Former Enron Broadband chief operating officer Kevin Hannon will finish his testimony today in the trial of former key Enron executives Ken Lay and Jeff Skilling. Most likely, with the testimony of former Enron CFO Andy Fastow to follow, Hannon’s testimony will quickly fade into obscurity.
However, the nature of the media reporting on Hannon’s testimony from last Thursday afternoon got me to thinking. The prosecution went for a cheap score with Hannon by eliciting from him that Skilling had supposedly admitted during a May 2001 meeting with a group of other Enron executives that “they’re on to us” after a small analyst firm had produced a research note critical of some Enron transactions. Most of the media covering the trial (representative examples: NY Times and Houston Chronicle) seized on Hannon’s statement as gripping testimony that could prove to be highly probative in the government’s case against Skilling.
Well, maybe so, but doesn’t Hannon’s testimony really undermine the government’s case? The report that supposedly prompted Skilling’s remark was based on negative information about Enron that the company had made available to the efficient securities market. The report was not even a particularly novel analysis of Enron, given that it came a couple of months after Peter Elkind and Bethany McLean’s much-bantered Fortune article that suggested that Enron stock was overpriced. Despite the negative inference that Hannon attributed to Skilling’s alleged comment, it’s at least just as likely that Skilling — if he made the statement at all — was making light of the report to a group of company executives while emphasizing that his more optimistic opinion of the same information should also be made known to the markets.
But more importantly, how does the Enron Task Force square the report’s negative evaluation based upon information that Enron disclosed to the efficient securities markets with its core allegation that Skilling withheld such information from the markets?
Call it the risk of going for the cheap score. The prosecution went for testimony that seemed damaging to Skilling on its face, but in substance is counterproductive to the prosecution’s case. By the time Skilling lawyer Mark Holscher had elicited from Hannon on cross-examination yesterday that previous anti-Skilling witness David Delainey had also attended the meeting and heard Skilling’s supposed dramatic admission, but somehow failed to recall it in his testimony last week, it would not be surprising if the jury is, might we say, skeptical of Hannon’s testimony about Skilling’s statement and of the prosecution’s motive in eliciting it.
All of which just reinforces that Lay and Skilling will never win their case in the court of public opinion. But they still just might win it in court.

Oral argument takes place today at the Fifth Circuit Court of Appeals in New Orleans in the appeals of Dan Bayly, Robert Furst, James Brown and William Fuhs, the former Merrill Lynch executives who were convicted of wire fraud and conspiracy charges in November 2004 in the trial of the Enron-related case known as the Nigerian Barge case.
The plight of the Merrill Four in the Nigerian Barge case is a case study in the dubious nature of the government’s criminalization of business in the post-Enron era (for a thorough discussion of that subject, begin here). In the barge case, the Task Force took a finance transaction between Enron and Merrill Lynch 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. In short, the Task Force effectively prosecuted the Merrill Four 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 at trial.
Then, to make matters worse, the Task Force at trial played on the jury’s hindsight bias and presented to the panel a fictional screenplay of the underlying transaction while effectively effectively preventing the Merrill Four from presenting exculpatory testimony and evidence that contradicted the Task Force’s fictional account. The Task Force is deploying precisely the same deplorable tactics in the ongoing trial of former key Enron executives Ken Lay and Jeff Skilling.
Interestingly, part of the key testimony that the Task Force has elicited to date during the Lay-Skilling trial contradicts an important part of the testimony that it presented in convicting the Merrill Four during the Nigerian Barge trial. In Lay-Skilling, the Task Force had former Enron investor relations chief Mark Koenig testify that he learned on January 14, 2000 — just days before Enron was scheduled to publish its fourth-quarter 1999 financial statement — that earnings were likely to be 30 cents a share, a penny below the 31 cents a share that had been forecast on Wall Street. Koenig then testified that he alerted Enron’s CFO, Richard Causey, that the company would miss its forecast and that, on January 17 — the day before the earnings report was scheduled to be publicly released — he saw a draft memo saying that the company would earn 31 cents a share. On Jan. 19, the day after the earnings release, Koenig testified that he discussed the sudden change with Lay, who seemed surprised and allegedly observed to Koenig that “he went to bed and we were at 30 cents and, when he woke up, we were at 31 cents.”
In contrast, during the barge trial, the Task Force elicited extensive testimony and contended during closing argument that Enron’s motivation to arrange the barge transaction with Merrill Lynch in December 1999 was to help Enron hit its earnings target of 31 cents per share, not the 30 cent-per-share target that Koenig in his Lay-Skilling testimony suggested was the company’s true target until just days before the January 18 earnings release. Thus, the Task Force’s evidence in the barge trial that Enron’s earnings target in December 1999 was 31 cents per share directly contradicts Koenig’s testimony in Lay-Skilling that the company increased its earnings target by a penny-per-share just days before the January 18, 2000 earnings release.
So it goes in the wacky world of criminalizing corporate agency costs.
Meanwhile, Alexei Barrionuevo and Kurt Eichenwald of the NY Times provide this article today in which they summarize the testimony to date in the Lay-Skilling trial and observe that this week’s star witness — demonized former Enron CFO Andy Fastow — may end up being just another witness in the trial.