On the heels of the Fifth Circuit Court of Appeal’s extraordinary order last week commanding the release of former Merrill Lynch executive William Fuhs, the three other Merrill Lynch executives convicted in the Enron-related Nigerian Barge case — including Merrill’s former global investment banking division chief, Dan Bayly — have filed this motion seeking a similar release pending the Fifth Circuit’s disposition of their appeals (this earlier post examined Bayly’s initial such motion). The government’s uninspired response to the Merrill executives’ motion is here, and Bayly’s succinct reply to the government’s response is here.
As noted in these earlier posts, the plight of the four Merrill Lynch executives in the Nigerian Barge case is a prime example of the appalling cost of the government’s criminalization of business in the post-Enron era (for a thorough discussion of that subject in the context of the barge case, begin here). In the Nigerian Barge case, the Enron Task Force took a relatively small transaction under which Merrill Lynch bought a stream of dividend payments from an Enron affiliate and criminalized it through a brazen web of distortion, suppression of key testimony, inadmissible hearsay, opposition to the defense’s jury instruction on the key issue in the case and prosecutorial misconduct. The Task Force effectively prosecuted the Merrill Four for doing their jobs in connection with Enron’s sale of an asset for which Enron may have improperly accounted, although even that issue was never proven at trial.
In reality, the Merrill Four were convicted for having the misfortune of being involved in a legitimate transaction with the social pariah Enron. Here’s hoping that the Fifth Circuit begins the process of righting this wrong by ordering the immediate release from prison of Dan Bayly, James Brown and Robert Furst.

In connection with this NY Times/Alexei Barrionuevo and Kurt Eichenwald article on the upcoming testimony of former key Enron executives Ken Lay and Jeff Skilling, the Times provides this handy chart of the government’s core allegations in the trial.
The chart underscores the point made earlier here and here on why the Enron Task Force does not want the Lay-Skilling jury to see the indictment against Lay and Skilling, and does not want the Lay-Skilling defense team to be allowed to question witnesses about it — a substantial number of the allegations that the prosecution has elicited from its witnesses to date are simply not in either the indictment or statements in compliance that the prosecution filed against Lay and Skilling.
Moreover, the chart also underscores the Task Force’s slimmed down case (just half a dozen key witnesses) and — despite the conventional wisdom — that the limited areas of alleged wrongdoing make this an eminently defensible case for Lay and Skilling.

U.S. District Judge Sim Lake declared “Spring Break” at the conclusion of a short Week Nine of the criminal trial of former key Enron executives Ken Lay and Jeff Skilling as the prosecution concluded its case-in-chief and the Lay-Skilling team made final preparations for putting on its case.

The break was certainly appreciated by the participants in the energy-draining trial and allowed everyone else who is following the case to step back and evaluate where the trial stands.

My experience is that it is almost impossible to understand the dynamics of a particular trial fully unless one sits in the courtroom and watches the trial each day.

Although I have read the entire trial transcript to date, I have only been able to sit in on the trial on a few occasions, so I certainly do not have as good a perch to view the trial proceedings as the primary beat reporters who are in the courtroom almost every day — Alexei Barrionuevo of the NY Times, Mary Flood of the Houston Chronicle, John Emshwiller and Gary McWilliams of the Wall Street Journal, and Carrie Johnson of the Washington Post.

Interestingly, although each has dutifully reported the presentation of the Enron Task Force’s case against Lay and Skilling, none of these day-to-day reporters have indicated that they believe the trial is a slam dunk winner for the prosecution.

At the Week Nine pole, my sense is that the prosecution has competently presented a reasonably fast-paced version of a fundamentally weak case.

That’s not to suggest that the prosecution can’t win it — indeed, weak cases are won all the time and the Task Force still has the huge advantage of the presumption that someone must be guilty of some crime whenever a company melts down in the way Enron did.

However, if the jurors have not already decided against Lay and Skilling based on that presumption, a quick glance of the Task Force’s case over the past nine weeks reveals more than enough holes through which the Lay-Skilling team could well deliver a good dose of reasonable doubt to the jury.

The week nine testimony was a case in point. Former Enron treasurer Ben Glisan completed his testimony in which, on direct, he 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, Glisan had no meaningful documentary evidence to support his testimony on that issue, and Lay’s attorneys on cross-examination introduced Glisan’s own reports from September and October, 2001 detailing Enron’s improving finances.

In fact, on October 8, Glisan told Enron directors that the company was “on target” to meet its year-end liquidity goals and it would hold onto its investment-grade credit rating, calling a lowered outlook the “most likely worst-rating outcome” from its third-quarter earnings report. Glisan also transmitted an October 17 Deutsche Bank credit analysts’ report to Mr. Lay and others that noted Enron’s “liquidity remains solid.”

But lack of documentary evidence to support testimony and contradictory documentary evidence in regard to such testimony are not the only problems for the prosecution. Virtually every material prosecution witness — including Glisan — testified that they initially lied to investigators when they denied that they did anything illegal at Enron.

Now, however, those witnesses are claiming that they are telling the truth after cutting a deal with the Task Force in return for their favorable prosecution testimony. Is the jury really going to believe that the biggest corporate conspiracy in history was hidden from everyone except these relative few Enron executives who have copped pleas, struck deals while in prison or entered into non-prosecution agreements?

Moreover, virtually none of the testimony to date has supported a key element of the prosecution’s case — the alleged huge conspiracy within Enron to cover up the wrongdoing at the company.

Despite alleging now that Lay and Skilling were involved in lying about Enron to the investment community years ago, none of the prosecution witnesses produced any corroborating documentary evidence that they had any reservations at the time about the statements that Lay and Skilling were making and none of the witnesses have testified that either Lay or Skilling at the time ever confided to them that they thought they were making misleading statements. Doesn’t sound like much of a conspiracy, does it?

Meanwhile, the Task Force has several major problems with a number of its witnesses.

Mirroring his infamous false testimony in the Enron Broadband Trial and the Task Force’s abysmal handling of that false testimony, it now appears that the prosecution team had former Enron Broadband executive Ken Rice testify in Lay-Skilling regarding a dubious presentation document that the prosecution failed to produce to the defense as required before trial.

It’s usually not a good sign for the prosecution when a key prosecution witness performs so badly that the defense is considering calling the witness back to testify in the defense’s case-in-chief.

Likewise, the Task Force’s decision to go for a cheap score during the testimony of former Enron Broadband executive Kevin Hannon — he of “they’re on to us” fame — has turned into a major can of worms for the prosecution.

Understandably, the the Lay-Skilling defense is wondering why no other prosecution witness who attended that meeting testified regarding such a supposedly revealing statement by Skilling and, if they didn’t hear the statement, why that exculpatory evidence was not disclosed to the defense prior to trial?

Finally, the testimony of key prosecution witness Andy Fastow on his negotiation of a plea deal at the expense of his wife and on the “Global Galactic” memo was so bizarre that the prosecution simply elected not to attempt to corroborate Fastow’s testimony with either former Enron chief accountant Richard Causey or key Fastow henchman, Michael Kopper.

Maybe the Task Force brings in Causey as a rebuttal witness later, but, if not, then what did Causey tell the Task Force about Global Galactic?

So, midway through the corporate criminal case of the decade, the Task Force has presented a “pump and dump” case that, to a large extent, relies on a complex mix of innuendo and opinion.

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

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 alleged 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 that Enron had become.

That theory of the case plays heavily on “the presumption” in such cases — 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.

Come Monday, the Lay-Skilling team begins presenting its case-in-chief, which I expect to be spirited and entertaining.

However, the defense is not without its own problems, the biggest of which is its inability to obtain exculpatory testimony from numerous former Enron executives who are declining to testify on the basis of their Fifth Amendment privilege after the Task Force fingered them as targets of the Enron criminal investigation and designated them as unindicted co-conspirators in the Lay-Skilling case.

That such witnesses will likely not be testifying is a terrible injustice to Lay and Skilling. Although reasonable people can differ over whether criminalizing corporate agency costs is sound public policy, there is no 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.

If the government believes that those important principles must be shoved aside to obtain successful prosecutions of questionable business judgments, then isn’t that a blue ribbon reason to re-think the prosecution of such cases altogether?

Week Eight of the corporate criminal case of the decade drew to a close on Thursday with former Enron treasurer and Andy Fastow acolyte Ben Glisan on the stand and with the Enron Task Force announcing that presentation of its case-in-chief was drawing to a close.

That’s entirely appropriate because, in many ways, Glisan’s testimony has been a microcosm of the Task Force’s case against former key Enron executives Ken Lay and Jeff Skilling.

During a heavily-scripted direct examination that took a little over a day, the Task Force had Glisan provide a 30,000 foot flyover of the various alleged misrepresentations that, somewhat surprisingly, mostly Lay and, to a lesser extent, Skilling made to the market and Enron employees about the company’s finances.

Then, during yesterday’s cross-examination, defense attorneys began to chip away systematically at Glisan’s allegations, focusing much more on the specific circumstances relating to Glisan’s allegations of wrongdoing than the prosecution did on direct. Much of the testimony on both direct and cross-examination pertained to dizzying analysis of the financial details of the Raptor financial structures that involved certain of Enron’s special purpose entities, a subject that clearly has become a snoozer for the jury and even the ever-patient Judge Lake, who continually encourages both sides to move things along.

Nevertheless, Glisan provided some of the most fascinating testimony to date in regard to the sledghammering manner that the Task Force has handled the biggest corporate criminal investigation in the United States since Rudy Guiliani’s prosecution of Drexel Burnham and Michael Milken almost 20 years ago.

First, as noted in this earlier post, Glisan disclosed that he had been successfully negotiating with Task Force prosecutors about a better prison deal almost from the beginning of his prison term in September 2003.

That important fact was not revealed to the court and the jury during Glisan’s key testimony in the earlier Enron-related Nigerian Barge trial in 2004 that resulted in four Merrill Lynch executives being sent to prison for the dubious “crime” of not sufficiently appreciating that Enron may not have accounted properly for an asset sale.

The Task Force had presented Glisan in the barge trial as a witness whose testimony was particularly credible because he had not cut any deal with the government in regard to his testimony and was being compelled to testify under a grant of immunity. That presentation of Glisan in the barge trial was disingenuous, at best.

Then, during cross-examination yesterday, Glisan revealed even more sordid details of his negotiations with the government.

Soon after Enron went into bankruptcy in early December, 2001, Glisan and his attorney went to prosecutors and the SEC and attempted to minimize his role at Enron while, at the same time, apparently hoping that prosecutors wouldn’t discover Glisan’s involvement in effectively embezzling about $1 million from Enron in connection with Fastow’s Southhampton deal.

When that approach didn’t work and Glisan was indicted in April, 2003, Glisan changed his story and began singing like a canary about alleged wrongdoing at Enron, but entered into a plea deal with the Task Force that did not include a cooperation agreement so that he could begin serving his five-year prison term immediately at a minimum security prison camp, the best alternative in the bad choices that a prisoner confronts in the federal prison system.

Despite Glisan’s turnabout, the Task Force apparently was still interested in extracting a better level of “cooperation” from Glisan. So, rather than sending him to the prison camp that the judge in Glisan’s case recommended and for which Glisan qualified, the Task Force apparently arranged with the Bureau of Prisons to send him to a harsher minimum-security prison facility, where Glisan was shockingly thrown into solitary confinement for most of his first two weeks in prison and then forced to share an 8 by 12 ft. prison cell with two other prisoners over most of the following month.

That had the intended effect on Glisan, who immediately began bartering his testimony in other Enron-related cases for the Task Force’s assistance in moving to the more-desirable prison camp and in lessening the length of his sentence. That led to arguably the most shocking revelation of all.

In February, 2004, the Task Force arranged to have Glisan brought to Houston so that he would be here during the time that Skilling was indicted. On the day after Skilling’s indictment, when the Task Force put Skilling through his “perp walk” before his initial court appearance, the Task Force had Glisan — in prison jump suit, leg shackles and handcuffs — meet Skilling and ride with him in the same federal courthouse elevator.

In one of the most dramatic exchanges of the trial, Skilling lawyer Daniel Petrocelli asked Glisan the following question about that incident:

“Did you believe for one second, sir, that [meeting Skilling in the elevator] was a coincidence?” asked Petrocelli.

“No, I didn’t believe that,” replied Glisan.

Although the Task Force’s transparent purpose in exposing the defeated Glisan to Skilling in this heavy-handed manner was to shock Skilling into seeking his own plea deal, the Task Force badly miscalculated the strength of Skilling’s backbone.

Glisan went on to testify on how he parlayed his testimony in the barge and Lay-Skilling trials into a Task Force-sponsored transfer to the more desirable mininum-security prison camp in Beaumont, liberal furloughs at home while working with the Task Force, and the Task Force’s facilitation of a reduction of his prison sentence by over year through his participation in an alcohol-rehab program.

As a result, Glisan — who entered prison in September 2003 to serve a five-year sentence — is scheduled to be released to home confinement in September of this year and will be released from custody entirely in January, 2007.

Not bad for a “non-cooperating” witness, eh?

What effect all of this is having on the Lay-Skilling jury remains decidedly unclear. I was in the courtroom for most of the direct examination of Glisan and it is clear that most the jurors now check out when the testimony turns toward the boring details of Enron’s complex financial transactions.

On the other hand, reports from courtroom observers from yesterday indicate that most jurors were listening intently during Glisan’s testimony about his solitary confinement and his arranged courthouse elevator meeting with Skilling.

My sense is that the Task Force has done a competent job of presenting a generally weak case that has some gaping holes, and that the jury is anxious to begin hearing Lay and Skilling’s side of the story.

So, at this point, it appears that Lay and Skilling will begin presenting their side of the case on Monday, April 3rd and that the defense’s case-in-chief will take about a month to six weeks to put on.

My bet is that it will be a vigorous and highly entertaining defense, so stay tuned as the corporate criminal case of the decade — and arguably the purest attempt to criminalize corporate agency costs in recent memory — turns toward home.

When former Enron treasurer and Andy Fastow henchman Ben Glisan cut his plea deal with the Enron Task Force in September, 2003, he did not — unlike most other Enron plea bargainers — enter into a cooperation agreement that required him to cooperate with the Task Force in other Enron-related prosecutions.

Interestingly, in connection with Glisan’s plea deal, U.S. District Judge Ken Hoyt recommended that Glisan be assigned to a more-favored minimum-security camp.

However, the Bureau of Prisons assigned Glisan to the Bastrop, Texas prison facility, which was contrary to Judge Hoyt’s recommendation that Glisan be assigned to the less-restrictive camp. Glisan reportedly was miffed with the BOP’s assignment.

Nevertheless, during the previous Enron-related Nigerian Barge case in Sept.-Nov., 2004, Glisan was the key prosecution witness. Because he has no cooperation agreement, Glisan testified in that trial — as he is currently doing in the Lay-Skilling trial — under a grant of use immunity so that his testimony cannot be used against him in another prosecution.

Accordingly, the Task Force presented Glisan during the Nigerian Barge trial as a witness who was being “forced” to testify under the immunity grant and who had no deal with the Task Force to get a lighter sentence in return for his testimony. Indeed, the prosecutors touted Glisan during the barge trial as a witness who was more credible than the typical prosecution witness who had cut a deal for a reduced sentence under a cooperation agreement with the prosecution.

Well, in a startling revelation during Glisan’s direct examination in the Lay-Skilling trial yesterday, it appears that the Task Force’s presentation of Glisan as a non-cooperating witness during the Nigerian Barge trial was a sham.

A letter introduced into evidence yesterday sets forth the terms of the cooperation agreement between Glisan and the Task Force. In return for Glisan’s cooperation in other Enron-related cases, the Task Force arranged Glisan’s transfer to his favored Beaumont, Texas minimum-security camp (from the his disfavored Bastrop, Tx. prison facility) and helped Glisan shave a year off of his five-year prison sentence by facilitating his involvement in a prison alcohol-rehab program.

As a result of the deal, Glisan is now scheduled to complete his five-year prison sentence in January, 2007 and will be released to home confinement in September.

Moreover, although the letter between the Task Force and Glisan’s suggests that Glisan’s lawyer had proposed “the deal” in early 2005 after the completion of the Nigerian Barge case in November, 2004, it’s clear that Glisan and the Task Force were negotiating the deal well before the trial of the Nigerian Barge case.

The final paragraph of a June 1, 2004 from the Task Force to the defense counsel in the Nigerian Barge case contains the following statement about Glisan’s negotiations with the Task Force:

In May, 2004, Glisan, through his counsel, requested that the government support his request to be transferred to a minimum security camp in Beaumont, Texas. The government responded to Glisan’s attorney as follows: the government will not weigh in on BOP’s decision to designate Glisan to a particular facility; that is a matter for BOP. However, if BOP inquired, the government would advise BOP of the government’s assessment of Glisan’s truthfulness in [the Nigerian Barge case].

Contrary to the foregoing statement, it now appears clear that the prosecution did weigh in on Glisan’s transfer to the Beaumont facility, in addition to helping Glisan shave a year off of his sentence.

Moreover, contrary to the suggestion in the June 1 letter that the BOP is independent of the Task Force, the September 30 Task Force letter exposes that the BOP is, in fact, a cooperating agency with the Task Force (the BOP’s Houston office is on the same floor of the federal courthouse as the Task Force’s offices).

Does anyone really believe that Glisan’s original assignment to the more restrictive Bastrop prison facility was the result of “administrative necessity?”

Or that the assignments of Nigerian Barge defendants Dan Bayly and William Fuhs to more-restrictive facilities far away from their families was not the product of Task Force intervention with the BOP?

Remember, Task Force prosecutors were clearly upset with U.S. District Judge Ewing Werlein’s refusal to accept their draconian recommendation regarding the length of the prison sentences for the four Merrill Lynch defendants convicted in the barge case.

Glisan’s testimony helped place four Merrill Lynch executives in prison for doing their jobs in connection with the firm’s purchase of a dividend stream for which Enron, not Merrill, may have improperly accounted, although even that issue was never proven during the barge trial.

Now it appears that the true motivation for Glisan’s testimony during that trial was not disclosed to either the defense or the jury.

Chalk it up as yet another example of the lengths that prosecutors must go to justify the criminalization of the unpopular businesspersons of the moment in the post-Enron era.

As noted on several occasions previously, the Lay-Skilling trial has settled into a rhythm during the Enron Task Force’s case-in-chief in which long stretches of boring testimony regarding rather dry topics is interrupted intermittently with a tidbit that really appears to capture the jury’s attention.

The same routine took place yesterday and surprisingly, only the Chronicle’s John Roper among the major news media reporters covering the trial appears to have picked up on the most riveting testimony for the jury.

For most of Monday, the jury and spectators endured testimony from a couple of former Arthur Andersen partners who worked on the Enron account and testified how they thought Enron violated various accounting rules.

Most of it was pretty dry, but prosecutor Sean Berkowitz had the following exchange with Tom Bauer, one of the former Andersen accountants who worked closely with former Lay-Skilling defendant and former Enron chief accountant, Richard Causey, regarding the Global Galactic agreement between Causey and former Enron CFO, Andy Fastow:

Q: Do you recognize anybody’s initials on this document, Mr. Bauer?

A: I recognize what appears to Mr. Causey’s initials.

Q: And are you familiar with Mr. Causey’s initials from having worked with — having worked with him?

A: I’d seen Mr. Causey’s initials on a number of documents that I have reviewed during the course of my work.

Q: And do the initials on each of these three pages appear, to the best as you can tell, to be Mr. Causey’s initials, based on your — your knowledge and recollection of his initials?

A: They appear to be.

During Fastow’s testimony, the Lay-Skilling defense raised substantial questions regarding the validity and authenticity of the Global Galactic agreement, and those questions have become even more compelling by the revelation that the Task Force has chosen not to have Causey corroborate Fastow’s testimony on Global Galactic, at least during the presentation of the prosecution’s case-in-chief.

During cross-examination yesterday, Skilling lawyer Randy Oppenheimer displayed for Bauer and the jury a handy graphic that contained several examples of Causey and Fastow’s initials, including Causey’s alleged initials on Global Galactic.

As the jury looked on with keen interest, Oppenheimer led Bauer through a review of the various initials, getting Bauer to admit that the alleged Causey initials on Global Galactic indeed looked different from Causey’s initials from other documents and that certain characteristics of Fastow’s writing appear similar to the alleged Causey initials on Global Galactic.

Appearing somewhat dumbfounded, Bauer’s final statement to the jury during his testimony yesterday was the following regarding Global Galactic:

“Sir, I can’t say who authored this document. When I saw the initials on them, they appeared to me to be the initials of Mr. Causey, but I’m not a handwriting expert. I can’t testify with regard to who authored this document.”

Where is Waldo? er, I mean Causey? Indeed.

Remember Kevin Hannon? He is the former Enron Broadband executive whose testimony was the subject of this earlier post on the risk for the Enron Task Force of attempting to score points with the jury by eliciting seemingly helpful testimony about a statement that Skilling allegedly made (“they’re on to us”) that, upon reflection, actually turns out to be contrary to the Task Force’s case.
Well, based on this Lay-Skilling motion filed this past Friday, the Task Force’s attempt at a cheap score may have an even more negative effect on the Enron Task Force’s case against Lay and Skilling than first thought. According to the motion, the Task Force apparently has not turned over to the Lay-Skilling team other witness statements team regarding the “they’re on to us” statement that Hannon contends that Skilling made.
Prior to Hannon’s testimony, at least a couple of other prosecution witnesses previously testified that they were at the same meeting in which Hannon alleges that Skilling made the statement. However, no other prosecution witness has testified that Skilling made any such statement. Accordingly, the Lay-Skilling team points out that the prosecution witnesses’ pre-trial statements that they did not remember such a statement from Skilling would be potentially exculpatory to Skilling and Lay, thus, should have been turned over by the prosecution to the defense. Moreover, given that the Task Force placed such emphasis on Hannon’s allegation regarding the alleged Skilling statement, the Lay-Skilling team observes that it’s highly unlikely that the Task Force didn’t at least ask its other witnesses who attended the meeting about the alleged statement.
Meanwhile, as the Task Force’s case winds down, the NY Times’ Alexei Barrionuevo previews the upcoming week’s testimony, which includes a couple of former Arthur Andersen accountants and former Enron treasurer and Andy Fastow protege, Ben Glisan.

As the seventh week of the epic corporate criminal trial of former key Enron executives Ken Lay and Jeff Skilling drew to a close, U.S. District Judge Sim Lake gave the lawyers and the jurors an extra day off to prepare for the closing witnesses of a slimmed-down prosecution case and the beginning of what will almost certainly be one of the most interesting defense presentations in a white collar criminal case in recent memory.

In some ways, Week Seven of Lay-Skilling reflected the Enron Task Force’s case to date — long on hype, but short on substance.

The week began with the Task Force’s star witness, Andy Fastow, and closed with the self-promoted Enron media star, Sherron Watkins. However, my sense is that there is a method to the prosecution’s approach to presenting its case.

After the disastrous result in the Enron Broadband trial last year in which the jury was put to sleep during long stretches and a glacial opening pace to the Lay-Skilling trial, the Task Force prosecutors have quickened the pace of their presentation and are now on course to finish their case-in-chief in about another week or so.

If that schedule holds, then not only will the Task Force have presented their case in substantially less time than prosecutors initially predicted, they will have avoided the trap of forcing jurors to endure long stretches of mind-numbingly boring testimony.

In fact, the trial has settled into a fairly standard routine with most witnesses.

Each prosecution witness has gone through a heavily-scripted direct examination in which they confidently accuse Skilling, and to a lesser extent Lay, of making various misleading statements to the investing public and employees.

Then, defense attorneys on cross-examination chip away at the prosecution witnesses’ testimony and the witnesses generally become far less decisive in, or defensive about, their accusations.

Much of the testimony is quite boring and technical, but there are usually enough short bursts of interesting exchanges to keep the jury engaged and Judge Lake moves things along with a steady hand and a dry wit.

So, after filing and publicizing a 66-page indictment (which the Task Force doesn’t want the jury to see (and the Lay-Skilling team does) that asserts a wide array of alleged corporate crimes, the Task Force has slimmed down its case to a plain “pump and dump” case — i.e., Skilling and Lay touted the failing company’s shares while selling their own.

As noted in this earlier post, that theory of the case plays heavily on “the presumption” in corporate criminal cases — Lay and Skilling are rich and Enron collapsed, so they must be guilty of something for failing to announce to the investing public that Enron might collapse if something such as Fastow’s effective embezzlement of funds using Enron’s special purpose entities ever was revealed to the markets.

Although clearly a smart move from an appeal-to-jury standpoint, the Task Force’s slimmed-down case is not without risks.

To a large extent, the case still relies on a complex jumble of innuendo and opinion that requires the jury to connect the dots of amorphous points in finding a crime.

For example, one Task Force theme has been that Enron was so successful in making money in its trading operations that it allowed Lay and Skilling to soft-pedal to the markets the losses that Enron was incurring in a couple of less successful parts of its business.

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.

According to the Task Force, 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 that it had become.

Another risk to the Task Force is whether the jury really even recalls much of that after the highly-publicized and sometimes bizarre testimony of Fastow.

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 on the Global Galactic memo certainly raises the question of why the Task Force is not corroborating Fastow’s testimony on that key issue with the testimony of former Enron chief accountant, Richard Causey, who the Task Force has announced will not be called in its case-in-chief.

Perhaps the Task Force is planning on saving Causey to testify as a rebuttal witness after the defense presents its case, but the Task Force’s emphasis on Global Galactic during Fastow’s testimony creates a huge hole in its case unless the more credible Causey corroborates Fastow’s testimony at some point on that key issue.

Meanwhile, almost forgotten in the mainstream media reports on the trial to date is that virtually none of the testimony from prosecution witnesses and even less documentary evidence over seven weeks of trial has supported the prosecution’s allegation of an alleged huge conspiracy within Enron to cover up wrongdoing at the company.

As a result of the paucity of evidence on that key issue, the Lay-Skilling defense would seem to have a reasonably strong basis for seeking immunity grants from either the prosecution or Judge Lake in regard to the testimony of dozens of former Enron executives who are currently invoking the Fifth Amendment privilege in the face of the Task Force’s designation of them as unindicted co-conspirators. Those executives could provide exculpatory testimony for Lay and Skilling during presentation of the defense’s case-in-chief. Stay tuned on that issue.

As the prosecution’s case winds down, the Task Force will call two former Arthur Andersen accountants as witnesses early next week, and then likely end the week with its final major witness, former Enron treasurer and Fastow confidant, Ben Glisan.

Glisan was arguably the Task Force’s most-effective witness in the 2004 trial of the Nigerian Barge case, which appears to be unraveling somewhat for the Task Force. As a result, Glisan’s testimony in Lay-Skilling could turn out to be very interesting, indeed.

Yesterday was Sherron Watkins day at the criminal trial of former key Enron executives Ken Lay and Jeff Skilling, and despite her self-portrayal as a paragon of virtue amidst a cauldron of corruption at Enron, Watkins came off in person as an insufferable know-it-all. Even when it’s not particularly in her interest to do so.

Everyone who follows the Enron saga knows Ms. Watkins. She is the former mid-level Enron executive who parleyed this mid-August 2001 warning memo to Mr. Lay into a lucrative talk show-pundit career of waxing eloquent on all things Enron.

She testified to fawning Congressional subcommittees, co-authored an Enron book, was one of the primary Enron employees interviewed during the Enron movie, and has made a tidy living over the past several years on the rubber-chicken circuit portraying herself as a whistleblower with special expertise on the subject of leadership. Wherever there is a light and a camera, Ms. Watkins is ready to pontificate about Enron.

The fact that Ms. Watkins was not a whistleblower (she never alerted anyone outside of Enron or Arthur Andersen about alleged accounting improprieties) and that her memo to Lay characterized Enron’s problems as primarily a public relations issue has gotten lost in the Enron milieu.

In fact, the specific LJM transactions that she criticized in her memo had been approved by accountants and attorneys inside and outside of Enron. At the time of her memo, Lay listened courteously to her concerns, ordered an investigation, protected her from Mr. Fastow’s threats to fire her for going around him to Lay, and ultimately ordered the unwinding of the Raptor financial vehicles that resulted in more than a $500 million charge to Enron’s earnings in the third quarter of 2001.

Nevertheless, Watkins insisted self-righteously yesterday that Lay committed fraud in connection with his handling of the matter, primarily because he did not follow each and every one of her recommendations to him.

Meanwhile, Watkins’ testimony was downright bizarre regarding her $47,000 in insider trades of Enron stock that she made after delivering her memo to Lay and prior to the company’s announcement of the charge to earnings. Despite having certified in a 2002 Enron employment agreement and sworn in Congressional testimony that she had not engaged in any illegal insider trading while at Enron, Watkins yesterday conceded on direct examination that the trades were not “proper” because “I had more information than the marketplace did.”

But then, on cross-examination, Lay lawyer Chip Lewis courteously attempted to defend Watkins from a charge of insider trading by pointing out that, at the time of the trades, it was still unclear whether there was anything wrong about the accounting for the Raptor financial vehicles and, thus, she was not trading on material, non-public information.

In the ensuing exchange, Watkins proceeded to dispute Lewis’ attempt to portray her trades as not illegal. Tip to Watkins — keep that defense attorney on your payroll.

Also, Watkins is not going to be getting any holiday greeting cards from Houston-based Vinson & Elkins, which was Enron’s primary outside counsel. After accusing V&E of engaging in criminal acts with regard to its handling of the Lay-ordered investigation of the matters raised in her memo, Watkins engaged in the following exchange with Lewis:

Q: Now, in talking about V&E, you would acknowledge with me that they’re one of our country’s most prominent legal institutions, wouldn’t you?

A: Not anymore.

Finally, U.S. District Judge Sim Lake — who has the patience of Job and administers the trial proceedings with a delightful combination of firmness and grace — probably had the best observation about Watkins’ testimony. After enduring Watkins’ continual refusal to respond directly to the question asked on cross-examination, Judge Lake finally turned in exasperation to her and observed:

“You’ve got to respond to [Mr. Lewis’] questions. We’ll be here through the weekend if this keeps up.”

The mainstream media covering the criminal trial of former key Enron executives Ken Lay and Jeff Skilling continues mostly to miss the point that the prosecution’s case over almost seven weeks now has been extraordinarily weak for a case of this magnitude.

Virtually all of the substantive testimony has come from prosecution witnesses testifying under draconian plea deals, most of the testimony alleging wrongdoing has been uncorroborated, and documentary evidence to back up claims of wrongdoing has been almost non-existent.

Of course, no one knows what effect any of this is having on the jurors, some of whom may already have been swayed to convict simply by the overwhelming media bias against Lay and Skilling.

Yesterday’s testimony was a case in point. Three witnesses testified and not one of them came close to implicating either Lay or Skilling in a crime.

Vince Kaminski, a former high-level Enron risk analyst, testified that he warned that some of Enron’s special purpose entity structures were inherently risky, but that management went ahead with the deals, anyway.

Johnnie Nelson, a colorful former Enron pipeline worker who was offered by the prosecution for the transparent purpose of entertaining the jury, testified that he was angry with Lay because he, like Lay, invested virtually all of his personal savings in Enron stock that turned out to be worthless.

Finally, Chris Loehr, a seemingly nice young man who worked for one of the special purpose entities that Fastow managed, confirmed that Fastow told him about Fastow’s secret “Global Galactic” agreement that supposedly guaranteed that the SPE’s would not lose money on a number of their deals with Enron, but could not corroborate Fastow’s testimony that Skilling knew about it.

Now, there is a prosecution witness who could corroborate Fastow’s testimony about the Global Galactic agreement — former Enron CFO and former Lay-Skilling co-defendant, Richard Causey. Fastow claimed that he worked out the terms of the Global Galactic deal with Causey, who Fastow claimed disclosed it to Skilling. Causey entered into a plea deal with the Enron Task Force on the eve of trial and, thus, is readily available to testify.

But in a stunning development that has gone largely unreported in the media covering the trial, it now appears that the Enron Task Force will not call Causey as a witness to corroborate Fastow’s testimony. The NY Times’ Alexei Barrionuevo — Kurt Eichenwald‘s colleague who is one of the few reporters covering the trial expressing increasing skepticism regarding the prosecution’s case — reports on this development in his latest dispatch on the trial:

A looming question is when, or if, Richard A. Causey, Enron’s former chief accounting officer, will testify in the case. He could be crucial to supporting Mr. Fastow’s claims that Mr. Skilling was shown a list of side deals that Mr. Fastow kept track of.

Mr. Causey is not on the government’s witness list. But prosecutors say that does not preclude them from calling him in a rebuttal that would follow the expected testimony of Mr. Skilling and Mr. Lay. Mr. Causey pleaded guilty to fraud in December, just one month before the trial started.

Mr. Fastow testified for four days about the partnerships and about secret side deals he said he made with Mr. Skilling that guaranteed the partnerships would profit from purchasing distressed Enron assets. But during three days of cross-examination by defense lawyers, Mr. Fastow admitted to stealing tens of millions of dollars from Enron while deceiving his bosses and even his own wife about much of his illicit activity.

The government knew that calling Mr. Fastow brought inherent risks, but chose to call him anyway.

Barrionuevo is spot on. If the Task Force does not call Causey, then that means he cannot corroborate the key testimony of the primary prosecution witness in the trial to date. That would blow a huge hole in what is already a shaky prosecution case and — if the jurors have not already made up their minds to convict — could well be the basis of reasonable doubt about the prosecution’s entire case.

Where is Waldo?, indeed.