrors public opinion that is conditioned by the mainstream media’s presumption in such cases — i.e., that Enron melted down and, thus, Lay and Skilling must be guilty of something as a result.

Although most of the reporters attending the trial each day are providing reasonably objective analysis, that hardly makes a dent in the societal bias against anything having to do with Enron. Heck, the business columnist for Lay and Skilling’s hometown newspaper has rarely missed a day during the trial in which he does not call for the conviction of the two men.

Nevertheless, my sense remains that the dynamics in play in the Lay-Skilling courtroom indicate that the outcome is not as certain as conventional wisdom suggests.

This week, the defense witnesses have presented an interesting contrast to the prosecution witnesses of the previous nine weeks. Inasmuch as virtually all of the key prosecution witnesses had cut plea deals with the Task Force in return for their testimony against Lay and Skilling, their testimony came after many hours of preparation with prosecutors. In contrast, almost all of the defense witnesses this week had either met only briefly or not at all with the Lay-Skilling team before testifying.

The result was testimony that was not as prepared as that of the prosecution witnesses, but maybe just more credible to the jury than the heavily-scripted testimony of the prosecution’s plea-bargaining witnesses.

Similarly, the Task Force’s cross-examination of the defense witnesses has seemed mostly off-target.

For example, during cross-examination of Max Hendrick, a Vinson & Elkins partner involved in the investigation of the allegations in the Watkins memo, a Task Force prosecutor attempted to impeach the testimony of Hendrick with the hearsay statement of an unindicted co-conspirator, even though the statement was exculpatory with regard to the unindicted co-conspirator being involved at all in the alleged conspiracy at Enron.

That not-so-subtle point went unreported in the mainstream media accounts of the trial, but it nevertheless highlighted perhaps the biggest injustice of all of the Enron-related prosecutions — the Task Force tactic of effectively precluding key witnesses with exculpatory testimony from testifying for the Lay-Skilling defense.

Likewise, the Task Force’s cross-examination of Derrick on Thursday afternoon was questionable, at best. During direct examination earlier in the day, Derrick had recounted conversations with Skilling on how they both valued the importance of family and how burdensome Enron executive jobs were on their them.

Derrick — who did not prepare his testimony with the Lay-Skilling team before taking the stand — then expressed appreciation to Skilling and Enron for allowing him to take an extended 1991 vacation trip rafting down the Colorado River with his only son, who died unexpectedly several years ago. “I’ll be forever grateful,” stated Derrick from the stand regarding Skilling’s kindness. An observer of the morning session told me later that the jury’s attention was riveted on Derrick during that part of his testimony.

Then, in the afternoon session (which I was able to attend), Task Force prosecutor Hueston attacked — with an accusatory tone in his voice — Derrick’s credibility and integrity.

Never changing his quiet and patient demeanor in the face of Hueston’s misguided tone of cross-examination, Derrick politely but firmly refused to give Hueston an inch and, by the end of the day, appeared to have Hueston flustered.

After the morning’s testimony about Derrick and his son, my sense in the courtroom was that the jury — which is predominantly female — was not appreciating the style of Hueston’s cross-examination toward Derrick one bit. Sometimes such seemingly small incidents in long trials end up making a big difference in the way jurors ultimately frame the issues.

Derrick returns to testify on Monday for a short time before Skilling takes the stand, probably around mid-morning.

Thus, Week Eleven of the corporate criminal case of the decade will be the Jeff Skilling Week, as the former Enron CEO will probably be on the stand for the entire week and probably a portion of the following week.

Unlike many white collar business defendants, Skilling is anxious to tell his side of the story, and I expect his testimony will be a fascinating look into the conflicting considerations and pressures that surrounded the process of making tough business judgments for a huge company that was often involved in taking cutting-edge risks.

From a business law standpoint, it doesn’t get much more interesting than that, so stay tuned.