A bid to tie Enron duo to deceit

Week 1 of the trial against Lay and Skilling presents first 'brick' in 'wall of evidence.'

Days before Enron was to release its fourth-quarter 1999 financial statement, Mark Koenig learned that the energy giant had missed earnings projections by 1 cent per share.

He was "sick about it" because, as Enron's chief of investor relations, he knew the news would hurt the company's stock price. But to his surprise, a day later, he saw an internal draft of the financial statement showing that Enron had met the projected earnings of 31 cents a share.

It was not the last time Enron executives would manipulate financial statements and lie to investors about the company's health, Mr. Koenig testified in court last week. And to keep his job, he played along.

Koenig is the federal government's first witness in the long-awaited criminal trial against Enron founder Kenneth Lay and former CEO Jeffrey Skilling. Already, his testimony has provided a glimpse into the government's legal strategy and revealed how the parties expect to proceed in coming months.

Even after one week, experts agree, both sides are making compelling cases - indicating that the jury's task is going to be a difficult one.

As the trial enters its second week Monday, it appears that many at the top of the company intentionally broke the law. Indeed, Koenig is one of 16 executives who pleaded guilty to wrongdoing and can be called to testify.

And while Mr. Lay and Mr. Skilling were "very involved in the daily running of the business," including all the financial matters, according to Koenig, the government has a long way to go in proving that they were knowingly part of a conspiracy.

With more than 4,000 documents, the case is expected to last four months.

"The government is building this wall of evidence one brick at a time, and each of the bricks is intended to show the involvement of Skilling and Lay in the criminal conspiracy," says Gerald Treece, assistant dean at the South Texas College of Law in Houston. "It's tedious. But in the real world, this is what government lawyers do. This ain't 'Law and Order.' "

How the defense frames the case

Lay is charged with seven counts, including conspiracy and fraud. Skilling is charged with 31 counts, including conspiracy, fraud, and insider trading.

Both say they are innocent. Lay's lawyer, in his opening statements, told the jury that Enron was a victim of its own tremendous growth and success, and that it went bankrupt because the market panicked and creditors pulled out.

"In a bear market, the company lost the trust of [Wall] Street and its trading partners, and the machine froze up," said Michael Ramsey. "It is Greek-like in its tragedy."

Skilling's lawyer, Daniel Petrocelli, went even further when he told jurors that the two men were not simply sitting up in their offices while a massive conspiracy was swirling around them. There was no conspiracy, he said.

"This is not a case of hear no evil, see no evil. In this case, there was no evil."

The two defense lawyers blame a few greedy executives for crimes at Enron, but say their actions were not part of a larger conspiracy to defraud investors.

In fact, Mr. Petrocelli said that many of those who pleaded guilty were not actually guilty of crimes and were frightened into pleading guilty by prosecutors. Both defense lawyers plan to attack the credibility and motivation of government witnesses.

Koenig pleaded guilty to aiding and abetting securities fraud in 2004 and is facing 10 years in prison for his role in Enron's collapse. When asked by prosecutors if he agreed with defense attorneys that he was innocent, he said, "I wish I could agree with it, but I was guilty."

What Skilling didn't say to investors

During two days on the stand, Koenig testified that Enron's retail unit suffered $726 million in losses in the first half of 2001, and that it was a common topic of discussion at weekly management meetings that usually included Lay and Skilling.

Prosecutors then played an audiotape of a conference call with investors after the release of the second quarter 2001 financials. Skilling did not disclose the huge losses, instead telling investors that the unit was "hitting on all cylinders" and "poised to expand rapidly."

The defense is expected to argue this week that there were no such losses in the retail unit.

Koenig also told jurors that he sold $700,000 of company stock in May 2001 when he knew things were going sour, and then misled investigators about his role in the wrongdoing after the company collapsed late in 2001.

"I wish I knew why I did it," he said. "I did it to keep my job, to keep the value that I had in the company, to keep working for the company. I don't have a good reason for why I did it."

Prosecutors were right to put Koenig on the stand first, says Christopher Bebel, an economic crimes expert based in Houston. While he admitted to lying to investors and cashing in some stock, he makes a convincing, sympathetic witness and tied Lay and Skilling to meetings where the company's health was discussed.

"Most people at the company really didn't have access to Lay and Skilling, but Koenig had that access and he is cleaner than most witnesses the government will end up putting on the stand," he says.

Andrew Fastow, for instance, is likely to be ripped apart when he testifies for the government. The former chief financial officer admitted to spending years lining his pockets in off-balance-sheet partnerships.

Defense attorneys will now get to cross-examine Koenig, and his remorseful testimony could look decidedly different by week's end. Ramsey is at his best in cross-examination, says David Berg, a civil trial lawyer in Houston.

But the defense is most in danger of the "drip, drip, drip of testimony that nobody was telling the truth and Skilling and Lay knew about it," he says. "That is one of their greatest vulnerabilities."

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