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Skilling, Lay Cases Build on Plea Deals

"The company was losing money virtually everywhere," including its Internet, retail gas and power, and high-tech investment portfolio, said University of San Diego law school professor Frank Partnoy, who has studied the Enron collapse. "The trading operation was the heart that remained healthy throughout but everything else died."

Perhaps the unit where the contrast between expectations and reality was the starkest was the broadband division, which was responsible for a huge spike in the company's stock price throughout most of 2000. Its onetime chief executive, Kenneth D. Rice, pleaded guilty to securities fraud July 30 and agreed to cooperate with prosecutors. Rice had a close friendship with Skilling, whose allegedly false optimistic statements to analysts and investors about broadband figure largely in Skilling's own indictment.

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"The purpose in making these misrepresentations was to falsely portray to the investing public that [the broadband division] had a thriving telecommunications business that had successfully developed revolutionary software which would, in turn, cause Enron's stock price to increase significantly," Rice said in his plea agreement. The government claims the broadband unit never made a profit.

Prosecutors also have secured recent guilty pleas from Kevin P. Hannon, the chief operating officer of the broadband division, who had previously worked in the company's trading unit, and Paula H. Rieker, a former deputy to Koenig who accompanied Lay and other Enron officials to meetings with investors in the months before the company plummeted into bankruptcy.

Last year, David W. Delainey, who had headed both the energy services and the North American trading units, pleaded guilty to insider trading. In his plea deal, Delainey said that at the time he sold stock in 2000, he knew about Enron's use of cash reserves to meet earnings goals. He added that when he sold stock in 2001, he was aware of "Enron's concealment of massive receivables" that California utilities owed Enron.

Plea agreements indicate that the government is focusing on the several years in which Skilling directed day-to-day operations at Enron. He abruptly resigned in August 2001, handing the reins to Lay, who headed the company through its bankruptcy. The criminal case against Lay is narrower than that of Skilling and centers on optimistic public statements he made in the six-month period leading up to the bankruptcy.

Lawyers inside and out of the Enron cases caution that there can be a danger in relying on guilty pleas in business fraud trials. Indeed, Daniel M. Petrocelli, the lead trial counsel for Skilling, repeatedly has said that the government is using harsh federal sentencing guidelines and other tactics as a way to coerce guilty pleas from reluctant corporate insiders. He said prosecutors are labeling dozens more former employees as possible targets or co-conspirators, making them reluctant to testify as defense witnesses.

"If I had their power, I could get innocent people to plead to crimes, too," Petrocelli said.

Michael Ramsey, the top lawyer for Lay, said his client has nothing to fear so long as witnesses tell the truth.

Former prosecutors added that witnesses can be unpredictable when they take the stand and sometimes waver under vigorous cross-examination. For instance, defense lawyers portrayed David B. Duncan, the star witness in the Justice Department's obstruction-of-justice case against audit firm Arthur Andersen LLP, as a confused and misguided accountant who pleaded guilty to escape a long prison term and spare his family the anguish of a criminal trial.


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