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: It was scoundrel time at the Enron trial, to borrow a phrase from Lillian Hellman. We had bear hugs, Global Galactic memos, byzantine business partnerships and a whole lotta sparring between star witness Andy Fastow and the lead defense lawyer for Jeff Skilling. Fastow is now preparing for his third and final day of cross examination by lawyers for Ken Lay on Monday. And everyone else in Houston needs a breather after a roller coaster sixth week in the Enron trial. Let's reflect!

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Washington, D.C.: How is the jury expected to understand the complexity of the partnerships if many of the ENRON lawyers and accountants barely understood them?

Carrie Johnson: Good question. From the start, the prosecution has told the eight woman, four man jury that this is a trial about repeated lies by former chairman Ken Lay and former chief executive Jeff Skilling.

Prosecutor John Hueston raced through direct questioning of former finance chief Andy Fastow in little more than a day, focusing on the effect his business partnerships had on Enron's finances--moving billions in debt and sometimes manufacturing earnings at the very end of a financial quarter to help the company meet Wall Street earnings expectations.

Defense lawyers, as is their right, have so far delved more deeply into the workings of the partnerships themselves, pointing out that many of the deals were approved by Enron's board and scores of lawyers and accountants. Dan Petrocelli, the lead attorney for Jeff Skilling, spent hours yesterday trying to get Fastow to admit that countless people blessed the partnerships, which were not illegal on their face.

Several jurors appeared to have a rough go of it yesterday afternoon, with at least one nodding off and others slouching and struggling and in need of a break after listening to details about LJM, Cuiaba, Nigerian barges, Bob West Treasure, and others that made my head spin.

Whether the jury will accept the government's premise and focus on optimistic statements by the defendants during Enron's final months, or follow defense lawyers deeply into accounting treatment, is an excellent question. We won't know the answer for some months, I'm afraid.

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Arlington, Va.: Hi Carrie,

So have any other high-profile businesspeople popped into the trial? On a side note, do you get the sense that Skilling and Lay's defense borrowed anything from Scrushy's (successful) team?

Thanks...

washingtonpost.com: Scrushy Pops In on Enron Trial (March 9, 2006)

Carrie Johnson: This week already had enough drama. Then former HealthSouth Corp. chairman Richard Scrushy showed up for a piece of the action. It was an unbelievable, mindblowing, surreal vision to see him sitting in the media overflow room, on a little black plastic chair with one of those pullout desk tops.

There have been unusual visitors, including congresswoman Sheila Jackson Lee and various Houston luminaries, over the course of six weeks but Scrushy caused the biggest stir, by far.

As far as strategy, I think we see echoes of Scrushy in the Enron defendants' attempts to portray government cooperators as (a) bumblers and (b) scoundrels. But unlike Lay and Skilling, Scrushy acknowledged that an accounting fraud went on at his company. He said he was misled by all five of his former finance chiefs about it, though.

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Austin, TX: Who is Fastow doing more damage to- Defense or the government? Is he coming across as at least a chastened witness, or is his famous abrasiveness coming through?

Carrie Johnson: Fastow, the most vilified fellow in the Enron saga, has been surprisingly forthright on the witness stand about his many faults. He repeatedly took the blame for lying, cheating and stealing and maneuvers that helped send his wife to prison for a year. He told the jury, "I've ruined my life."

Then he went on to talk about what he called the high level thievery that went on among other members of senior management, a group that he said included Skilling.

Fastow repeatedly has challenged the interpretations and premises of defense lawyers but he has not been abrasive.

Jurors in other high profile fraud cases have said they discounted testimony from admitted liars who testified on the government's behalf.

But Fastow has not broken down on the witness stand the way some observers thought he might--and that is one solid note for the government. Prosecutors are hoping to corroborate his testimony with at least two other witnesses, former employees Chris Loehr and Ben Glisan. Glisan is serving five years in prison for his work on one of the partnerships.

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Fairfax, VA: Has Fastow appeared to be a reliable witness for the Prosecution or has he appeared to lose credibility on cross examination? Are you still expecting to see Lay and/or Skilling as witnesses at some point?

Carrie Johnson: Got to your first question already. (See earlier response and the Post stories from the past two days on Fastow's performance under hostile cross examination.)

Skilling has promised to take the witness stand in his own defense. That will be a very exciting moment.

Lay too has said he wants to testify in his own defense, but his lawyer, Mike Ramsey, was not as emphatic about that in his opening statement as was Skilling's attorney.

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Miami, Florida: How did the management of Enron convince the board of directors that Fastow's participation in LJM1 and LJM2 did not constitute a conflict of interest. Was it not clear that these entities could be used to influence the financial status of Enron if the results were not consolidated in the published statements of the latter?

Carrie Johnson: Sophisticated question! Based on documents introduced as evidence at trial, and investigative reports, Enron management promised the board that strict control procedures and checks and balances would be in place: namely, that the company's risk office and that people in its office of the chairman (Skilling and Lay) would review and sign off on the deals.

But it later turned out that many of the Enron "deal approval sheets" lacked key signatures from Skilling and others. Enron's risk operation is now, notably, known to be a complete and utter disaster (or, to be kinder and gentler, remarkably ineffective).

Defense lawyers are arguing that the board approved the structures as did many outside advisors, which made them OK. Skilling attorney Dan Petrocelli said as much yesterday when he pointed out that a company wouldn't take such an expensive insurance policy (hedges, etc.) if managers thought the investments' value would go up, not down.

But prosecutors and Fastow claim that the board and the accountants weren't told that he had a quid pro quo arrangement with Skilling and others that invalidated the accounting on the deals and made them a sham.

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New York: Your coverage has really got me into the trial so brace yourself for some questions!

News reports indicated Fastow received over $45 million when he was at Enron and is reported to have returned $24 million. Where's the rest and is he potentially going to have to return more? From his plea bargain he reportedly is facing 10 years in prison. Is that a ceiling or is there the potential for him to face more/less? We are perplexed by why Lea Fastow received such an apparently harsh sentence for filing joint tax return under, unknown to her, false information; yet she pleaded guilty. Were there other issues that explain this seemingly 'unfair' outcome or are there other issues that would have prompted her to plead guilty?

washingtonpost.com: Carrie's past Enron trial articles are online here .

Carrie Johnson: Thanks for your questions, New York!

Fastow has returned already $24 million in the form of cash, investments, and property. He could be forced to return even more money when he is finally sentenced by the judge. Under direct questioning from prosecutors this week, Fastow sighed and said his liabilities to the government and to shareholder lawsuits could amount to "millions or billions, it's irrelevant, really."

He is facing 10 years in prison. Unlike in many cases, prosecutors will not seek leniency for him and will not ask the judge to reduce his sentence. So under Bureau of Prison rules, he must serve about 85 percent of his sentence--or 8 1/2 years.

Lea Fastow was originally charged with six felony counts related to her filing of false tax returns that underreported income from her husband's partnerships. She eventually bartered that down to one misdemeanor count. Prosecutors recommended she serve five months in prison but the judge threw the book at her and gave her the maximum one year sentence.

If Andy Fastow lies on the witness stand during this trial, the government reserves the right to prosecute him on more than 90 other charges and to reopen his wife's case as well--giving him a powerful incentive to tell the truth, he said this week. (Of course, defense lawyers claim that gives him a motive to tell the truth the way the government sees it.)

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Edgewood, Ky.: Has anyone investigated the role of the board of directors? Did any of the board members have an unusal political connection?

Carrie Johnson: Enron's board of directors was a star studded group, from former Stanford Business School dean Robert Jaedicke and famous doctor Charles LeMaistre to investor Herbert Winokur, British Lord Wakeham, and academic Wendy Gramm, the wife of former Sen. Phil Gramm. Many had political connections.

The board was investigated by the Dept. of Labor and by the Senate Permanent Subcommittee on Investigations, the latter of which produced an extensive written report you can find on the web. No charges were ever brought against Enron's directors but they did pay millions in insurance proceeds and some money out of their own pockets to settle the Labor Department case and a big civil lawsuit.

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Carrie Johnson: One more thing to add, in response to the question about the Fastows and their respective guilty pleas. The couple has two young sons. Andy Fastow testified this week they were fearful of both going to prison at the same time, so Lea struck a deal, served her sentence, and is now home with the boys. It's unclear when Andy will report to prison after this trial ends.

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Washington, DC: I know it's not your primary role, but can you handicap the verdict for us. Right now, after following the coverage in Wash Post and other papers, I think it might be not guilty. Fastow is just so unlikeable, filthy, smarmy and obviously corrupt, Lay and Skilling can just say, "He was lying to us too". What's the vibe down there?

Carrie Johnson: No handicapping, alas. But I'll say this in response to your last question.

Prosecutors for some time now have minimized the importance of Fastow to their case. They put him on the witness stand in the middle of their long case in order to leave jurors with the impression that things were very wrong within multiple operating divisions at Enron for years before the collapse. Fastow is testifying about conversations and meetings he had with Skilling and Lay, no doubt very important. But the government is trying to bolster his account with other less personally tainted witnesses on the front end and on the back end.

Defense lawyers of course are attacking all of the cooperators as people with motive to save themselves at the expense of Skilling and Lay. This strategy sometimes works (see Richard Scrushy acquittal) and sometimes doesn't (see Bernie Ebbers and John Rigas convictions).

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Summit, NJ: Is this the last of the Enron trials, or are other (alleged) scoundrels still awaiting trial?

Carrie Johnson: There are retrials scheduled in the next few months for several former executives in Enron's high speed Internet division, known as Enron Broadband Services. Jurors last year could not reach agreement in that case, which ended in a mistrial. Prosecutors have since streamlined their case and broken up that one big trial into smaller ones.

There is an active grand jury in Houston set up to hear more evidence about Enron's collapse. It's unclear for now whether any fresh charges--and new defendants--will spring from that ongoing investigation.

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Eugene, Oregon: I, for one, a "one" who had his retirement savings looted by these devils, want a new law that imposes a punishment to fit the crime. That would be the death penalty. Given that I and thousands of others like me are close to retirement age and have nothing to support us, given that Bush and his goons have likewise looted Social Security, I cannot fathom why these corporate thieves are allowed to retain any money, any house, anything at all, while we are condemned to live the ends of our lives in poverty.

Carrie Johnson: You must be one of a bunch of workers at PG&E who lost millions when Enron collapsed. Sorry for your loss. You seem to have very strong feelings about this case.

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washingtonpost.com: From FindLaw: The Role of the Board of Directors in Enron's Collapse - Report Prepared by the Permanent Subcommittee on Investigations of the Committee on Governmental Affairs - United States Senate

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Fairfax, Va.: 90 other charges!!!! How often does the defense drive home the point that Fastow is testifying as part of a deal to lessen his own jail time?

Carrie Johnson: Lots and lots and lots. Almost as much as they drive home the point that Fastow stole millions from Enron under the table without the knowledge of Skilling and Lay.

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Seabrook, TX: Didn't the board exempt Fastow from the conflict of interest prohibition?

Concerning Petrocelli's claim alluded to in your last answer, what risk? The outside investors were the only ones at risk, and they had to constitute three percent of the deal. So wasn't Enrons risk only the guarantees to Fastow? And even if the quid pro quo was concealed from the board, didn't the conflict of interest exemption signal that they knew some laws would be broken?

Carrie Johnson: Yes, the board actively moved to exempt Fastow from the company's conflict of interest provisions when he set up LJM, the first business partnership.

I think the board would say they knew that Fastow was going to be on both sides of the table, so to speak, but that they relied on promises that his actions would be overseen by senior management at Enron and that he wouldn't get a pecuniary interest in the form of Enron stock.

Clearly, the board really fell down on the job when it took the unusual step of waiving the conflict code. There is an incredible bit of testimony (not in this trial) from David Duncan, the lead audit partner at Arthur Andersen on the Enron account, who said he could not believe the board would do something so zany (my word, not his).

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Chatham, NJ: In the movie "Smartest Guys in the Room", there was a starring role for Lou Pei. The movie portrays that he got out of Enron "early" and is retired in Hawaii. Any talk of bringing him to trial?

Carrie Johnson: Lou Pai has not been charged with wrongdoing. He faces investigation by regulators at the Securities and Exchange Commission and many shareholder lawsuits. He appears on the witness list in this case but no one expects him to testify.

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Aliso Viejo, CA: Hi Carrie,

Didn't the Enron Board have to waive some of their governance rules in order to approve the partnerships?

Also, are there any sanctions that will apply to the Houston law firm that created the language for the partnerships and signed off on them?

Carrie Johnson: See above response in answer to your first good question.

As for the law firms that worked on Enron's behalf (Vinson & Elkins and Kirkland & Ellis, among many others) it appears they have mostly got a pass--something that dismays many corporate governance experts who believe gatekeepers such as lawyers and accountants performed terribly in this episode.

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Bethesda, Md.: I don't get it. They stole millions of dollar from people. What kinds of proof does the goverment need to prove? Just take all their assets and put them in jail for the rest of their lives and I bet nobody is going to complain that that is unfair.

Carrie Johnson: You feel that way now, but what if it were you sitting at the defense table maintaining your innocence?

Given the amount of negative publicity and public vilification of people who worked at Enron, this case more than most cries out for fairness and constitutional protection. These guys deserve the right to a fair trial and they are certainly getting one (spending $70 million (!) on their own behalf). The government needs to prove Skilling and Lay broke the law, beyond a reasonable doubt, just as in any other criminal case.

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Butte, Mont.: Any fallout for Wall Street investment or commercial banks and their officer-employees from this trail?

Carrie Johnson: Good question. Several former employees of Merrill Lynch & Co. are in prison now for their work on what is now known as the Nigerian barge deal, a last minute transaction in December 1999 that helped Enron hit earnings targets. Those employees, which include former Merrill vice chairman Dan Bayly, are appealing their convictions.

Other banks, including Merrill, CIBC, Chase, and Citigroup have paid out the nose to settle civil charges and to avoid prosecution in their dealings with Enron.

The barge case has come up this week in testimony.

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Eugene, Oregon: With regards to the question on investigating the directors of Enron - they were NOT all a star "studded group". I can think of two board members who have been involved in similar scandals. Look at Jerome Meyers. He was the CEO of Tektronix and presided over taking what was once Oregon's largest employer (28,000) and outsourced and downsized it to 3,000 all the while compiling multimillion dollar bonuses. Another was involved in somehow illegally arranging the shipment of military technology to foreign states - including Iran, North Korea, China, India, etc. Beyond this, even a cursory examination of that "star studded" board will show hundreds of millions of dollars of stock options and other payments. Also, it was that same "star studded" board that was responsible for removing corporate ethics rules that permitted the entire Enron fiasco. I submit, the Enron board is as responsible as the executives.

Carrie Johnson: Putting this out there...

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Dallas,Tx: Which side seems to be winning? Has there been any evidence against Lay or Skilling that can be linked to them in the partnership transactions?

Carrie Johnson: According to testimony this week, both Skilling and Lay saw documents that showed Fastow's LJM partnership was making outlandish, "astronomical" returns of sometimes 2000 percent or more, considering the quick turnaround in its investments.

Fastow says Skilling gave him oral promises that his deals would not lose money but there has not been explicit documentary evidence linking Skilling to that promise or "bear hug." Might want to take a look at today's Wash Post story which focuses on defense efforts to discredit Fastow on these points.

We do not yet know which other government witnesses waiting in the wings will offer testimony about the partnerships or other dealings.

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Norfolk, VA: Do you have any idea if the jury will see video of the Sat. Night Live-style skits referenced in the Enron movie?

Carrie Johnson: The defense successfully moved to keep out some of the most inflammatory recordings, including the phone calls of California traders laughing over their efforts to bilk "Grandma Millie."

I do not think the government will show some of the other skits in which Skilling and others joke about the company's accounting.

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Arlington, VA: Hi Carrie,

How effective do you think the defense's cross examination of Andy Fastow was with the jury? I've read Conspiracy of Fools and think Andy Fastow is a liar and a weasel, but I'm not sure I'd feel the same if I were on the jury and only heard the evidence presented. Did you think he came across as a credible witness, or was Petrocelli successful in exposing the true Fastow?

Thanks,

EDK

Carrie Johnson: I'm reserving my fire on this until I see Lay's lawyer, Mike Ramsey, cross examine Fastow on Monday.

Petrocelli surely highlighted many negative character traits of Fastow's, including his greediness, opportunism, and cravenness. But prosecutors tried to blunt the attack by getting Fastow to admit to those things himself during his direct examination.

Fastow said he wanted to be remembered as someone who committed many wrongs, but who had the "character" to admit his failings, do right by his family, and admit his wrongdoing. Whether a jury believes him is an open question.

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Carrie Johnson: Thanks very much for all your questions. Sorry I could not get to all of them today. But I hope you'll be back next week for more Enron drama.

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