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Skilling, Lay Defense Teams Take Over Monday

Over nine weeks, the government has built a case against Enron Corp. founder Kenneth Lay and ex-CEO Jeffrey Skilling brick-by-brick, with more than 20 witnesses claiming the men not only knew about the problems at the company but that they took an active part in deceiving shareholders, Wall Street and the media about its true financial condition. On Monday, the defense teams will attempt to chip away at the testimony piece-by-piece.

According to the law, the government must prove Lay's and Skilling's guilt beyond a reasonable doubt. The defense, which is expected to take four to six weeks to present its case, is not required to prove Lay's and Skilling's innocence. There was illegal activity at Enron, the defense maintains, with ex-CFO Andrew Fastow and his subordinate Michael Kopper manipulating earnings and stealing from the company without Skilling's or Lay's knowledge. According to opening statements, the defense plans to prove the following:

Lay's lead lawyer Mike Ramsey said in his opening statements that his client should not be held criminally responsible for the failure of Enron nor the optimistic statements he made to ensure its survival.

"Do you want a Chicken Little at the helm of a company like Enron, every time it rains a little bit, saying, 'Oh, my God. The sky is falling?'" Ramsey asked the jurors in opening statements. "You want somebody with a steady hand on the helm, with guts enough to stay steady in the midst of a storm."

But even with their bold assertions of innocence, the defense teams "are both going to have to hit home runs," said Philip Hilder, a lawyer for former Enron vice president Sherron Watkins, who testified against her former bosses. "The government's case was coherent. It made sense and was put in terms that the jury should be able to understand."

The government eschewed the complex and arcane financial details to offer a simple, straightforward case focused on the inner workings and on the people -- and to many outsiders, it appeared to work. Simplifying the case made it "into a powerful theme that resonates with average people...doing what's right and doing what's wrong," said Houston-based lawyer David Berg.

The prosecution failed to produce a "smoking gun," or paper trail leading directly to the two defendants concerning any of the illegal activity at Enron. So with the focus on the people, the case "remains a witness case, not a document case," with "incremental development and no magic moment. It's 1,000 little steps" to prove Skilling and Lay mislead investors, said former Enron Task Force prosecutor Samuel Buell, who now teaches at the University of Texas School of Law.

In their four-year investigation, prosecutors never found e-mails or any memos from Lay or Skilling that indicated they were aware of the financial wrongdoing at the company. However, the sheer number of former top executives who have so far testified against them is impressive, legal experts noted. While it could be difficult to convict someone on the word of an uncorroborated witness, when several say the same thing, the jury is likely to take note -- even if many of those witnesses face prison time.

Barring a change of heart by some of the 100-plus witnesses on their list, defense lawyers said they will be operating at a disadvantage because many of their potential witnesses have indicated they will invoke their Fifth Amendment right against self-incrimination if they are called to testify. Those potential witnesses include former Enron retail unit CEO Lou Pai, former treasurer Jeffrey McMahon, former vice chairman Greg Whalley and former trading chief John Lavorato. In the indictments against Lay and Skilling, the prosecution indicated there are many "unindicted co-conspirators" who still could face charges.

"We have been extremely handicapped because a number of critical witnesses have refused to testify," said Skilling lawyer Daniel Petrocelli. He said "fear" of prosecution was the only reason many of the potential defense witnesses are refusing to come forward. "This is the Enron case...There are people who should be in this court, getting on that witness stand and raising their right hand. They're not going to do that. We're disappointed."

The defense is expected to instead rely on internal company documents and other ex-Enron employees. Joannie Williamson is expected to be the first defense witness called on Monday. She worked in Enron's investor relations unit and then went on to work for Lay. Williamson is expected to tell the jury that Mark E. Koenig, the former chief of investor relations, told her he had done nothing wrong but had pleaded guilty under government pressure.

Koenig was the first prosecution witness called (see NGI, Feb. 6). He pleaded guilty in 2004 to aiding and abetting securities fraud, and he agreed to cooperate with investigators.

However the case is presented over the next few weeks, the defense will have to be careful of what the prosecution may do on rebuttal. One prosecution witness who was not called -- and who may be the ace in the hole -- is former Chief Accountant Richard Causey. Causey had been scheduled to go to trial with Lay and Skilling, but he pleaded guilty in December to securities fraud and agreed to cooperate with the prosecution (see NGI, Jan. 9). Both Skilling and Lay are expected to testify in their defense, and whatever they say on the stand could be rebutted if Causey were to testify.

Still, Petrocelli said he was glad to be at a midpoint in the trial.

"We're really relieved to have the first part of the case over," he said outside the Houston courtroom last week. "And we're really looking forward to this next part." He said the government had only scored "glancing blows" and few "hard, concrete facts." Petrocelli said he plans to stick with the theme he began pushing during opening arguments. "Everyone's entitled to their opinions, but not their own facts," he said.

Before court adjourned on Tuesday, U.S. District Judge Sim Lake granted a motion by the government to dismiss three criminal counts against Skilling and one criminal count against Lay. The counts against Skilling (15, 21 and 30) and Lay (30) concern securities fraud charges for a quarterly income report filed on May 15, 2000, an April 12, 2000 conference call with financial analysts, and a Nov. 12, 2001 conference call. (To view the government's charges against them, click here.)

Prosecutor Sean Berkowitz told the court the charges were dropped "out of economy and some other reasons." He did not elaborate. The prosecution will produce a new version of the indictment. Skilling's and Lay's lawyers filed motions for acquittal, but they were immediately denied.

To view the government's trial exhibits and lists of witnesses, click here. Lay also has a website that includes not only trial exhibits, Enron employee video presentations and news articles but also some of the transcripts from the trial, including testimony by ex-CFO Fastow and ex-treasurer Ben Glisan. Click here to view the website.

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