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Prosecution Moves Closer to Wrapping Up Case Against Lay, Skilling

The defense team grabbed the spotlight last week in the trial of Enron Corp. founder Kenneth Lay and former CEO Jeffrey Skilling by attempting to tear down former CFO Andrew Fastow's credibility. Lawyers for Skilling and Lay went right to the heart of their defensive strategy, telling the jury that Fastow was a devious accountant and skilled liar who duped his bosses, stole millions and pushed the company toward financial ruin.

"You were very proficient at looking [Lay] right straight in the face and telling him you were loyal, and he could count on you, but you knew in your heart you were stealing from the house," Lay lawyer Mike Ramsey said to Fastow last Monday. "You were successful in your lying and your deceit from 1997 all the way up to 2001, weren't you sir?"

"With regard to everything, I had all of those people fooled, yes, sir," Fastow replied. "With regard to certain of the things I did, I got away with it for a very long time."

Ramsey tried to show jurors Lay and Skilling had no knowledge of Fastow's illegal activities in connection with Enron's special purpose entities (SPEs), which were partially blamed for the company's bankruptcy. The SPEs, which were approved by Enron's board, were set up and run by Fastow and his subordinates. He is alleged to have stolen at least $25 million from the company, in the form of partnership fees and profits. He has pleaded guilty to fraud and was sentenced to 10 years in prison.

Ramsey, who called some of Fastow's earlier testimony against his former bosses "cockamamie," accused him of exaggerating his testimony, calling one statement about an Enron power plant in India as "an absurdity on its face." Ramsey asked Fastow whether he would lie to help prosecutors obtain a conviction.

"Would you exaggerate to help your position with lawyers on the [Enron] task force?" Ramsey asked. "No sir, I believe exaggeration would not be telling the truth. I'm trying to be truthful," Fastow said. "My job is to tell the truth here, not to exaggerate it."

Ramsey, who had several heated exchanges with Fastow concerning his truthfulness, at one point quizzed, "When was the magic day that you quit lying?" Fastow said he stopped lying after signing his plea agreement. "I've told the truth ever since," he said.

On Tuesday, a former Fastow subordinate testified that backdating company documents within some of the company's SPEs was so common it was jokingly called "time travel" in the office. Chris Loehr, one of the few government witnesses not under indictment, appeared to bolster Fastow's claims about financial shenanigans within LJM partnerships, which were used to keep Enron's poorly performing assets off the balance sheet.

Loehr, who appeared visibly nervous as a witness, was 24 when he began working at Enron in January 1999; he left in August 2001. He now works for Chicago-based Invenergy LLC, a wind-farm energy company. While he was employed at Enron, Loehr testified he acted as an investment analyst on LJM deals. He said he had two offices within the company: one for his Enron-related duties and another to help put together finance deals for LJM.

Under direct questioning by prosecutor John Hueston, Loehr described several transactions over a 14-month period when LJM documents were recreated and backdated so the partnership could avoid paying taxes on assets. Loehr read a section of an e-mail he had written in March 2001, announcing the completion of some documents he and another employee of LJM had backdated. The message read, "Merry Christmas. There are time machine documents...from Chris and Anne." Loehr told the jury the holiday message was intended as a time travel joke because Christmas had been three months before. In the e-mail, Loehr wrote, "time travel takes its toll."

Enron accountants, including the defunct accounting firm Arthur Andersen, "kind of covered their eyes" to the unlawful activities, Loehr testified. "They took a see-no-evil, hear-no-evil approach," he said.

On cross examination, Skilling lawyer Daniel Petrocelli tried to pick away at Loehr's credibility. Petrocelli noted Loehr said he was paid by Enron, but he worked for "independent" LJM partnerships. The questioning is key because the defense claims LJM's illegal deals were conducted by Fastow and his subordinates without Lay's or Skilling's knowledge. Loehr testified his paychecks were from Enron -- not LJM.

Asked by Petrocelli if he believed he was doing illegal work, Loehr replied, "I knew we were doing things that were wrong...I did not consider myself a criminal, though."

"Were you concerned about getting caught?" Petrocelli asked. "Not particularly. The conduct was fairly open and notorious," Loehr said."It was no great secret what we were doing."

In redirect questioning by Hueston, Loehr said he was not surprised when the FBI tracked him down when the investigation of Enron began. Loehr, 31, said the FBI found him in Chicago attending graduate school. "What was the first thing you said to FBI agents?" Hueston asked. "I remember asking them what took so long for them to find me," Loehr replied.

Johnnie Nelson, who began working for an Enron predecessor company in 1985 at a pipeline field station in New Mexico, also testified Tuesday. When Enron collapsed in 2001, he said, "I lost everything."

Nelson, who provided some of the most colorful testimony so far, said he trusted Lay. When the company was beginning to grow, Nelson said Lay was always true to his word, and he fixed any problems. Nelson said he did not know Lay was selling company stock in late 2001, but he wished he had known. "He's the flagship of the company," Nelson said of Lay. "If he's buying, we're buying. If he's selling, we're selling."

Under cross-examination by Lay lawyer Mac Secrest, Nelson said he didn't care if Lay was legally required to disclose stock sales or not. Nelson said Enron employees should have been told. Nelson later gave Lay credit for helping Enron's stock price to rise, but he also held him responsible for its fall. "He violated my trust," Nelson said. "That's all I know."

Asked by Secrest if he thought a chief executive of a company the size of Enron should know everything going on within the company, the plain-spoken witness replied, "We're not talking about stamps and stationery, these were millions and millions of dollars."

Later, Secrest told Nelson that Lay had not sold all of his Enron shares in late 2001, noting he had only sold enough to meet margin calls that didn't have to be disclosed. By holding on to his Enron stock, Secrest said Lay lost millions. "I'm heartbroken," Nelson replied sarcastically.

Wednesday, Enron whistle-blower Sherron Watkins testified she knew things were getting bad at the company when Skilling resigned in August 2001. "He knows it, he knows it's bad, and he's getting out," she told jurors.

Watkins joined Enron in 1993, hired by former CFO Andrew Fastow after working for Arthur Andersen LLP and trading conglomerate Metallgesellschaft in New York. Among her duties at Enron, Watkins, a vice president, examined assets in the Raptors partnerships, which were run by Fastow's staff and created to hedge Enron investments. She left Enron in November 2002 and now is a consultant on corporate governance issues.

Watkins may be best known for writing "the" memo to Lay on Aug. 15, 2001, which described accounting fraud within the company. A copy of the now-famous memo is available at

The day after Skilling resigned, Watkins sent Lay an anonymous memo via a drop box for an all-employee meeting Lay was going to hold. The memo was introduced as evidence Wednesday as "information communicated to Mr. Lay" and not as fact, under a ruling by presiding U.S. District Judge Sim Lake. In part, the memo read, "I am incredibly nervous we will implode in a wave of accounting scandals." She wrote the business world, in retrospect, would consider Enron's considerable successes "as nothing more than an accounting hoax."

After telling Lay she had authored the memo, Watkins described a meeting with him in late August 2001 to discuss her concerns. For about 30 minutes, she discussed the seven-page memo with Lay, including a page titled, "Summary of Raptor Oddities," which she considered the most important information.

"He seemed surprised that these things could be problematic," Watkins, 47, testified of Lay's response. But "accounting just doesn't get that creative." She wanted to leave the meeting with Lay with one question answered: How was Enron going to pay for the off-the-book partnerships? "With loans, Enron stock?" Watkins said she asked. "If they're going to pay us from our shares, then I don't think we'd have a fact pattern that would look good to the SEC [Securities and Exchange Commission] or investors."

At that meeting, Lay "winced" when she read him comments she received from an unnamed fellow Enron employee who wrote her: "I wish we would get caught. We're such a crooked company." That message, which is part of the memo, "slapped him in the face more than anything else."

Watkins said Lay told her the company's general counsel would investigate her claims. However, days later, she said she was shocked to hear Lay's statements to employees about the solid state of the company. Following his meeting with Watkins, Lay oversaw an all-employee meeting on Aug. 22, 2001, in which he told employees that "no other shoe" would drop at the company, referring to Skilling's departure. "If my allegations were true, then those statements were very false."

Under cross-examination, Lay lawyer Chip Lewis asked Watkins about her request to Lay to bring in another accounting firm to review Enron's SPEs. Did she realize it took the Enron board audit committee to hire a new accounting firm? Lewis asked. Watkins replied that she wasn't talking about hiring a new accounting firm. Instead, she thought another firm should review the partnership issues.

Did she realize Lay could not bring in another accounting firm? Lewis asked. "That is not a true statement," Watkins replied. "He could hire whatever accounting firm he wanted."

Prosecutors told Lake they expect to wrap up their case by the final week of March. The defense then will put on its show, including expected testimony by Lay and Skilling -- barring any change of heart. After the defense has completed its case, the prosecution then will present its rebuttal.

Lake, who has run a surprisingly tight trial, told jurors the trial could wrap up by the end of April -- but court observers believe the estimate is optimistic at best. So far, the government had presented 15 witnesses, seven of whom pleaded guilty to crimes at Enron. Another witness, who hasn't been charged with a crime, settled allegations by the Securities and Exchange Commission that he helped Enron manipulate earnings, and another testified under an immunity deal.

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