The pace of the Enron Task Force’s legacy case against former key Enron executives Ken Lay and Jeff Skilling continued to pick up pace during its fifth week, but that quicker pace is highlighting an unusual aspect of the trial — that is, the Task Force’s case appears to be shrinking dramatically before our very eyes.

After years of a highly-publicized propaganda campaign against anything having to do with Enron, after bludgeoning plea bargains from over a dozen former Enron executives, after alleging the biggest criminal conspiracy in the history of federal prosecutions, and after issuing a 66-page indictment against Lay and Skilling that is so far afield from what is going on in court that the prosecutors don’t want the jury to see it, the Task Force’s case is coming down to a complex jumble that relies heavily on innuendo and requires the jury to connect the dots of amorphous points that the Task Force is hoping will be enough to convict Lay and Skilling.

This week’s testimony was a case in point. The Task Force’s main theme was that Enron was so successful in making money in its trading operations that it allowed Lay and Skilling to soft-pedal to the investing public the losses that Enron was incurring in a couple parts of its business.

Mind you, the Task Force is not suggesting that Lay or Skilling was involved in approving fraudulent accounting; rather, the Task Force alleges that Skilling engineered a reorganization of an Enron business unit in a manner that hid losses of the poorly-operating 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 presumably Lay, although he was almost an afterthought this week — to misrepresent Enron as a stable logistics company than a more volatile trading company, which the Task Force contends would not have been as highly valued in the marketplace.

Thus, the prosecution of Lay and Skilling is shaping up as the purest prosecution of corporate agency costs in the post-Enron era.

The underlying message of this prosecution is that an executive of any publicly-owned corporation better disclose every bit of bad news about their company or risk prosecution — under the sharp lens of hindsight bias — for misleading the investing public about the true health of the company. If the Task Force’s approach is successful against Lay and Skilling, one would wonder why any executive of a publicly-owned corporation would risk saying anything to analysts and the investing public other than “go read the financial statements in our regulatory filings. It’s all there.”

Amidst this muddle, the Task Force continues to show clear signs of desperation.

One such sign is that the Task Force continues to fumble about in regard to the order of its witnesses, a problem that drew the rare ire of the remarkably patient Judge Lake early this week.

Moreover, the Task Force continues to rely heavily on testimony from witnesses who are testifying under cooperation agreements with the Task Force under which the witnesses hedged the risk of a long prison term and the loss of millions in return for their testimony.

Is the jury really going to believe that the biggest corporate conspiracy in history was hidden from everyone except the relative few Enron executives who have copped pleas or entered into non-prosecution agreements?

An even bigger problem for the Task Force is that the testimony of the cooperating witnesses has been all over the map in regard to their conduct.

Mark Koenig testified that he lied a few times while touting Enron. Paula Rieker testified that others lied, but she did not — she only “overstretched” a few times. This week’s star prosecution witness, former Enron Energy Services executive David Delainey, testified that he lied all the time. Wes Colwell, a former Enron trading unit accountant, incredibly testified that he was involved at Enron in defrauding Tom Bauer, a former Andersen accountant with whom Colwell is now in business!

Meanwhile, there is no documentary evidence that any of these cooperating witnesses thought they were lying at the time of the alleged crimes and no meaningful evidence that they even told anyone that they thought they were lying.

Meanwhile, the defense has introduced on cross-examination large amounts of documentary and video evidence that the cooperating witnesses appeared to be working hard under difficult conditions to help Enron’s cause.

Is the jury going to believe that all of these witnesses were such good liars? And, if so, will the jury believe that they were lying then or lying now on the stand?

Seemingly sensing this dynamic, the Task Force elicited testimony at the end of the week from its latest cooperating witness — former Enron Broadband executive Kevin Hannon — that Hannon had actually participated in a meeting with Skilling, Lay and others in May 2001 in which Skilling supposedly admitted that an analyst’s report at the time had finally figured out his elaborate fraud on the market.

Testimony for the week closed with Hannon still under direct examination from the prosecution, so no cross-examination has occurred. But just how likely is it that such a significant meeting took place and Skilling made such incriminating statements, and yet none of the half-dozen previous former Enron executives who have testified during the trial were told about it by either Hannon or any other participant in such meeting? Stay tuned on that issue.

Consistent with the shrinking nature of the prosecution’s case, the Task Force announced this week that it is over halfway through with putting on its case in chief and expects to be through presenting its case by the end of this month. Inasmuch as the Task Force originally estimated that it would take 36 days (i.e., nine weeks) to put on its case, assuming an equal amount of time on cross-examination to that spend on direct.

Even though the Task Force took more time than was necessary or advisable with its initial witness Koenig and cross-examination has been taking far longer than direct, the Task Force is now over halfway through presenting its case. That’s another indication that the Task Force is literally adjusting its theory of the case “on the fly” during the trial, and that it has concluded that it cannot prove the vast majority of what it alleged in its charging documents against Lay and Skilling.

Next week should be particularly interesting as demonized former Enron CFO Andy Fastow — the architect of Enron’s special purpose entities or “SPE’s” — takes the stand after Hannon.

Fastow was a notoriously volatile fellow — at least to subordinates — while at Enron, and it will be interesting to see whether his demeanor has changed since he copped a plea deal with prosecutors back in early 2004.

On the other hand, the Task Force’s case to date has wandered away from the SPE’s, so there is a decent chance that a difficult-to-control Fastow could end up being a not-so-important witness in the ever-changing big scheme of this corporate criminal case of the decade.