Witness Says He Warned Skilling
Enron Played 'Fast and Loose,' Ex-Trading Chief Testifies

By Carrie Johnson
Washington Post Staff Writer
Thursday, March 2, 2006

HOUSTON, March 1 -- A former Enron Corp. official warned Jeffrey K. Skilling, then chief executive, that an accounting move "lacked integrity" and testified that the company played "fast and loose" with the rules, jurors heard this week in the fraud trial of Skilling and former Enron chairman Kenneth L. Lay.

David W. Delainey said Skilling responded by asking him, "What do you want to do?" The former trading chief interpreted that as an admonition to "get in line" with the plan to improperly shift hundreds of millions of dollars in losses into another division in early 2001.

The remark attributed to Skilling was far from a direct command to break the law, as defense lawyer Daniel M. Petrocelli pointed out Wednesday. Like half a dozen other witnesses who preceded him in this fraud and conspiracy trial, Delainey offered no smoking gun e-mails or recordings to back up the government's central allegations: that Skilling and Lay misrepresented Enron's financial health in the months before the company descended into bankruptcy protection.

Instead, the Justice Department's Enron Task Force is painting with repeated strokes a company on the verge of disaster, hoping that jurors will send both men to prison for the rest of their lives based on a steady accumulation of indirect evidence that they resorted to fraud to avert it. The bulk of the government case revolves around former insiders, many of whom have pleaded guilty and are testifying in exchange for reduced sentences.

In what has quickly become a pattern, defense lawyers have been dissecting the motivations and interpretations offered by witnesses in blistering days-long cross-examination. Their aim? To convince jurors that Enron collapsed amid a market panic, not a fraud designed to cover up its troubled operations. Petrocelli told jurors in opening statements that "no document, not a single one," ties Skilling to fraud.

Michael W. Ramsey, lead attorney for Lay, asked the jury: "What would you do if your family welfare, your freedom and all of your assets were threatened in such a fashion? Any one of the people you are going to hear testifying could have been cast in this pit of a courtroom today but for their willingness to cooperate."

The biggest challenge for defense lawyers, experts say, may be overcoming the sheer number of guilty pleas -- 16 -- from company insiders who testify that Enron's former leaders engaged in financial manipulations and misstatements to meet Wall Street earnings targets and keep its stock price high.

In recent weeks, the government has used witnesses as building blocks, putting on the stand accountants and traders to explain technical concepts and introduce financial documents to the jury.

These lesser-known insiders set the stage for executives who had more contact with Skilling and Lay. Prosecutors said they plan to call former chief financial officer Andrew S. Fastow to the stand as early as next week. Fastow, who is considered a crucial witness, pleaded guilty to two criminal charges in exchange for a 10-year sentence.

The scheduling decisions also give prosecutors the side benefit of what some trial lawyers call water torture: the drip, drip, drip of allegations as they are repeated.

"That's the game; that's what you're trying to do -- witness after witness who basically explains variations on the same theme," said Sheldon T. Zenner, a securities lawyer at Katten Muchin & Rosenman LLP in Chicago.

That strategy has been on display this week. On Monday, former Enron accountant Wesley Colwell testified about Enron's improper release of funds held in rainy-day reserve accounts, as well as other maneuvers the company used to engineer financial results -- long after the books had closed for the quarter.

"Speaking of closed, it looks like we may be looking to beat the street by .02 instead of .01," Colwell wrote in a 2000 e-mail to his then-boss, Delainey. "I understand [then-chief accountant Richard] Causey spoke to Skilling today and this was his preference."

M. Randall Oppenheimer, a lawyer for Skilling, asked Colwell on cross-examination, "Mr. Skilling never demanded anybody do anything inappropriate?"

Colwell replied, "I didn't talk to Mr. Skilling about it."

He was followed on the witness stand by onetime risk analyst Wanda Curry, who said she helped prepare a document showing that many of Enron's biggest contracts to deliver energy to retail customers were in disarray, with $250 million in unreported losses as of late February 2001. Her supervisors met with Skilling to discuss the problem, but she was not in the room, she said.

The document suggested that the unit would have reported a loss for the first quarter of 2001, a loss that would amount to "five times" the amount of income Enron reported during that period.

Weeks after the meeting, Enron announced that it would wrap most of its retail unit into its wholesale trading operations. Through the summer of 2001, both Skilling and Lay told analysts in conference calls that the move helped the company seize efficiencies and that the retail unit was flush with business. Prosecutors argue the move helped Enron bury massive losses.

That was the very same accounting issue Delainey told jurors "lacked integrity." Memorably, he described the retail unit as a "basket case" and showed the jury a June 2001 e-mail containing a joke video clip of a man being struck by a taxi -- what he said it felt like to run the increasingly risky retail business "on an average day." Several members of the eight-woman, four-man jury laughed, as did Skilling and Lay.

Wednesday, Petrocelli bore down on Delainey in a full afternoon of cross-examination that will continue into Thursday, asking why the witness shared vivid details about damaging comments by his superiors only after several meetings with government investigators. He also billed Delainey as an opportunist and a liar bent to save himself.

"We didn't use the word 'crime,' but I tell you in that meeting . . . everybody knew what was going on," Delainey replied. "That was the worst conduct I have ever been a part of."