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.”