Enron Trial Update

Washington Post staff writer Carrie Johnson was online from Houston to answer your questions on the ongoing trial of former Enron executives Kenneth L. Lay and Jeffrey K. Skilling .

Coverage on Enron's collapse and the legal proceedings against its former executives, including regular audio reports from Carrie, is available in a special report online here .

A transcript follows.

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Carrie Johnson: Good morning. Thanks for dropping in today to talk Enron! All eyes are on Houston, where former chief financial officer Andy Fastow could take the stand as early as Tuesday to testify against his onetime mentors. Serious fireworks are expected. I can hardly wait. Can you?

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Chicago, IL: Hi Carrie, I've enjoyed your columns, and I saw where Mr. Fastow would soon be taking the stand. I'm guessing you're talking to legal experts. What's there estimation as to how well the prosecutors has established their case?

Carrie Johnson: Thanks! Sean Berkowitz, the director of the government task force, said in court this week that prosecutors are a little more than halfway through with their case. They've put on more than half a dozen witnesses who have testified in indirect ways about what Jeff Skilling and Ken Lay knew in the months before Enron's collapse. (See my story published Thursday for more on this.)

The government has not been able to unearth explicit email messages or documents indicating that either Lay or Skilling approved improper accounting practices. But they have put on a parade of witnesses who say they knew the business was going down the tubes and by implication, so did Skilling and Lay. Whether the jury believes the testimony of Enron insiders who pleaded guilty in exchange for reduced or no prison time is something we won't know for months. Defense lawyers are certainly hammering away at the credibility of prosecution witnesses but in all 16 people pleaded guilty and it's unclear whether the sheer volume alone will influence the jury's verdict.

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Los Angeles, CA: Do you remember how Skilling practically lectured Congress when he was called up to Capitol Hill?

How about that Arthur Anderson accountant, Melvin Dick?

"We acted in accordance with Generally Accepted Accounting Principles. We acted in accordance with Generally Accepted Accounting Principles... blah blah blah"

What a robot.

Carrie Johnson: Skilling's congressional testimony was indeed memorable. His turn on the witness stand in this trial could well surpass that of Fastow for sheer dramatic impact. Skilling is by all accounts a brilliant, conceptual thinker and his response to cross examination will be something we may be talking about for years to come.

As for Arthur Andersen, its role in the Enron debacle has been well plumbed. Defense lawyers for Skilling and Lay are basing part of their argument on the fact that Andersen approved some of the partnerships and accounting maneuvers in question. (Reliance on auditors and lawyers can be a defense in criminal fraud cases.) But prosecutors say Andersen often did not have the full story when it signed off on those transactions.

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Denver, CO: I read an article yesterday that stated the trial was moving a lot faster than expected and that the prosecution thought they would rest at the end of March. This leads me to believe the prosecution feels pretty good about their case. Am I wrong?

Carrie Johnson: Prosecutors have worked mightily to simplify their case, after what Justice Department officials have called the most sophisticated fraud investigation in history.

They are slashing witnesses left and right and they hope to be done by the end of March, depending upon how long the cross examination of Fastow takes.

But the government lawyers are not out crowing in front of the cameras. This is a difficult case for them, in part because they are facing a well funded ($70 million dollar!) defense and in part because there is no direct evidence to tie either Skilling or Lay to the accounting tricks. They are using witnesses as building blocks and hoping that the steady accumulation of evidence from different sources influences the jury to come out in their favor.

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Denton, TX: The single event that captured my attention concerning Enron was the suicide of Cliff Baxter.What was his role in the company, and what was the burden that prompted him to take his life?

Carrie Johnson: This is a very sad story. I don't think we will ever know what led Cliff Baxter to take his own life in the months after Enron collapsed. He played a variety of roles at Enron and was known as a master dealmaker and a close friend of Skilling who had no problem speaking truth to power, even if it was sometimes an uncomfortable truth. For instance, he protested mightily when Andy Fastow was put in charge of private partnerships that did business with Enron.

Baxter's suicide note was released publicly but it did not contain any explicit information about Enron or his motivations. His widow, Carol Baxter, appears on the defense witness list in this trial.

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Tel Aviv, Israel: I worked for Enron 1986 - 1996 in Risk Managment as a trader. Kevin Hannon was my boss and Lou Pai ran the Energy Risk Management Services.

My question. How did Lou Pai, who ran the retail group, the trading company, etc, walk away with 300 MM not be tried, etc.

Can they not indict him for anything as he reported directly to skilling and lay and must know what went on.

Carrie Johnson: Thanks for writing. I'd be very interested in hearing from you after this chat is over. If you like, please send me an email message: johnsonca@washpost.com.

Lou Pai has come up a lot in testimony this week and he has been excoriated by several government witnesses for not paying attention to mounting problems at Enron's retail unit, Enron Energy Services. There were some really vivid anecdotes this week about even the most basic fiscal operations in a state of disaster. Dave Delainey, who took over the unit from Pai, called it a "basket case" and basically testified that he told his superiors the division was in free fall under Pai's leadership.

Pai left Enron months before the bankruptcy and in the midst of a divorce, he cashed out the majority of his stock--giving him a $280 million windfall. He promptly bought the largest or second largest parcel of land in Colorado, which he has since sold. Pai has never been charged with criminal wrongdoing although he remains under investigation by the Securities and Exchange Commission.

As Ken Lay's lawyer Michael Ramsey told jurors in his opening statement, business failure is not a crime--neither is neglecting one's job in most circumstances.

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Chicago, IL: Do you expect the prosecution to introduce any evidence of Jeff Skilling's personal involvement in the decision to adopt mark-to-market (MTM) accounting?

Kurt Eichenwald's book said that Skilling himself made the presentation to the SEC to get them to allow MTM for one Enron unit. Skilling did that because he knew MTM would increase book income and Skilling's own pay.

To me, MTM is a huge part of the Enron story. If they hadn't booked so much artificial profit from MTM, they wouldn't have needed Fastow's off-the-books entities to hide the losses and debt.

Carrie Johnson: The government has not waded deeply into the ocean that is mark-to-market accounting. I don't disagree with you that MTM, an accounting method that allowed Enron to book all profits of multiyear contracts immediately, rather than as they are collected, was central to the company's notoriously opaque financial statements.

And from interviews and the many books on Enron's demise, we also know that Jeff Skilling made the company's use of mark to market accounting a condition of his joining Enron full time from his consulting perch at McKinsey & Co. For a time, Skilling was compensated based on profits the company booked from MTM.

I think prosecutors are concerned that if they go too far into MTM, they will confuse the jury and lose their focus--which government lawyer John Hueston said in his opening was about alleged lies by Skilling and Lay, not the "spider webs" of complex accounting.

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Houston, Texas: Momentum seems to have picked up this week with testimony from a variety of witnesses -- not all of whom have plead guilty to other crimes - that substantiates the prosecution's belief that KLL and JF are guilty. What's your reaction to the wide range of accusations and assertions in their testimony? Also, were you surprised by the defense attorney's quip about 'honor among thieves'?

Carrie Johnson: The government definitely built momentum this week by putting on a stream of witnesses to provide brief but vivid testimony about Enron's retail unit. That will be important coming into next week, when the defense is likely to take a big bite out of Andy Fastow on cross examination.

You refer at the end of your question to a comment by Dan Petrocelli, Skilling's lead defens lawyer, when he was cross examining former trading chief Dave Delainey. Delainey admitted he had lied and lied and lied again about a host of things while he ascended Enron's corporate ladder. Petrocelli was trying to show that Delainey, who testified that he checked out certain accounting issues because he was suspicious about Enron's handling of them, was motivated only by the desire not to get caught.

Hard to say how the jury took that comment. Several jurors were quite expressive this week, smiling and rolling their eyes on occasion. Whether they were enjoying the tit-for-tat of Petrocelli's entertaining courtroom performance or expressing distaste for the government's witnesses, I don't know.

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washingtonpost.com: Witness Says He Warned Skilling (March 2, 2006)

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Alexandria, LA: Any hint that the prosecution is going to use Skilling's congressional testimony against him?

Carrie Johnson: It's not clear whether the government will use Skilling's congressional testimony against him directly in cross examination. But Skilling has clearly made lots of statements to Congress and to investigators at the Securities and Exchange Commission that commit him to a version of events.

Interestingly, Skilling's lawyers have tried to bar the government from using his SEC testimony against him, particularly statements he made about his reasons for selling Enron stock in September 2001. But the judge has rejected their motion.

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Louisville, Ky.: Who are these jurors that they can take this much time away from work? Do you know if their jobs are still paying them? Do they seem to be paying attention? I would imagine this is probably hard to follow for the average person.

Carrie Johnson: We don't know a whole bunch about the jury because their identities are being kept under wraps. But I wrote a story a couple weeks ago about what we know so far based on jury selection transcripts. You can find it if you do a search on www.washingtonpost.com.

Jurors work Monday through Thursday, from 8:30 to 4:30 with a break for lunch and two short breaks in the morning and in the afternoon. That helps them stretch, caffeinate, and do whatever they have to do to pay attention. They have been really interested so far, not as much sleeping as one might have expected. Yesterday the judge heaped praise upon them for their diligence and called them the best jury he had ever seen, including his 18 years in private practice before he took the bench.

As far as the pay issue, I believe many employers pay and others receive at least $40 per day over the course of the trial.

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Washington, D.C.: Is any Arthur Andersen accountant going to be prosecuted or charged civilly over the Enron audits? As I recall Andersen was charged with destroying evidence, but not with participating in the alleged accounting fraud.

Carrie Johnson: Short answer: it's not clear. David Duncan, the Andersen partner who led the Enron account, pleaded guilty to obstructing justice. But he reversed his plea with the government's assent late last year after the Supreme Court threw out the jury verdict against the firm itself.

Duncan and other Andersen accountants are not out of the woods yet, since there is a sitting Enron criminal grand jury in Houston. None of them has been charged civilly by the SEC, which is still investigating as well.

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washingtonpost.com: The Formation Of Enron Jurors' Opinions Is Under Scrutiny (February 21, 2006)

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Fake Trading Room: Hi--part of the the Enron coverage included the legendary fake "trading room" that would be populated when analysts came in.

How could the employees who responded to the all-hands-on-deck to man the "trading room" not know something was wrong? Wouldn't you have started selling your 401-held stock right then?

Carrie Johnson: Hey, I appreciate your skepticism. But it's worth remembering that it was the late 1990s/early 2000s. Don't you remember all that junk about the "new economy"?

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Arlington, VA: Do either of these jerks give off the slightest hint of what they've caused, both to their former employees, investors and the public? Or is it all about them covering themselves and shifting blame? Do they consider anyone accountable?

Carrie Johnson: In his opening statement, Ken Lay's lawyer said Lay pained for the loss of jobs and retirement accounts and that he took responsibility for the collapse of the company. He distinguished, however, the issue of civil (financial) responsibility and the issue of criminal (maximum security prison) responsibility.

Lay's lawyer has blamed a crisis in market confidence on Fastow, the Wall Street Journal, and short sellers.

Skilling's lawyer argues that there was no fraud at Enron save for some siphoning by Andy Fastow and his crew.

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Washington, DC: After reading "Power Failure", I have a strong bias against several of the defendants. On a personal level my career (accounting) was destroyed back in the 90s because a small-company employer demanded I participate in several fraudulent actions.

As a result of my refusal, I was fired for not being a "team player" and the management team (incl HR) consistently gave horrible recommendations to any potential employers.

Do you sense that as details emerge, members of Congress will take note and move towards passing strong legislation to protect workers from employers who try to manipulate them into questionable activities?

Carrie Johnson: Sorry to hear about your experience.

The 2002 Sarbanes Oxley Act, passed after frauds at Enron and WorldCom, did offer some additional protections to corporate whistleblowers. I doubt that lawmakers are interested in reopening the issue at this point, even though the importance of blowing the whistle is being highlighted in all sorts of political and business settings these days.

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Houston : Does Ken Lay or Jeff Skilling show any emotion during the long days of the trial?

Carrie Johnson: Skilling usually sits facing the witness or the jury. He sometimes talks to his lawyer or writes notes.

Lay far more often jots notes on a yellow legal pad. He talks with his lawyer and sometimes with his daughter Elizabeth Vittor, an attorney who is on his defense team.

Occasionally Lay and Skilling share glances when they are particularly happy or irritated with a point made by a witness or one of their lawyers.

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Houston, Texas: Do you believe its right that the prosecution is letting other guilty parties run free just to try to get two of the top guys that may, or may not have participated in any wrong doings? Also besides yesterday's testimony that claimed Skilling said "they're on to us" is the only real testimony that I can see that real implicates Skilling of Lay. Am I missing something or is the prosecution letting too many guilty people go just to prove their case? It should be easy enough without these witnesses and their plea deals if Skilling and Lay are truly guilty. Would you please share you comments. Thanks!

Carrie Johnson: I don't think anything about this case is easy for either the government or the defense.

Because there's very little paper and because so many deals were vetted by lawyers and accountants, prosecutors have had to rely on Enron insiders to tell their story. The government's case is subtle and indirect as our Thursday Wash Post story suggests.

As for Enron executives who have not been charged, the government maintains a list of more than 100 (!) unindicted coconspirators. It's unclear whether prosecutors will ever get around to charging those folks with crimes given the investigation is well into its fourth year. The defense would argue vociferously that many of those people are innocent as are Skilling and Lay and that the government labeled them as coconspirators in order to bar the defense from calling them as witnesses.

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Washington, DC: On what basis did Skilling's lawyers try and keep his SEC testimony out? It seems like an incredibly gutsy or desperate thing to do.

Carrie Johnson: Your characterizations, not mine but--

Skilling's lawyers argued that he was not informed at the time of the SEC interviews that he had become a target of criminal investigators. Had Skilling known that, they said, he never would have talked under oath to the SEC investigators.

Prosecutors say they were not engaged in improper sandbagging or collaboration with the SEC. The judge has agreed with them.

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Ashburn, VA: Having sat through all of this to date do what do you think the jury will decide?

Any gut reaction?

Carrie Johnson: I'm not a betting gal, so -- sorry -- but you're not getting any prediction out of me.

Having sat through most of the Andersen, Scrushy and other trials from this wave of scandals, all I can tell you is that when jurors finally tell us what was going through their minds, it is often unpredictable. Talk about learning how the sausage is made!

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Carrie Johnson: Thanks much for all of your interesting and sophisticated questions. Hope to chat again soon! The next week or so should provide us with a wealth of material.

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