Judge Drops Some Enron Charges

Twenty-two witnesses. Piles of documents. Hours of audiotapes and videotapes. And lots of memories of allegedly shady discussions with no explicit orders to commit wrongdoing.

Bit by bit, those pieces made up the puzzle of the government's fraud and conspiracy case against former Enron Corp. chiefs Kenneth Lay and Jeffrey Skilling. Prosecutors rested Tuesday and a judge approved their request to drop several charges they hadn't addressed.

Now it's the defendants' turn.

Both Lay and Skilling have argued publicly — Skilling before Congress and Lay to reporters — that they committed no crimes.

But after the defense opens its case on Monday, the pair will make good on promises to make their case to the only people who really matter — eight women and four men on the jury.

Observers looking for an incriminating e-mail, a tape recording of conspirators planning illegal acts or any other obvious smoking gun were disappointed. The government built its case on the recollections of witnesses who said the former corporate titans' optimistic public statements didn't jibe with internal discussions during which no one was wearing a wire.

"The government has really made its case that what Lay and Skilling said and were told in private were very different from what they were doing and saying in public. It really comes down to that," said Michael Wynne, a former federal prosecutor who has observed much of the trial firsthand.

Robert Mintz, another former federal prosecutor who has followed the trial, said each prosecution witness is intended to be viewed as part of a whole that when combined paints a "very damning portrait of these two defendants."

But, he said, "This is still a difficult case for prosecutors because there is no 'smoking gun' evidence. There are no bombshells. There's nothing that conclusively ties the defendants to a scheme to defraud the investing public," he said.

The government rested its case Tuesday, but the defendants appeared undaunted.

"We're looking forward to getting on the stand and getting our case out there — the positive case," Lay told reporters outside the federal courthouse in Houston.

"We are anxious to get our story told," said lead Skilling lawyer Daniel Petrocelli, his client at his side.

Prosecutors declined comment, as is customary during a high-profile trial.

Lay and Skilling will enter the defense phase a little lighter because U.S. District Judge Sim Lake approved a government request to drop several charges against them to streamline an already complicated case. Specifically, two counts of securities fraud and one count of lying to auditors pending against Skilling were dropped, leaving 28 criminal counts remaining; and a single count of securities fraud against Lay was dropped, leaving six.

Lake denied routine requests from the defense for acquittal.

The dropped counts against Skilling stemmed from allegations the former chief executive signed a fraudulent quarterly report submitted to the Securities and Exchange Commission; lied about Enron's health during a first-quarter earnings conference call; and signed a statement to auditors that vouched for fudged financial statements.

The count against Lay that was dropped grew from allegations the company founder lied to analysts about Enron's finances during a conference call.

The government says Lay and Skilling repeatedly lied about Enron's financial health, optimistically praising the company's strength when they allegedly knew it was weak but for accounting tricks to book earnings and hide losses.

Prosecutors sought to bolster its allegations through the memories of witnesses, audiotapes of conference calls with Wall Street analysts and videotapes of employee meetings.

The two men counter that there was no fraud at Enron other than that by a few employees who skimmed money for themselves from secret scams, including former Chief Financial Officer Andrew Fastow. They say they did nothing wrong and attribute Enron's descent into bankruptcy protection in December 2001 to negative publicity coupled with loss of market confidence.

The government's 22 witnesses included eight former executives who have pleaded guilty to crimes, one with an immunity deal, one who settled regulatory allegations and three who have not been accused of any wrongdoing who said they voiced concerns about financial peril that fell on deaf ears.

Petrocelli said the government's lineup offered only "glancing blows" and the defense case will present "hard facts."

"We're scrambling to get witnesses to testify, and it has not been easy," Petrocelli said. "You'll probably see more than the government called."

The defense teams have repeatedly complained that ex-Enron executives who haven't been charged with crimes are afraid to testify on behalf of Lay or Skilling for fear of being indicted despite repeated assurances from the judge that they would face no government retribution for doing so.

The defense teams originally had a witness list that exceeded 200 people and included former top executives who sold tens to hundreds of millions of dollars in stock. But many of those, including one who made off with the most millions — former retail energy unit CEO Lou Pai, who sold nearly $300 million in stock before he quit Enron in mid-2001 — were expected to invoke their Fifth Amendment rights not to testify.

So the defense teams have pared their list to about 100, though only one-fourth are likely to testify.

Petrocelli said former Enron Chief Accounting Officer Richard Causey is on the list, but was unsure if he would testify. Causey was slated to go to trial alongside Lay and Skilling until he defected from the unified defense after Christmas and pleaded guilty to securities fraud.

The government's highest profile and most anticipated witness was Causey's ex-peer — Fastow.

The former chief financial officer had no written proof that he and Skilling discussed Enron's use of his partnerships to help the energy company manipulate earnings, but insisted that they "committed crimes together" and Skilling egged him on, saying "get me as much of that juice as you can."

Fastow also said Lay knew from discussions with him and others that Enron was in serious financial trouble by the fall of 2001, even as the company founder gave rosy reports of its health to investors and employees.

The defense teams gave Fastow repeated verbal beatings, highlighting how the ex-CFO skimmed money from Enron through other scams unknown to Lay and Skilling and drew his wife into his crimes, for which she served a year in prison. Fastow pleaded guilty to two counts of conspiracy in January 2004 and agreed up front to serve the maximum 10-year prison term.

As the government wound down its case Tuesday, it left jurors with a taste of the large salaries Lay and Skilling raked in — almost $375 million between them — before the company slipped into bankruptcy.

Skilling earned more than $151.7 million from Enron Corp. from 1999 to 2001, the time span of the indictment. The 28 counts against him include 10 counts of insider trading, and those trades gained him more than $41 million.

In the same three years, Lay earned more than $222.8 million from the company.

Lay is not charged with improper stock sales. But prosecutors sought to show through their final witness, Enron accountant Joanne Cortez, that Lay borrowed millions of dollars from Enron and repay the loans with company stock as the energy giant was sinking.

In August 2001 Lay repaid a $4 million line of credit with Enron stock days after Skilling resigned. A week after Enron reported massive third-quarter losses in October 2001, Lay's credit line was bumped to $7.5 million from $4 million. By the end of the year he had maxed it out, she said.

An executive's stock sales back to a company don't have to be reported until the year after they occur.

"I thought it was improper," Cortez said, though she conceded on cross-examination that she didn't know Lay used the line of credit to repay bank loans under lender orders.

Lead Lay lawyer Michael Ramsey, who appeared healthy Tuesday despite having had a stint inserted into his heart late last week to alleviate chest pain, said outside of court it was a "unique situation" that the government ended its case with testimony that implies insider trading even though his client isn't charged with it.

"We've had a good trial," he said.