News analysis by Greg Farrell, USA TODAY
HOUSTON – As if former Enron CEOs Ken Lay and Jeff Skilling don’t have enough to worry about with the government’s star witness expected to begin testifying against them today, a prominent defense lawyer who helped win an acquittal for another embattled CEO says the two men are already toast, at least in the courtroom.
Donald Watkins, a civil rights lawyer and businessman who last year helped former HealthSouth CEO Richard Scrushy beat charges that he masterminded a $2.7 billion fraud, said in an interview Friday that Lay and Skilling are “doomed.”
“There comes a time when you can forecast the outcome of a contest,” said Watkins, who has not attended the trial but has followed it closely in the media. “In this contest, these guys have lost.” (Story: Star witness Fastow to take stage)
The reason, according to Watkins, is that the two men settled on the wrong defense strategy. In their opening arguments, lawyers for the two men told the jury that Enron was a solid company done in by a loss of confidence among investors and trading partners after the disclosure that former chief financial officer Andrew Fastow had diverted tens of millions of dollars into his own pocket.
Watkins says this defense – that Enron was fundamentally a healthy company – is a non-starter. “Nobody’s going to buy that,” he says. Further, the tactics used so far by the defense – vigorous cross-examinations of cooperating witnesses who have already pleaded guilty – “lacks imagination.”
“These types of trials involve not only legal issues, but political and social issues. You have to address all of that. They have ignored the political and social angles. When you do that, you lose every time. They never put the government on trial.”
“Lay and Skilling are the poster boys for Sarbanes-Oxley,” says Watkins, referring to the law passed after the exposure of accounting problems drove Enron and WorldCom into bankruptcy. “They’re part of a Justice Department campaign to clean up accounting in Corporate America. The defense is treating it like it is a regular white-collar criminal case.”
Watkins says the Lay-Skilling defense would have been better off putting the government itself on trial, digging into the process by which prosecutors built their case. In the Scrushy trial last year in Birmingham, Ala., Watkins and his legal team challenged the prosecution at every turn, forcing the government to put FBI agents on the stand to testify about how secret recordings of the defendant were made and handled.
“There are certain things that resonate with jurors,” Watkins says. “They will not tolerate government misconduct, period. Every juror scans the courtroom and wonders privately, ‘If I were sitting there, would they be coming after me, too?’ You have to address these thoughts and make them think, ‘Yes, they would steamroll me, too.’ ”
Hard to handicap from afar
Lay’s attorney, Mike Ramsey, respectfully disagreed with Watkins, saying, “It’s very hard to handicap a case without being in the middle of it.” But he did concede that so far, at least, “There have not been a lot of over-the-top attacks on people in the courtroom.”
But after five weeks, Ramsey says, “I’m very happy with the position we’re in right now. It’s hard to know in the middle of a fight, in the fog of battle, whether you’re winning. We’re probably in better shape now than we thought.”
As for the prosecution, Watkins says it is doing a good job pacing the trial. For the first two weeks, jurors listened to testimony from Mark Koenig, Enron’s former head of investor relations. Koenig, who pleaded guilty to one count of aiding and abetting securities fraud, was a minor player in the fraud that Lay and Skilling are alleged to have covered up at Enron, but he came across as credible and set the table for a number of issues that subsequent witnesses addressed.
Since Koenig stepped down, nine others have testified about accounting problems at Enron or other related issues. Today, prosecutors will call Fastow, and he is expected to implicate Lay and Skilling in the conspiracy to prop up Enron’s earnings.
“In Scrushy’s case, the government couldn’t wait to trot out their big cooperators,” Watkins says. The Enron prosecutors brought out “their more credible witnesses first” and put their biggest witness in a position where the entire case doesn’t ride on his credibility.
According to Watkins’ rules for managing white-collar criminal cases, there is some hope. In the Scrushy trial, the primary defense lawyer, Jim Parkman, emerged as a folksy, likable character who frequently got jurors and the judge to laugh.
“If the jury is not laughing with you, you are losing,” Watkins says. In the Scrushy trial, “They bonded with Parkman. I have never seen jurors convict a defendant when they’re laughing with a defendant. If there’s no smiles, no laughter, those guys are doomed.”
That’s good news for Skilling. His lead attorney, Daniel Petrocelli, has emerged as the star of the trial, cracking up jurors with unscripted remarks and amusing U.S. District Judge Sim Lake with lively banter.
As for Watkins, Ramsey suggested he travel to Houston this week “to watch us work over Mr. Fastow.”
Skilling to Testify in Rare Attempt to Win a Fraud Acquittal
April 6 2006 (Bloomberg) — Enron Corp.’s former Chief Executive Officer Jeffrey Skilling is scheduled to take the stand today in an atypical move to refute prosecution evidence that he and past chairman Kenneth Lay defrauded investors.
Skilling will be followed by Lay during the defense’s four- week case in federal court in Houston.
Testifying in one’s own defense is chancy, because it shifts the jury’s mindset from the prosecution’s evidence to the defendant’s personalities, lawyers following the case said. The outcome of the trial could depend not just on what the two men say about how Enron collapsed. It also hinges on how they say it.
“When the accused testify, the whole focus of the trial changes to: ‘Are they telling the truth?”‘ said Dick DeGuerin, a Houston-based defense lawyer who’s been following the proceedings, which began Jan. 30.
Defense lawyers contend Lay, 63, and Skilling, 52, aren’t to blame for the collapse of Enron, once the U.S.’s seventh- largest U.S. corporation by sales. They blame subordinates.
Lawyers for the two men, said Mark Mahoney, a Buffalo, New York, defense lawyer not connected to the case, are “taking the only sane approach” by putting Lay on the stand. “The art for the defense lawyer is to bring out enough about the case that allows a juror to say, ‘Wait a minute, this person’s only a scapegoat,”‘ he said.
Enron had more than $68 billion in market value before it sought bankruptcy protection in December 2001, wiping out thousands of jobs and $1 billion in retirement funds. Former employees testified that the two men lied to investors, employees and analysts about the company’s prospects that year while selling Enron shares.
Response to Questioning
People who observed Skilling and Lay before and during the trial think that the way they respond to questioning is crucial after the nine-week prosecution case. Where Lay is personable, Skilling is dynamic, said Peter Veruki, the former admissions director for the graduate business program at Rice University in Houston, where Skilling was a frequent lecturer.
“He certainly wasn’t the warm, folksy type like Mr. Lay,” said Veruki, an Enron investor who lost about $40,000. “He’s the kind of guy who inspires people with his vision. I’ve heard people say they would have followed the guy off a cliff if he jumped.”
Skilling has had more experience under public questioning, answering inquiries before two congressional committees after the company went bankrupt. Lay twice refused to appear before Congress. Still, Skilling can seem intense, said Veruki.
“Skilling risks more than Lay does because he can be volatile and emotional,” said DeGuerin, the defense attorney.
Lay tried to explain himself in a December speech before a Houston business group. He blamed Enron’s former finance chief Andrew Fastow and other executives for the company’s demise. Fastow pleaded guilty to fraud and testified against Skilling and Lay last month. He faces 10 years in prison when sentenced.
“Lay is making eye contact with the jury, and they’re not looking away from him, which is a very good sign for Lay,” said David Berg, a Houston lawyer who has been attending the trial.
Kathleen Magruder, a former in-house lawyer at Enron, expresses the kind of impression defense lawyers may be hoping to cultivate with the jury. She looks upon Lay as a parent might view a child who makes a mistake.
“It doesn’t mean you quit loving the child,” said Magruder. “I don’t think the measure of Ken Lay is 2001.” She agrees with Lay and Skilling that Enron’s collapse was the result of a “run-on-the-bank mentality” and poor oversight of dishonest employees.
Don’t Take Stand
Some lawyers advise clients not to take the stand. “I think it’s more harmful than it is good,” said Jim Parkman, whose client, HealthSouth Corp. founder Richard M. Scrushy, was acquitted of securities fraud last year. Parkman persuaded Scrushy not to testify. “Most defendants say, ‘Put me up there, and I can explain everything away.’ And that doesn’t happen.”
Lay and Skilling do enjoy one benefit in the U.S. legal system: Juries must be unanimous to convict. The two men “may be able to convince one juror,” said Joel Androphy, another Houston lawyer, “and that’s all they need.”
The case is U.S. vs. Skilling, 04-cr-25, U.S. District Court, Southern District of Texas (Houston).