In Enron trial, a novel - even brash - defense

Defense lawyers for Kenneth Lay and Jeffrey Skilling said two months ago they would prove not only that the top executives did not know about any wrongdoing at Enron, but that there was no wrongdoing, save for the actions of a few bad apples.

Monday in a federal courthouse here they'll begin to try to build their case for that bold assertion - one never before used as a defense in a corporate corruption trial.

The "there was no evil" defense is a high-risk strategy, but it may be born of necessity, court watchers say. In other recent trials involving allegations of corner-office malfeasance, the usual argument - that corruption existed but that corporate leaders were ignorant of it - often didn't fly.

"Jurors are quite skeptical of CEOs who ask them to accept that they were competent, hands-on managers, but completely unaware of massive fraud right under their noses," says Robert Mintz, a former federal prosecutor. "I can assure you that [Messrs Skilling and Lay] have paid attention to other CEOs who have tried to raise [that] defense and failed."

Case in point: The verdicts last year against former WorldCom CEO Bernard Ebbers and former Tyco CEO Dennis Kozlowski.

The Enron defense's novel approach - which caused many in Houston to gasp in disbelief upon hearing it - posits that Enron was basically sound and that it went bankrupt because the market panicked and creditors pulled out when investor confidence eroded and Enron's stock price plummeted.

That argument, though, may be hard to reconcile with testimony of the past eight weeks, as one government witness after another has said that Lay, Enron's founder, and Skilling, its CEO, knew of wrongdoing and even participated in it.

"So far, the biggest surprise is how effective a job the government is doing," says Gerald Treece, assistant dean at the South Texas College of Law in Houston. "The case is stronger than I thought it would be. The witnesses have been more effective than I thought they would be. And the young prosecutors have more than held their own against the more experienced defense attorneys."

Moreover, the defense team isn't the only one to take some lessons from earlier corporate corruption trials. The government learned a few things from losing its case against former HealthSouth CEO Richard Scrushy - and is using them to its advantage in the Enron case, says Jim Parkman, Mr. Scrushy's lawyer. The HealthSouth executive was acquitted last year of all charges in the $2.7 billion accounting fraud at the hospital chain - a case in which the "CEO didn't know" defense did manage to prevail.

For one, the Enron prosecutors did not spend a long time on the company's Byzantine accounting practices, as the HealthSouth prosecutors did. For another, they didn't replay endless analyst conference calls or hide their witnesses' wrongdoing from the jury, says Mr. Parkman.

"All of that bored the jury to no end, and you cannot bore a jury - no matter what kind of case it is," he says. "The government learned two important lessons from us: Keep it short, and never hide the bad."

The Enron prosecutors did not hide, for instance, the culpability of the man billed as their star witness: Andrew Fastow, the company's former chief financial officer. But Mr. Fastow's testimony "turned out to be almost irrelevant after a steady stream of witnesses told the same story," says David Berg, a Houston defense lawyer and author of "The Trial Lawyer: What It Takes to Win."

To date, the government is ahead - as it should be at this stage in the trial, say Mr. Berg and others. To try to chip away at that advantage, the defense will probably launch a charm offensive, Berg says, because "juries give verdicts to people they like."

That is expected to come from character witnesses, as well as Lay and Skilling themselves, who have said they will testify. Jurors are also likely to hear from Enron's outside accounting firm and from lawyers who signed off on the complex deals that masked the company's losses.

Though the government put on a strong case, defense attorneys Michael Ramsey and Daniel Petrocelli definitely have room to maneuver, say legal experts.

They have already done a good job of highlighting weaknesses in the prosecution's case, noting in particular the lack of direct evidence against Lay and Skilling, says Mr. Mintz.

Most of the evidence linking the two men to crimes has come in the form of conversations, conference calls, and speeches, not documents.

After the government rested its case, it dropped one charge against Lay and three against Skilling. Lay is now charged with six counts, including conspiracy and fraud. Skilling faces 28 counts, including conspiracy, fraud, and insider trading.

In the end, the case may hang on how jurors assess Skilling and Lay - and their credibility - when each takes the stand.

Experts are split on the wisdom of letting the defendants testify.

Parkman, who did not put Scrushy on the stand during the HealthSouth CEO's trial, cautions "there is too much damage that can be done under that pressure."

Moreover, under the federal sentencing guidelines, a defendant who testifies in his own case and loses can suffer a greater punishment than if he hadn't. Though the US Supreme Court threw out the guidelines last year, many judges still look to them for direction, says Parkman.

But Mr. Treece, at South Texas College of Law, says the two simply must testify because the case comes down to credibility.

For almost two months, witnesses have been detailing Lay's and Skilling's misdeeds. "Now the jury is going to want to hear their version of events," he says.

"It's impossible to predict the outcome," Treece adds. "All the experts in the world can't really know what the jury's thinking."