Enron Defense Fails to Land Any Body Blows

If the Enron trial was a boxing match, the defense has yet to land any body blows. In fact, some of the defense's punches have resulted in self-inflicted wounds.

In the second week of trial, Michael Ramsey and Daniel Petrocelli, respectively the aggressive defense lawyers for Kenneth Lay and Jeffrey Skilling, set out to destroy the credibility of the U.S. government's first witness Mark Koenig, the former head of Enron's investor relations department. On direct examination, Koenig appeared to be a truthful and sincere witness, testifying that he, at the behest of Skilling and Lay, lied to investors about Enron's crumbling financial picture in order to keep the stock price high. Specifically, Koenig admitted that he was aware of Enron's phony accounting which resulted in Enron declaring that it beat analysts' expectations by a penny a share in a key quarter and that Enron had wrongfully shifted $726 million in losses for the first half of 2001 from a key division of the company.

To counter that compelling testimony, Petrocelli threw a haymaker punch that may have hit his client. The thrust of Petrocelli's main defense is that Koenig and more than a dozen other Enron executives pleaded guilty to crimes that were never committed because of heavy coercion from the prosecution. It requires a tremendous leap of faith to accept that such an extensive roster of high-level executives would plead guilty to crimes that were never committed. Petrocelli reportedly nearly brought Koenig to tears when he referred to the witness' three small children. Its one thing to question a witness' credibility, but Petrocelli crossed a dangerous line when he made a gratuitous reference to the man's family. I would be surprised if some jurors have not already taken a dislike to Petrocelli and his bullying tactics.

Petrocelli's effort to play a lengthy tape of Enron's "glory days" portrayed Skilling and Lay as being on top of a highly successful company. Given Enron's bankruptcy and the hardship caused to thousands of employees and shareholders, the tape might serve to remind jurors of an apparent fraud rather than convince them that Enron was a real success whose failure was due to outside sources.

Ramsey then took his shot at the witness again, pounding him that he pled guilty when he was innocent. This point can be made in the matter of minutes, not days as is Ramsey's strategy.

A trial lawyer, like a boxer, needs to throw his punches carefully and score some quick hits. If the punches are not landing, it's best to wait for the bell ending the round, then regroup and try to score some points in the next round. The next prosecution witness is Kenneth Rice, Skilling's protégé and the head of Enron's broadband unit.

A Look Ahead

Rice will likely testify that Enron lied to investors about the capabilities of the company's fledgling broadband unit in order to inflate the company's stock price. Rice will testify that he and the defendants told Wall Street that the broadband network was up and running when it was not.

Rice who reaped an astounding $47 million windfall from his Enron stock sales was known to live in the fast lane racing Ferraris and going on exotic trips with Jeff Skilling, his mentor.

The defense might be wise to change its tactic of claiming that Rice, like Koenig and 15 other witnesses, pled guilty when they were innocent. The argument may start to have a hollow ring as it may not seem credible that Rice would give up everything and plead guilty if he did not commit financial crimes.

In any event, the trial, like a boxing match, is 15 rounds with more parries and thrusts to come.

Jake Zamansky is principal of Zamansky & Associates, a New York securities-law firm representing individual investors.

Enron Trial Starts with the Lines Clearly Drawn

Last week I attended the Enron trial in Houston, Texas. I heard the opening arguments of the prosecution and the defense and the testimony of Mark Koenig, the former Enron Investor Relations Executive, who was the prosecution's first witness.

In opening statements, the prosecutors presented a compelling and easily understood case that Lay and Skilling knowingly lied to the investing public about Enron's financial condition, when they were well aware that the company's finances were crumbling. By contrast, the defense touted the "brilliance" of Skilling and Ken Lay's charitable works in Houston and his connection to World leaders.

Koenig was a very effective witness who testified that Lay and Skilling were involved in misleading investors about Enron's deteriorating financial condition.

My full comments are reflected in a USA Today op-ed article which I wrote and my blog on Forbes.com of the first week of trial entitled "Blowing Smoke or Raging Fire?"

You can view my Enron articles on my website "www.zamansky.com."

Blowing Smoke or Raging Fire?

There's an old adage among trial lawyers: "If the facts are on your side, argue the facts. If the law is on your side, argue the law. If you have neither, confuse the jury."

Attorneys for former Enron Chairman Kenneth Lay and former Chief Executive Jeffrey Skilling are clearly focused on the confusion strategy. And if their opening arguments are indicative of the strength of their defense, Lay and Skilling should cop a plea bargain.

Indeed, opening arguments by the defense hinted at the existence of nary a wart in Lay and Skilling's character--or even their management of Enron. Daniel Petrocelli, Skilling's attorney, characterized him as a "brilliant visionary" who changed the energy world and rose to the top of the corporate ladder. He focused on Enron's efforts to build its various energy businesses in the 1990s, when it appeared to be a successful company. Petrocelli insisted that Enron's accounting was legal, and that all transactions were vetted by top lawyers, accountants and investment bankers.

Petrocelli's pushy New Jersey-meets-Los Angeles style was not received well by the jury of Houstonians. One must only look to 1985, when a similarly brash attorney named Marty Lipton testified during the courtroom showdown between Texaco and Pennzoil over Getty Oil. Lipton's outsider, in-your-face demeanor surely contributed to the $11 billion awarded to Pennzoil.

Lay's attorney, Mike Ramsey, attempted to pull at heart strings, recounting his client's extensive charitable works and his efforts to build a stadium once known as "Enron Park." Ramsey showed pictures of Lay with such luminaries as the first President George Bush, Russian Premier Mikhail Gorbachev and Henry Kissinger. He even resorted to showing pictures of Lay with his family and grandchildren.

The message: Lay and Skilling are fine and decent men, incapable of doing all the bad things of which they are accused. All the defense needed was the violins.

The defense seemed strategically out of sync at times as well. On several occasions during proceedings, Judge Sim Lake soundly rejected the defense's highly technical objections. Bearing in mind that this is the same no-nonsense judge who, last Monday, picked a jury in one day for the most important corporate-fraud trial of all time, frequent interruptions are a mistake. Judge Lake also appeared to set jurists at ease with his paternal handling. If the defense continues to anger him, they may lose the jury more than they have already--Petrocelli's plans to wear cowboy boots notwithstanding.

John Hueston, the federal prosecutor, chose not to insult the intelligence of the Enron jurors. He presented a compelling and easily understood case that Lay and Skilling knowingly lied to the investing public about Enron's financial condition, when they were well aware the company's finances were crumbling.

The motive? Greed. Hueston charged that Lay and Skilling were trying to keep the stock price up, so they could sell out before the company collapsed. Greed is a toxic concept to plant in jurors' minds. It's an emotion that is familiar. And Hueston clearly plans to keep his case tightly focused to convince the Enron jury that Lay and Skilling knowingly lied.

That strategy played itself out on Wednesday, when Enron Vice President of Investor Relations Mark Koenig took the stand. Koenig testified humbly and remorsefully that he was "sick" that he had to--at Skilling's direction--lie to Wall Street and to investors that Enron had exceeded earnings expectations, when in fact they had not. He testified convincingly that he was uncomfortable giving out false information--especially because he knew the true state of affairs. But he still followed the "Enron program."

However, Koenig's humility and position at Enron may not even be the most damaging aspect of his testimony. Three words, "I was guilty," could prove most damning at the end of the day. This was Koenig's response when asked why he pled guilty and agreed to testify for the prosecution. The insinuation was that his motive (and that of future witnesses) is to avoid long-term jail time. This defense's strategy requires too much of a leap of faith on the part of the jury. Perhaps indicative of what's to come, the government's convictions in the Bernard Ebbers and Martha Stewart cases started with convincing testimony by investor relations witnesses.

A Look Ahead

Recent white-collar trials have shown that, even in an age of widespread corporate malfeasance, "reasonable doubt" can destroy a well-prosecuted case. Despite a very strong first week, the prosecution still has to ensure that the words, "Ken Lay and Jeff Skilling told me to lie," are uttered in the coming weeks. Whistleblower Sherron Watkins, who warned Lay that she feared Enron would "implode in a wave of accounting scandals," will likely provide that sound bite.

Due up this week for the prosecution is Ken Rice, the former head of Enron's broadband unit. Rice pled guilty to securities fraud. Rice's testimony will show jurors how Enron fraudulently boosted earnings. This is an area that will require the prosecution to discuss Enron's finances, which carries the risk of confusing the jury.

All in all, for Lay's and Skilling's sake, their attorneys better have something up their sleeves to spring on the Enron jurors as the trial unfolds. Even with all their attempts at creating smoke, jurors can still see a raging fire.

Jake Zamansky is principal of Zamansky & Associates, a New York securities-law firm representing individual investors.