Prosecutors pursuing the fraud case against former Enron Corp. chairman Kenneth L. Lay sought permission yesterday to present evidence about what they called Lay's "familiar posture of ignorance," citing a trading scandal that almost destroyed the company in 1987.
The Justice Department's Enron Task Force is hoping to use the long-ago incident to reinforce its criminal case against Lay. He denies knowing that the Houston energy firm was hurtling toward bankruptcy in late 2001 when he urged employees and investors to buy stock.
Government lawyers argue that Lay's attempts to "whitewash" problems and his public denials during the company's earlier brush with death will help them establish a pattern in the upcoming fraud and conspiracy trial, set to begin Jan. 17.
"When faced with circumstances remarkably similar to the ones alleged in the indictment, Lay fraudulently attempted to dupe the public with protestations of ignorance, indications of lack of warning and rants about 'rogue' senior executives," prosecutors John C. Hueston and John A. Drennan wrote.
Michael Ramsey, a lawyer for Lay, called it "an act of hysteria." Defense lawyers frequently argue in such instances that the prior conduct is too old and irrelevant to the case at hand. Lay will have several weeks to respond before U.S. District Judge Simeon T. Lake III issues a ruling.
Legal experts said judges typically evaluate such requests very carefully. "The danger is, a jury might tend to convict someone based on prior conduct rather than present conduct," said white-collar defense lawyer and former prosecutor E. Lawrence Barcella Jr.
Enron's first crisis ensued after two traders in the Enron International Oil Inc. unit in Valhalla, N.Y., incurred $85 million in losses by making risky, and ultimately disastrous, bets. The debacle erased half of Enron's profits for the year. It could have led to the meltdown of the company if not for a bold and ultimately successful trading bluff by another executive.
Prosecutors argue that the incident offers a rare window into Lay's thinking in the face of calamity. They claim Lay improperly said he had no idea of the problems and also misled workers in an October 1987 conference call about when he learned about them. Lay had previously defended the two traders at the heart of the scandal, even in the face of allegations that they had misappropriated funds, because they had generated millions for Enron, prosecutors wrote.
Lay has long maintained that he was kept in the dark about the extent of Enron's financial troubles before its December 2001 bankruptcy. He had returned to serve as Enron's chief executive after handpicked protege Jeffrey K. Skilling abruptly resigned that August.
Among other things, Lay's trial may help clarify what executives are expected to know about their company's financial health, governance experts say.
Prosecutors maintain that Lay's past actions are relevant to the ongoing criminal case. Indeed, they argue, Lay highlighted the parallels between what turned out to be Enron's fatal cash crunch and the earlier incident in an Oct. 23, 2001, meeting with employees. There, an upbeat Lay said that Enron had been able to recover from previous obstacles, including an oil trading scandal that "could have taken the company down." Less than two months later, the company filed for bankruptcy protection and cut thousands of jobs.
The prosecutors said they would enlist at least two witnesses to testify about the 1987 conduct, including Mike Muckelroy, a former Enron trading executive who has told reporters that he informed Lay about the severity of the problems months before Lay publicly disclosed them. The government also attached previously undisclosed investigative reports and memos about the event.
In one memo, dated Nov. 5, 1987, Lay pronounced himself "damn mad" about the trading losses and said they would "have no significant adverse impact on our future profitability and success."
"If there is any lesson to be learned from the recent trading losses, it is that everyone -- and I do mean everyone -- must abide by the company's policies, procedures and controls," Lay concluded.