Inasmuch as I had a couple of hearings yesterday in federal court, I was able to slip in and watch most of the closing arguments of the Enron Task Force’s case against former EBS CFO Kevin Howard (picture on the far left) and former EBS accounting director Michael Krautz. Based solely on the closing arguments — which are not always a good indicator of how the evidentiary phase of the trial went for either party — my sense is that acquittals of both men are likely.
Call the Howard-Krautz part of the Enron Broadband re-trials the “Nigerian Barge II case.” As with its basic theory in that case, the Enron Task Force in this one contends that Howard and Krautz engineered a series of secret side deals that undermined the validity of Enron’s accounting treatment for an otherwise valid joint venture deal with a small computer outfit named nCube. The purpose of the joint venture was to monetize Enron’s video on demand (“VOD”) contract with Blockbuster, which Enron used to buttress its earnings in a couple of quarters to the tune of around $100 million during 2000-2001. Although there is nothing wrong such a deal in theory, says the Task Force, the deal was a sham because nCube’s equity in the joint venture was never at risk because Enron orally promised to take nCube out at a stated rate of return, Enron controlled the joint venture and the parties operated no real business in the joint venture. The Task Force contends that Howard and Krautz were at the center of the sham deal.

Unfortunately for the Task Force’s theory of the case, nCube lost all of its equity in the joint venture and substantial evidence exists that the joint venture was not a sham. Sure, nCube wanted Enron to buy nCube’s interest relatively quickly after the deal was consummated, but Enron auditor Arthur Andersen advised that such a purchase would undermine Enron’s accounting for the deal and so, Enron undertook to find a third party buyer for nCube’s interest, which never panned out. As far as I could tell from the closing arguments, the documentary evidence that the Task Force used during the trial to support its charges was equivocal at best and constituted primarily emails and memos in which Enron and nCube personnel discussed what they could and could not do in regard to the deal to preserve Andersen’s blessing for accounting purposes.
Assistant U.S. Attorney Jonathan E. Lopez of Washington, D.C. handled the first part of the Task Force’s closing argument and, although competent, it was a real snoozer. As is typical of Task Force arguments these days, Lopez opened by contending that this was really a simple case of lies and deception by Howard and Krautz, and then proceeded to bludgeon the jury with a very unsimple-like analysis of the prosecution’s theory of the case. During Lopez’s argument, I noticed at least three jurors nodding off to sleep and the attention of most other jurors waned after a half hour or so of the hour-and-a-half argument. Task Force prosecutor Van S. Vincent of Nashville, who is the lead prosecutor in this trial, handled the rebuttal portion of the Task Force’s closing and, while more seasoned than Lopez in his presentation, largely covered the same material as Lopez. Although I didn’t notice any jurors nodding off during Vincent’s argument, my sense was that they were not particularly engaged.
The highlight of the day was the closing argument that Houston-based criminal defense lawyer Jack Zimmermann gave on behalf of Howard. Using the court’s jury instructions and excerpts of specific testimony by the Task Force’s main witness as a framework for his presentation, the folksy and articulate Zimmerman paced back and forth in front of the jury box in his trademark cowboy boots as he persuasively argued that the Task Force’s case does not come close to meeting its burden of establishing guilt beyond a reasonable doubt, particularly on the key element of the defendants’ intent. The jurors were transfixed by Zimmerman, who is one of several protÈgÈs of famed criminal defense attorney Richard “Racehorse” Haynes who make Houston’s criminal defense bar one of the best in the country. By the time that Krautz defense attorney Barry Pollack of Washington, D.C. concluded his well-organized and impassioned argument that characterized the Task Force’s case as a parody, my sense was that the jurors were ready to begin deliberations and that may explain their relative lack of enthusiasm for Vincent’s rebuttal.
Although its impact on jurors is unclear, the most telling moment in the closing arguments occurred when Task Force prosecutor Lopez dealt with the key contradiction in the Task Force’s case — i.e., that nCube’s equity in the joint venture was not at risk, but it nevertheless lost all of that equity. In an analysis that speaks volumes about the utter lack of business law-perspective that has permeated each one of the Enron Task Force’s prosecutions, Lopez beguilingly contended with a straight face that the reason why nCube lost all of its investment in the joint venture was that Enron went bankrupt, not because Enron wouldn’t have ultimately bought out nCube had it remained solvent. In the Enron Task Force’s rather odd world of commercial transactions, actually experiencing the risk of insolvency apparently does not equate with “at risk.”
Thus, based solely on closing arguments and in view of the upcoming holiday weekend, it would not surprise me if this jury makes short work of this particular case. Howard and Krautz — both of whom testified during the trial — are courteous and soft-spoken family men who did not make the big-money in Enron stock sales that their former Enron Broadband co-defendants made. Based on what I saw and heard during closing arguments, my sense is that, under normal circumstances, it would be extremely difficult for this female-dominated jury to send these two men to prison. But, as we all know, cases involving the social pariah Enron are anything but normal, so stay tuned.