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.
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Chapter 22 cases — the nickname for successive but seperate reorganization cases under chapter 11 — are uncommon, but certainly not unheard of. However, a chapter 26 case — a reorganization under chapter 11 followed by a bankruptcy case in a foreign country and an ancillary case in the U.S. under chapter 15 of the U.S. Bankruptcy Court — well, you just don’t see that even once a decade.
