Enron's demise has been the subject of a dozen-odd books and a fine documentary, but it's still, at some level, a mystery. The fraud trial of former Enron CEOs Jeff Skilling and Kenneth Lay ought to be a great chance to learn what really happened, to finally hear from the people who have been silent or lying—including the defendants themselves, who plan to testify.
So, I am a little disappointed that, at least to judge by their opening statements, the prosecution and the defense are going to try their best not to investigate the puzzle of Enron but instead to tell the simplest possible stories. To put it another way, they are treating the jurors like morons.
According to the Houston Chronicle,which has the best trial coverage, the jury is an unusually educated bunch, with seven college graduates among the dozen. But when prosecutor John Hueston laid out his case against Lay and Skilling, it sounded less like The Smartest Guys in the Room or the Wall Street Journal and more like Accounting for Dummies.
As Sheila McNulty of the Financial Times noted, "An earnings report become a 'report card.' " Wall Street analysts were described as "professional watchers, who look at and digest information." The off-balance-sheet financing vehicles, which were the linchpin of Enron's success (and fraud), were where the company stowed "nuclear waste." Hueston took pains to draw attention away from all that accounting "hocus pocus," saying: "It's not about the accounting. It's about the lie." It calls to mind Phil Hartman's old Unfrozen Caveman Lawyer routine on Saturday Night Live: All your strange numbers confuse and scare me, but I do know one thing—those men are liars.
In simplifying to the extreme, prosecutors were being mindful of past failure in white-collar accounting cases—the acquittal last June of former HealthSouth CEO Richard Scrushy, and the hung jury in the first trial of former Tyco CEO Dennis Kozlowski. And so you can't blame the prosecutors for wanting to keep it easy. Jurors don't have to know precisely what happened, only that a bunch of bad stuff went down and that the executives lied about it.
The problem for the prosecution is that Enron and its executives thrived on accounting complexity. Over the years they built an asset-light juggernaut by continually figuring out ways to report accounting profits from deals and investments that didn't produce real profits. Without the accounting complexity, there was no Enron.
The defense attorneys presume a different type of ignorance—jurors with a complete absence of common sense. The opening statements made by Skilling's lawyer, Daniel Petrocelli, and by Lay's lead lawyer, Michael Ramsey, are sharply at odds with the public record and what we know happened.
Here are some of Petrocelli's gems. "This is not a case of hear no evil, see no evil," he said. "This is a case where there was no evil." Enron wasn't felled by fraud, he said, it was done in during the fall of 2001 by liquidity problems, a run on the bank. What he didn't say was that those liquidity problems were caused by concerns about fraud. More Petrocelli: "There is no evidence that any books were cooked at Enron." And: "Enron did not need to manufacture earnings. If you don't have to create earnings, why did you have to go out and commit a felony?" Ramsey, the lawyer for Lay, was even more emphatic. He said there was no crime at Enron except for "minor thievery" by former CFO Andrew Fastow. "Andy stole crumbs. ... What Andy stole was Enron's reputation," he said.
Clearly, Petrocelli and Ramsey have chosen to ignore all the evidence of the past five years. They act as though they did not read The Smartest Guys in the Roomor any of the many plea deals and court decisions in which more than a dozen former Enron employees and outside associates either admitted to or were convicted of creating earnings, committing fraud, stealing, and generally doing evil. (Here's a nice summary of all the Enron-related legal activity.) Crumbs? The sums in play at Enron, and that will be mentioned at trial, were vast. Skilling and Lay were paid and realized hundreds of millions of dollars from stock sales. Fastow and his wife, Lea, admitted to taking enough crumbs to make a ton of bread. When Fastow pleaded guilty nearly two years ago, he agreed to surrender nearly $23 million.
To buy the defense's theory of the case, you have to believe that 1) the reporting and writing about the pervasive shenanigans, corruption, and deceptions that characterized the company's accounting and business practices are all made up; and 2) that all the indictments, convictions, and plea deals were trumped up. Apparently, the defense is hoping that this Texas jury is gullible enough to think Enron was just a big frame-up.
One reason Enron got in so much trouble was that it told investors and the public simple, happy stories that were utterly at odds with the firm's complex and ugly reality. That cost Skilling and Lay their jobs. If their lawyers keep telling the same kind of incredible stories during the trial, it could cost Skilling and Lay their freedom.