Judge Lets Enron Jurors Consider If Defendants Turned a Blind Eye

HOUSTON, May 10 -- Former Enron Corp. executives Jeffrey K. Skilling and Kenneth L. Lay say they held their heads high when they led the energy company. But jurors will be allowed to consider whether they intentionally buried their heads in the sand to avoid blame for fraud.

U.S. District Judge Simeon T. Lake III this week granted the government's bid for a controversial jury instruction known as "deliberate indifference" or "willful blindness." The language allows jurors to consider whether Skilling and Lay averted their eyes from fraud within Enron's ranks to deny responsibility for it later.

The provision could make it easier for prosecutors to win a conviction in a largely circumstantial case with no paper trail that directly links Skilling or Lay to earnings inflation. But it could also be grounds for an appeal, experts say.

The jury instructions, though technical, underscore a fundamental issue in the trial: What should have been expected of the two men running the corporation?

The government claims that both men failed to take steps that could have unraveled a scheme by then-finance chief Andrew S. Fastow to siphon millions of dollars away from the company, suspicions that came to light only after reporters asked skeptical questions in the fall of 2001, weeks before Enron spiraled into bankruptcy.

Calling themselves active managers who sacrificed their personal lives for Enron, Skilling and Lay also told the jury that they should not be held responsible for the conduct of the company's 30,000 employees.

Skilling testified that he focused more on building new businesses than on humdrum administrative responsibilities. He said that he was misled by Fastow about Fastow's compensation and that he would have signed paperwork approving Fastow's deals -- but he never received it. Prosecutors contend that Skilling intentionally avoided signing deal documents sent to him by a company lawyer so he could plausibly deny knowing the details.

Before the jury, Lay called himself "very much of a decentralization person" and a "delegator" who rejected internal warnings as uninformed and sometimes anonymous gossip. Lay said that during the hectic period when he resumed control of the company after Skilling's August 2001 departure, his staff often took care of his correspondence. "If I were to sit down and answer every e-mail, I'm not sure I would have time to do anything else," Lay told jurors last week.

Prosecutors say Skilling earned $150 million from 1999 to 2001 and Lay $220 million in the same period.

"You may find that a defendant had knowledge of a fact if you find that the defendant deliberately closed his eyes to what would otherwise have been obvious to him," the government proposed telling the jury in court papers. "While knowledge on the part of the defendant cannot be established merely by demonstrating that the defendant was negligent, careless or foolish, knowledge can be inferred if the defendant deliberately blinded himself to the existence of a fact."

Defense lawyers argue that the jury charge, also known as an ostrich instruction, will prejudice their clients and improperly lower the government's burden of proof to a "should have known" standard common in civil cases where financial damages -- not prison time -- is at stake.

"It could provide the jury a mechanism to find the defendants guilty without finding they acted willfully," Lay defense lawyer George "Mac" Secrest said outside the courthouse this week. Secrest once again objected to the instruction, which he said should be used sparingly, at a hearing Wednesday afternoon.

Jurors instead should focus on whether Lay and Skilling believed optimistic statements they made touting Enron's business units and its stock price, the defense says. "This is not a case of hear no evil, see no evil," Skilling lawyer Daniel M. Petrocelli told the panel in his opening statement four months ago. "This is a case of, there was no evil."

The willful-blindness instruction is a major focus of an appeal by former WorldCom Inc. chief executive Bernard J. Ebbers, who was convicted on fraud charges and sentenced to 25 years in prison. He remains free, awaiting a ruling from the U.S. Court of Appeals for the 2nd Circuit.

More broadly, faulty jury instructions have become prosecutors' nemesis in several recent cases, leading to the reversal of obstruction-of-justice convictions of investment banker Frank P. Quattrone and the accounting firm Arthur Andersen LLP. After jurors departed last week, Lake alluded to the U.S. Supreme Court's unanimous reversal of the Andersen decision presided over by his colleague, U.S. District Judge Melinda Harmon. "The government led the court into error, something that will . . . hopefully never happen again in this building," he said.

The language could have greater impact on Lay, who faces six fraud charges, than on Skilling, who faces 28 criminal counts. Throughout the trial, both government and defense lawyers have portrayed Skilling as more intimately involved in Enron's business operations, first as president and chief operating officer and eventually as its chief executive from February to August 2001. Lay, on the other hand, told the jury he traveled at least half the time to far-flung locales to meet with international business leaders and politicians.

"You're virtually on duty 24 hours a day, seven days a week," Lay testified. At the same time, Lay depicted himself as reliant on accountants, lawyers, and human-resource staffers to handle a series of alarming questions and complaints when he resumed control after Skilling departed.

Prosecutor John C. Hueston asked Lay this month why he chose to tell investors that a $1.2 billion-dollar accounting error was tied to the dismantling of one of Fastow's partnerships. "Sir, the buck stops with you," Hueston said. "This is the choice you made."

Lay said the language was already in a script he was given by employees from which he simply read.

As for an October 2001 conference call in which prosecutors say Lay wrongly told investors that losses were "nonrecurring," Lay told the jury that "what we looked at before was the prepared script . . . and I would rarely deviate from it."

Prosecutors spent the most time on what they characterized as a series of red flags Lay ignored. They include an August 2001 memo by executive Sherron Watkins warning that Enron "could implode in a wave of accounting scandals"; concerns about aggressive business practices expressed in an in-house survey released in October 2001; and an e-mail the same month from longtime employee Jim Schwieger, who wrote, "If you are going to play the game of lying, cheating and stealing, at least be intelligent enough to present a plausible story."

"Sir, you were being flooded with information" about possible crimes, Hueston said.

Lay told jurors he was "not sure" that message ever came to his attention. He also denied receiving daily reports that detailed the performance of Enron's trading positions, documents the government says indicated that the company engaged in increasingly risky business practices. Under siege from prosecutors' questions, Lay amended his remarks by saying that he had electronic access to the reports but that he rarely looked at them online. Finally, when prosecutors told him the reports were hand-delivered to his office for a time in 2000, Lay said he relied on Skilling and other executives to alert him to trouble spots.

"There are others who can speak to that a lot better than I can," Lay said.