Enron Trial Preview

Washington Post staff writer Carrie Johnson answered reader questions from Houston, where the trial of former Enron executives Kenneth L. Lay and Jeffrey K. Skilling is scheduled to begin with jury selection on Jan. 30.

Coverage on Enron's collapse and the legal proceedings against its former executives is available in a special report online here .

A transcript follows.

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Carrie Johnson: Good morning. It's warm and sunny in Houston. The press corps is already enlisting messengers to stand in line at an ungodly hour to gain access to a limited number of seats for Monday's jury selection process. Let's talk Enron!

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Mt. Lebanon, Pa.: The lead-up to these trials has lasted almost as long as WWII.

Are they ever going to begin? Begin means - opening statements, not motion filing.

Will they be covered LIVE on C-SPAN, Court TV, or some other instant participation forum? Or are we going back to the 30s with cartoon drawings and phoned-in write-ups ala Lindbergh Baby Kidnapping trial?

Awaiting the judicial process here in the 21st century..

Thanks much. HLB

Carrie Johnson: The lead up has lasted a while, I'll give you that--four years to be exact.

Judge Sim Lake, who is known as a taskmaster when it comes to scheduling issues, yesterday decreed jury selection would take most of the day on Monday. He wants the government to get ready for opening statements Tuesday. The day has finally arrived. (Though it may be more than four months before we can expect a verdict.)

The trial will not be televised. Cameras are not allowed in federal courtrooms. You'll have to rely on The Washington Post and other news outlets to get your daily Enron fix.

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Tampa, Fla.: My question concerns the potential jurors for this trial. Does Texas excuse professionals--especially accountants--from serving on juries? I ask this because I believe accountants (I'm a CPA) can see through the BS the defense will try to throw up and cut to the heart of the matter.

Those jurors with accounting backgrounds on the first Kozlowki/Tycon trial, which ended in a mistrial with a hung jury, were ready to convict. The jurors who were confused and couldn't convict because they didn't understand the evidence had no accounting or business backgrounds. I believe this was the key to Scrushy's acquittal in Birmingham, as well. I understand none of the jurors there had any accounting background, so Scrushy's lawyers were able to confuse them. One juror complained the prosecution didn't dust HealthSouth's financial statements for Scrushy's fingerprints! Seriously!

I expect the defense in the Enron trials to seek jurors with no accounting, finance, or business backgrounds, and then throw a mountain of evidence at the jurors, along with "experts" saying everyone did the same thing, anyways. Plus the Sgt Schultz defense from Hogan's Heroes: I know nothing, I saw nothing! Even thought these "geniuses" were paid tens of million$$ a year for knowing nothing and seeing nothing.

Carrie Johnson: This is a great question. From my understanding, jurors with accounting or business experience were NOT automatically excluded from sitting on the Enron jury. The judge sent out a long questionnaire to 400 potential jurors last year. Since then, more than 100 jurors have been excused for reasons of hardship or bias based on the answers they provided. The judge has called into court on Monday more than 100 prospective jurors, who will face individual questioning about their contacts with Enron and their ability to keep an open mind.

It is indeed true that many jurors in the Kozlowski I case (including a former Wall Street analyst who went on to become a Sports Illustrated reporter) were prepared to convict him. And it's also true that, on average, jurors in the Scrushy case had less than 10 years of education.

Financial schemes at Enron were very complex. One of the biggest challenges for prosecutors will be to make their theory clear to the jury: namely, that Lay and Skilling misled investors and employees about the company's financial health.

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Minneapolis, Minn: What's the latest on the Arthur Andersen partner - David Duncan? Last I heard he wanted to reverse his guilty plea. Is that possible? What's he doing now - is he working or just sitting at home?

Carrie Johnson: You're right. The Supreme Court last summer threw out the obstruction of justice conviction against Arthur Andersen, citing faulty jury instructions. The Justice Department recently announced it would not retry the firm, which is essentially defunct. David Duncan, the lead partner on the Enron account, had pleaded guilty and testifed against the firm at its 2002 trial. But his lawyers filed court papers seeking to reverse his plea and the Justice Department did not oppose the motion. I'm not sure what Duncan is up to these days.

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San Francisco, Calif.: How can the chief executive of any business, much less Enron, get away with saying he simply did not know what was going on in his company? For as vast a deception to have occurred, the culture of the business, his business, must have supported it, or he would would have been made aware, deception or no. He is 100% responsible for that.

Carrie Johnson: That's certainly what prosecutors think.

I gather you are referring to Ken Lay, Enron's founder, who came back to run its day to day operations in the summer of 2001, several months before it filed for bankruptcy protection. Lay claims he was deceived by subordinates including CFO Andy Fastow. The government argues he knew the company was swimming in debt and that he nonetheless touted Enron stock as "an incredible bargain" for employees and investors.

Lay has vowed to take the witness stand in his own defense. Perhaps we will get a clearer sense of what he knew, and didn't know, from his performance there later in the trial.

It's worth mentioning that when Congress passed the Sarbanes Oxley Act, after Enron collapsed, lawmakers there required CEOs and CFOs to vouch for the accuracy of their financial statements--an effort to remove "ignorance" as a defense in such cases.

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Rockville, Md.: Why, after the Enron scandal, were some former high-ranking members of Enron, employed by our current administration in high-level government positions?

Carrie Johnson: I think you may be referring to Tom White, the former secretary of the Army, who had led one of Enron's key business units. White eventually left the government after clashing with Defense Secretary Donald Rumsfeld over staffing and other issues. White has not been charged with any wrongdoing.

One of the things that made the Enron story so very radioactive in December 2001/early 2002 was that Ken Lay had longstanding ties to the Bush family, particularly George HW Bush. Several prominent figures served on Enron's board, including Wendy Gramm, wife of former Sen. Phil Gramm. And scores of other Washington figures, including Paul Krugman and George Will, accepted consulting or public speaking fees from Enron. Its reach indeed was quite broad.

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Alabama: Can you explain the government's case against Lay and Skilling? From everything I've read, the real criminal at Enron was CFO Andrew Fastow, who set up all those infamous shell companies. Skilling, I know, came up with the mark-to-market accounting that infected the company. That's incredibly poor business judgment, but it doesn't seem like law-breaking. And Lay's rather stunning disengagement from the day-to-day affairs of Enron appears extraordinarily incompetent without being criminal.

I could be missing something here. I know Lay and Skilling had to approve many of Fastow's schemes, even if they didn't scrutinize them carefully (and Skilling had a degree from Harvard Business School? Jeez.)

Carrie Johnson: Lay and Skilling certainly argue the real lawbreaker at Enron was Andy Fastow, one of the government's star witnesses, who pocketed more than $40 million in secretive deals.

One of the reasons why this trial is so important is that it will send a message to the business world about the things for which executives should be held accountable, or not.

Prosecutors increasingly are focusing on optimistic public statements Skilling and Lay made about Enron's financial condition, at a time when the government argues its troubles were mounting. They've secured 16 guilty pleas from Enron insiders who admitted to taking part in a fraud. The question is whether a jury will believe them--or the arguments of Skilling and Lay, two very bright men who stood at the top of the business world for years.

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Laurel, Md.: Is it possible to empanel a jury that can actually understand the nature of the charges and the elements of Enron's complicated financial dealings that cross the line into illegality?

Carrie Johnson: The judge certainly thinks so. But this is a reasonable question. In Europe for instance, I believe there are special courts that exclusively handle complex business issues exactly because of concerns like these.

The Constitution provides defendants with the right to have their cases heard by a jury of their peers. It's clear that few, if any, of the people who hear this Enron case will have earned more than $400 million in stock and salary, as Skilling and Lay did in Enron's final years.

It will be interesting to see on Monday how prosecutors and defense lawyers use their limited number of strikes to remove jurors from the panel--whether they are seeking people who possess or who lack business or accounting acumen.

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San Francisco, Calif.: Is there any evidence that the Enron board members approved the schemes to hide the debt because they were receiving compensation in the form of Enron stock, speaking engagements, or other high level perks?

Carrie Johnson: Enron's board disastrously waived conflict of interest provisions that allowed Andy Fastow, Enron's chief financial officer, to lead partnerships doing business with the company. Fastow, we now know, took advantage of those partnerships to line his own pockets. Moreover, at a congressional hearing a few years back led by the Senate Permanent Subcommittee on Investigations, Enron board members testified that they never followed up to see how much Fastow was earning until it was far too late.

Many of Enron's former board members were wealthy in their own right, former business leaders and medical doctors. My guess is that they were not motivated by the fees they received. Instead they were insufficiently aggressive in monitoring management.

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Mt. Lebanon, Pa.: Thanks for your response to my question.

It would appear that if Judge Sim Lake had handled the Lindbergh case closing statements would be coming up about now. That might be unfair - lawyers bill by the hour including government ones, at least they submit time sheets for review - but the old refrain: Justice delayed is justice denied - should be chiseled into the marble frontispiece of every federal courthouse in the land.

Thanks much. HLB

Carrie Johnson: To be fair, Judge Lake has tried to keep the case moving as much as possible. It is the longest running and most sophisticated business fraud investigation in history. Defense lawyers are still asking for delays, requests the judge has repeatedly denied this week. And the judge granted one previous, long delay to accomodate the busy trial schedule of lawyers for Rick Causey, Enron's former chief accountant. Causey pleaded guilty last month on the eve of trial.

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Crazy question but...: Is former Gov. Gray Davis testifying against Enron? I ask because based on what we know now about Enron's energy market manipulation in his state of CA (which didn't help him with voters during the recall since some blamed him for the woes), he could be a powerful witness for the prosecution.

Carrie Johnson: Not a crazy question. Former Gov. Davis does not appear on the government's most recent witness list of Jan. 6. Prosecutors want to introduce evidence about what Skilling and Lay knew about the company's activities in California, including manipulative trading deals known as Death Star and Fat Boy. The judge has signaled he will allow the government limited room to manuever here. Tim Belden, one of Enron's former traders who pleaded guilty to a crime, and another former Enron lawyer not accused of wrongdoing himself are on the government witness list.

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Bowie, Md.: What is the legal status of "generally accepted accounting pracices?" Is "they violated GAAP because they knew it would decieve people" an actual law?

Being devious scum is not a crime. Can it be shown they violated laws?

Carrie Johnson: Companies are required to follow accounting rules and are policed by the Securities and Exchange Commission if they run afoul of such rules.

Corporate managers also must not hide things or lie to their independent auditors--both things the Justice Department has claimed went on at Enron.

It's in the interest of defense teams for Skilling and Lay to play up the accounting angle and to argue that auditors and lawyers vetted many if not all of the transactions at issue in the indictment. The government will try to poke holes in those claims using testimony from corporate insiders and allegations that Enron managers hid key facts from the accountants at Arthur Andersen.

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Princeton, N.J.: Carrie, you say

Many of Enron's former board members were wealthy in their own right, former business leaders and medical doctors. My guess is that they were not motivated by the fees they received. Instead they were insufficiently aggressive in monitoring management.

Every executive, every trustee is wealthy in their own right. That doesn't trump greed

Carrie Johnson: Ok, but there is absolutely no evidence that any of Enron's former board members waived conflict of interest rules because they were greedy. One could make a case however that they were lazy.

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Gaithersburg, Md.: It's my understanding (emphasize limited) that Enron's core money-making activity was essentially brokering the future value of energy, and that there's no real way to put a current dollar value on such a thing.

Is it a central issue in this trial that "they had to come up with something, there was no accepted way to value it, so they invented favorable numbers"? Is that a crime?

Carrie Johnson: Inventing favorable numbers and pushing them out to the investing public is a crime. See the Securities Act of 1933, 1934.

In its final years, Enron lurched from one new business venture to another, many of which, including its international operations, lost a load of money. Its Internet broadband unit was highly touted but there were questions about whether the company could actually deliver on those promises. Its old, boring pipeline assets were its most stable, and also in the long run its most valuable.

Enron's trading unit used "mark to market" accounting to book immediate revenue from deals that ran far into the future. The company inexplicably persuaded the SEC to allow it to use this model and then promptly began abusing it. When Enron collapsed, the trading unit was among its hottest commodities. But while the sector has picked up somewhat, the initial buyer, UBS, quickly unloaded the unit after purchase.

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Pittsburgh, Pa.: About the Glitterazzi covering the trial.

I've read all the ENRON books. Are any of these best and brightest author types down in the front row talking into their blackberries, ipods, qumquats, or what-have-you? Did they get special PRESS passes apart from you oridnary media types?

In other words, is access fair and open or does it resemble a Supreme Court nominee hearing in front of Specter, et al - with all the "right" political handlers in the best seats?

Nero: Let the bread and circus begin!

Carrie Johnson: Alas, few glitterati appeared at the relatively routine final pretrial conference in Houston yesterday. I suspect we will have to wait for opening arguments on Tuesday for the media blitz to begin in earnest. (Have you ever seen working reporters, by the way? We are not the most glam types, I'm afraid.)

Court officials are reserving one row of the courtroom for family members of Skilling and Lay. Lay's wife Linda and daughter Liz often appear, as does a PR representative for him. Skilling's brother Mark is also a frequent attendee. The public must share seats, first come, first served. The press gets a row or two as well.

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College Park, Md.: Somebody mentioned that the case of Lay, the founder of Enron, has been delayed to possibly after Bush leaves the White house. Is that a setup so that he will be pardoned by Bush? Your comment..

Carrie Johnson: This is not true.

Lay goes to trial next week. The president remains in the White House for two more years. You do the math.

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Pittsburgh PA: Are any of the board memebers, Wendy Graham, et al subject to criminal prosecution themselves?

Or were their crimes merely incompetence and negligence with civil remedies yet to kick in?

Thanks.

Carrie Johnson: None of Enron's former board members has been accused of wrongdoing by prosecutors. The board members did settle civil shareholder claims using insurance proceeds and some money out of their own pockets. Most of the damage, though, has been to their formerly stellar reputations.

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Baltimore, Md.: Re "a jury of one's peers." I think that term, legally, goes back to the signing of the Magna Carta by King John, when the barons of England demanded that right, rather than to be judged by the King. (That's why English aristocracy is called "the peerage.") While none of the potential jurors made $400 million, I am sure, they are all "Kenny Boy" Lay's peers--commoners, just like he is.

Carrie Johnson: Thank you for your comment. Always good to go back to the source(s).

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Pittsburgh, Pa.: Again.. if any of the female members of the Lay party break down and cry in a Mrs. Alito moment, will the Judge halt the trial so that the defense counsel can rush out onto the front porch and rail against the harsh tactics of the prosecution?

Or is this kind of soap opera drama verbotten with this judge?

Thanks.

Carrie Johnson: We won't know how the judge will react til something like that happens. He's known for being a pretty firm guy but not without sympathy.

While I would never wish tears on anyone, as this case rolls into its second or third month, courtroom drama would most likely be welcome.

And, as for spinning, there will be plenty of opportunities for people involved in the case (and those pitching themselves as legal analysts) to draw media attention outside the courthouse.

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Tampa, FL (again): Two quick points: (1) Enron's use of stock options, as opposed to stock itself, encouraged aggressive accounting. Studies have shown the more a company uses stock options, the more likely it is to have to restate its financial statements. As the chief economist of a major Wall St investment bank said, anyone who denies stock options are the root cause of all these corporate scandals has no credibility on the issue. (2) From what I've read, Enron did not properly apply mark-to-market (M2M) accounting. M2M requires discounting future cash flows to their net present value. Enron appears to have simply recorded the future value of the cash flows as revenue. Any accountant will tell you this is outright fraud.

Carrie Johnson: Thanks for sharing these excellent points.

I'd point out that companies are now required to treat stock options as an expense, though businesses are busy searching for any and all loopholes they can find.

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Carrie Johnson: Thanks very much for your questions! Stay tuned for developments in the upcoming Enron trial.

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