For months, corporate crime experts have warned that the government's prosecution of former Enron Corp. leaders Jeffrey K. Skilling and Kenneth L. Lay faced long odds. The Houston energy giant's complex structure and the credibility problems of the Justice Department's star witness, who allegedly stole millions from Enron, loomed as serious obstacles.
But legal experts said a recent flurry of guilty pleas by senior executives, including the former head of Enron's oft-touted high-speed Internet unit and its former investor relations chief, has advanced the conspiracy and fraud case against Enron's top executives.
No trial date has been set, as prosecutors and attorneys for the two men spar over motions for separate trials. Two former, lower-ranking Enron executives, the first to face a jury, are scheduled to begin trial Monday in Houston over their role in an allegedly improper deal with Merrill Lynch & Co. to boost Enron earnings.
"I don't think there's any question [the recent guilty pleas] have been vital to building the case," said Daniel K. Hedges, a former U.S. attorney in Houston. "They've gotten pleas from the highest levels . . . people who worked intimately with Skilling and Lay and who worked on some of the transactions mentioned in the indictments."
The recent deals also help reinforce the government's theory that the company that reported revenue making it the nation's seventh-largest was a house of cards where executives manufactured earnings and hid severe losses.
Central to that effort, prosecutors claim, was an aggressive campaign to tout Enron's apparent success. Mark E. Koenig, who headed the company's investor relations unit from 1998 to 2002, served as the most important link between Enron managers and outside analysts who recommended the stock to investors.
Koenig pleaded guilty late last month to aiding and abetting securities fraud, telling a judge that by early 2001, he knew Enron's financial reports "intentionally concealed the true state of Enron" and in particular the success of two core businesses: Enron Broadband Services, which sent video and other data on high-speed networks, and Enron Energy Services, set up to provide energy to other large companies.
Koenig described in his plea agreement a series of conferences and telephone calls in which he misled investors to artificially boost Enron's stock price. In one such session, on Jan. 22, 2001, Koenig told analysts that a deal to sell some of the broadband unit's projected future revenue accounted for a "fairly small amount" of its quarterly revenue. In fact, the deal brought the struggling unit 84 percent of its $63 million in revenue that quarter, court papers said.
Koenig also said he and other top managers misled investors about the reason for a reorganization of two of Enron's businesses in early 2001. He told analysts the move was made to "increase efficiency," when in fact the shift allowed the company to hide hundreds of millions of dollars in losses at its retail unit by combining its finances with the vastly more successful wholesale energy division, which made large profits trading electricity, according to court papers.
That wholesale unit later came under fire for allegedly bilking West Coast energy consumers out of millions of dollars by using deceptive trading tactics. Three former Enron traders have pleaded guilty to playing a role in the price manipulation, which investigators say took place throughout the California power crisis in 2000 and 2001.
"The company was losing money virtually everywhere," including its Internet, retail gas and power, and high-tech investment portfolio, said University of San Diego law school professor Frank Partnoy, who has studied the Enron collapse. "The trading operation was the heart that remained healthy throughout but everything else died."
Perhaps the unit where the contrast between expectations and reality was the starkest was the broadband division, which was responsible for a huge spike in the company's stock price throughout most of 2000. Its onetime chief executive, Kenneth D. Rice, pleaded guilty to securities fraud July 30 and agreed to cooperate with prosecutors. Rice had a close friendship with Skilling, whose allegedly false optimistic statements to analysts and investors about broadband figure largely in Skilling's own indictment.
"The purpose in making these misrepresentations was to falsely portray to the investing public that [the broadband division] had a thriving telecommunications business that had successfully developed revolutionary software which would, in turn, cause Enron's stock price to increase significantly," Rice said in his plea agreement. The government claims the broadband unit never made a profit.
Prosecutors also have secured recent guilty pleas from Kevin P. Hannon, the chief operating officer of the broadband division, who had previously worked in the company's trading unit, and Paula H. Rieker, a former deputy to Koenig who accompanied Lay and other Enron officials to meetings with investors in the months before the company plummeted into bankruptcy.
Last year, David W. Delainey, who had headed both the energy services and the North American trading units, pleaded guilty to insider trading. In his plea deal, Delainey said that at the time he sold stock in 2000, he knew about Enron's use of cash reserves to meet earnings goals. He added that when he sold stock in 2001, he was aware of "Enron's concealment of massive receivables" that California utilities owed Enron.
Plea agreements indicate that the government is focusing on the several years in which Skilling directed day-to-day operations at Enron. He abruptly resigned in August 2001, handing the reins to Lay, who headed the company through its bankruptcy. The criminal case against Lay is narrower than that of Skilling and centers on optimistic public statements he made in the six-month period leading up to the bankruptcy.
Lawyers inside and out of the Enron cases caution that there can be a danger in relying on guilty pleas in business fraud trials. Indeed, Daniel M. Petrocelli, the lead trial counsel for Skilling, repeatedly has said that the government is using harsh federal sentencing guidelines and other tactics as a way to coerce guilty pleas from reluctant corporate insiders. He said prosecutors are labeling dozens more former employees as possible targets or co-conspirators, making them reluctant to testify as defense witnesses.
"If I had their power, I could get innocent people to plead to crimes, too," Petrocelli said.
Michael Ramsey, the top lawyer for Lay, said his client has nothing to fear so long as witnesses tell the truth.
Former prosecutors added that witnesses can be unpredictable when they take the stand and sometimes waver under vigorous cross-examination. For instance, defense lawyers portrayed David B. Duncan, the star witness in the Justice Department's obstruction-of-justice case against audit firm Arthur Andersen LLP, as a confused and misguided accountant who pleaded guilty to escape a long prison term and spare his family the anguish of a criminal trial.
At least a few jurors said after the Andersen trial that they discounted Duncan's testimony even though he had pleaded guilty to one count of obstructing justice. Prosecutors ultimately won a conviction in the case, which was upheld by an appeals court earlier this year.
If defense lawyers get their way, Andersen will play a central role in the upcoming trial of Skilling and Lay. Lawyers for both men have said their clients relied heavily on advice from lawyers and auditors to vet many of the deals and accounting maneuvers the government has cited in the indictment. Executives caught up in corporate fraud cases can cite reliance on auditors and lawyers as a way to show they did not intend to break the law.
"It would be impossible to have committed a fraud when thousands of people knew about it, including accountants, lawyers, employees, analysts and investment bankers, as well as the general public," Skilling lawyer Petrocelli said.
What's more, observers said, no one has yet tested the government's evidence in a case directly tied to Enron executives. The first Enron trial is set to begin Monday in Houston. Several former Enron and Merrill Lynch executives are accused of entering into an improper energy deal to help Enron meet earnings targets in late 1999.
Defense lawyers in that case are contesting the allegations, and in a series of motions zeroed in on statements made by Andrew S. Fastow, Enron's former chief financial officer. Fastow, who pleaded guilty to wire and securities fraud in January, allegedly told law enforcement officials that he never explicitly guaranteed that Merrill Lynch would not lose money in the deal -- which would have made the transaction illegal on its face. Instead Fastow said he left that impression with the Merrill executives without putting it in writing or making concrete verbal promises. That undercuts the premise of the case, the defense attorneys argue.
Investigators say Fastow siphoned off more than $60 million for his own use without the knowledge of the company's board of directors. Lawyers for Skilling and Lay said the men were kept in the dark about Fastow's activities and have called him a thief.
The recent guilty pleas help the government overcome Fastow's potential credibility problems, said lawyers following the case. They also put pressure on other indicted former Enron executives to plead guilty and help the government, rather than face costly trials and potentially decades-long prison sentences, they said.
Meanwhile, the Justice Department's Enron Task Force is moving ahead on several fronts. One set of prosecutors is preparing for a trial next March in the case against several former Enron broadband employees.
And the federal criminal investigation, which began in January 2002, shows no sign of ending. The grand jury has entered into its third year of work and its term will not expire until March.
"All indications are the grand jury is still investigating other activity that has not yet been brought to the forefront," said Philip H. Hilder, a Houston lawyer who represents several Enron witnesses.