The scandal that rocked the energy trading world and defined "off-balance-sheet transactions" comes full circle Monday, when former Enron Corp. Chairman Kenneth Lay and CEO Jeffrey Skilling begin their long-awaited trial in Houston. An estimated 200 million pages of documents have been submitted, 300 potential witnesses may be called to testify, and prosecutors have named more than 100 co-conspirators in a trial expected to last up to four months.
"People are going to be surprised how boring most of the trial will be," said Nancy Rapoport, a bankruptcy expert and dean of the South Texas College of Law. "Watching grass grow and paint dry will have more excitement. There will be some good stuff, but the good stuff will be punctuated by a lot of monotonous stuff."
The case may be monotonous, but many in the energy industry are expected to be riveted by what went on behind the scenes at the infamous company. Lay is charged with conspiracy to commit wire and securities fraud, perpetrating wire, securities and bank fraud and making false and misleading statements to employees at company meetings and to banks, securities analysts and corporate credit rating agencies. In addition to the trial beginning Monday, Lay also will be tried separately on four bank fraud counts that relate to his personal banking.
Lay, once one of Houston's leading philanthropists, has said he did not know what was going on at the company, and has blamed former CFO Andrew Fastow for the company's undoing. Initially, Lay invoked the Fifth Amendment before Congress during hearings into what happened in 2002, but since his indictment, he has had an ongoing public relations campaign to clear his name. The truth, he said, had been submerged by a "wave of terror" by the Enron Task Force (see NGI, Dec. 19, 2005).
Skilling faces at least 31 criminal counts, including insider trading, securities fraud, wire fraud, conspiracy and lying on Enron financial statements. Skilling had faced 35 counts, but last week, prosecutors moved to drop four of the wire fraud counts, which they said were redundant.
Richard Causey, Enron's former top accountant, had been expected to be at the trial, but last month, he pleaded guilty to securities fraud and agreed to help pursue convictions against Lay and Skilling (see NGI, Jan. 9). It was unclear whether he will actually take the stand against his former bosses.
Prosecutors are expected to focus on the optimistic public statements Lay and Skilling each made about Enron's financial condition -- especially in 2000 and through 2001. And from the outside, the case looks strong. Already, 16 Enron executives and managers have pleaded guilty, admitting they were part of a fraud conspiracy. Five others have been convicted by jury. This trial, however, is the main event, and is expected to detail just how deep the deception was.
The defense is expected to tell jurors the real lawbreaker was Fastow, who worked under Lay and Skilling and pocketed more than $40 million in secret off-balance sheet transactions, who was so confident in his abilities he named some of the off balance sheet transactions after his sons and wife. Fastow pleaded guilty in January 2004 to conspiracy to commit wire fraud and conspiracy to commit securities fraud. He faces up to 10 years in prison, forfeiture of $23.8 million in cash and assets, and he is permanently barred from serving as an officer or director of a public company (see NGI, Jan. 19, 2004). He will not be sentenced until the Enron Task Force completes its investigation.
But even if Fastow fingers Skilling and Lay in his schemes, the case is complex, and for those on the jury without accounting or business experience, the information will be daunting. About 100 people remain in the jury pool, and U.S. District Judge Sim Lake said he wants to have 12 jurors and 4 alternates picked on Monday. Lake, known as a taskmaster, has already advised the U.S. Attorney's Office in Houston to be prepared to make opening statements by Tuesday.
"We are ready," said Lay attorney Mike Ramsey on Friday. "We're finally getting into the courtroom with real facts and real evidence." He said, "The legend is different from reality...You hear Enron was rife with accounting problems. But that's not the truth of it." He agreed about the complexities of the case, but disagreed about statements that Enron was a "financial house of cards." Instead, he pointed toward the motives of those who already have pled guilty and could testify.
"We can handle their testimony once the jury knows what their motives are," he said. He noted many of those working for the prosecution did not have financial resources to face lengthy trials, and nearly all of them had families to consider. "They have universally refused to talk to the defense."
The case will not be without its humor. Included in court briefs has been a lengthy discussion between defense attorneys and Lake over which defendant would get the table next to the jury -- the defendant closer to the jury is said to garner more sympathy. In a letter to Lake, attorney Ramsey said Lay had a constitutional right to the table closer to the jury so he could look witnesses in the eye. Ramsey requested Lake forgo a coin toss planned to assign the tables.
In his reply, Lake said the issue had been "blown out of all reasonable proportion," and he wanted neither Lay nor Skilling "banished" to the far table, which is a few feet beyond the table by the jury. Lake claimed to sit in the seats Ramsey said would not allow Lay to have a full view of the witness stand, and he said he found several seats at both tables that offer a good view. "Since there is no law to guide me in this weighty decision," Lake wrote, the "fairness and common sense" rule will allow the prosecutors to sit at the near table to present their case and then the tables will be switched once the defense arguments begin.
On Thursday, Lake told the prosecution and defense teams, "You get some rest over the weekend. This is going to be a long trial."
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