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Wednesday, February 15, 2006

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.


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