HOUSTON (CNNMoney.com) - Ken Lay and Jeff Skilling knew there was a "ticking time bomb" at Enron Corp. but chose not to disclose the accounting problems that would eventually lead to the biggest business failure in history, a U.S. prosecutor said Tuesday at the trial of the two former CEOs.

A day after a jury of eight women and four men was seated, Assistant U.S. Attorney John Hueston told the panel in his opening argument: "This is not a case about accounting. It's about lies and choices."

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Hueston said Lay and Skilling told lie after lie about Enron's finances, and that they had key facts; with those facts, he said, they sold tens of millions of dollars of Enron stock.

But Skilling's attorney, Daniel Petrocelli, said his client never led a criminal conspiracy. "This is not a case of hear no evil, see no evil, because there was no evil," the defense lawyer said in his opening arguments.

Both Lay and Skilling appeared relaxed as they took their seats in the courtroom, shaking hands and hugging their lawyers. Skilling was seen smiling and chatting with Sean Berkowitz, a member of the government's legal team.

The two ex-Enron executives face more than three dozen fraud and conspiracy charges accusing them of lying to investors about the company's finances while they lined their own pockets by selling millions of dollars in stock.

Lay's attorney, Michael Ramsey, said that his client accepted responsibility for the bankruptcy of Enron. "But failure is not a crime," he said. "Bankruptcy is not a crime. Enron was in fact a cutting edge company. Ken Lay was at the front of that."

Ramsey said Lay "never sold one share (of Enron stock) that he wasn't compelled to sell."

Enron filed for bankruptcy in December 2001 after investigators found it had used partnerships to conceal more than $1 billion in debt and inflate profits.

The Houston-based company's collapse was the first of many high-profile scandals that eventually included WorldCom, Global Crossing, Adelphia and Tyco International. The wave of scandals led to passage of the Sarbanes-Oxley legislation meant to tighten oversight of how American companies are audited.

In his statement, Hueston drew a contrast between what the public saw -- Enron magically growing earnings at a 15 percent rate -- while there was accounting chicanery going on inside.

Hueston, noting Skilling resigned from the company after just six months as CEO, said the defendant knew of the billions of dollars in problems, but falsely told the public not to worry -- meanwhile selling Enron stock.

Lay, according to Hueston, was told by his top lieutenants of a "ticking time bomb." But the prosecutor told the jury, "Lay and Skilling chose to falsely assure the American public that there were no problems at Enron. They chose to lie."

Hueston described the company's various businesses, focusing on its ill-fated broadband distribution unit to illustrate Skilling's alleged duplicity.

The prosecutor played a videotape of an employee meeting in March 2001 at which Skilling told workers at Enron's broadband unit that "the market is in absolute meltdown," and that Enron was moving out of broadband.

Then Hueston played an audiotape of an analyst meeting a week later in which Skilling told the investing public that "We're coming along just fine. I'm pretty optimistic," referring to broadband.

Hueston said that Skilling was informed about the possible collapse of the unit by its head, and replied, "I don't want to hear the bad news."

But Petrocelli said the prosecution's presentation of the audio and video tapes "cherry picked" Skilling's comments to employees and analysts.

"He (Hueston) played you snippets of tapes," Petrocelli said. "We're going to play you all the tapes from beginning to end – assuming the judge lets us."

Petrocelli replayed the audio tape from the analyst meeting on March 23, 2001, a week after the employee meeting that Skilling mentioned the broadband problems. The tape showed Skilling told analysts that there is a "meltdown in prices."

Hueston also told the jury that the company had drained $14 million of its reserve accounts to inflate profits by two cents a share, even though Lay and Skilling were informed by chief accountant Richard Causey that using the reserves was illegal according to the standards set by the SEC.

Hueston said that between 1999 and 2001, Skilling was paid over $150 million while Ken Lay was paid over $220 million as the company's stock skyrocketed. Hueston told the jury, "as the stock went up, these men got richer and richer."

Hueston also told jurors they would hear testimony from former CFO Andrew Fastow that he had participated in a fraudulent partnership to buy poor performing assets in order to remove them from the company's balance sheet. Fastow was then promised that he wouldn't lose money on the phony sales, which would later be bought back at a profit, the prosecutor said.

The government's detailed timeline of the final months leading up to the company's bankruptcy in December 2001 was particularly telling.

Shortly after Skilling stepped down as CEO in mid August 2001, Lay who took on the position, was informed by then-vice president Sherron Watkins that she was "nervous that we will implode in a wave of accounting scandals."

Lay was also informed in a meeting with executives that the company was facing major problems, the prosecution said.

But Lay assured employees worried by Skilling's sudden resignation that there was "no accounting issue, no trading issues, no reserve issues...there's no other shoe to fall."

Hueston said these comforting words indicated that employees shouldn't be concerned about the security of their investments in the company. But even as he assured employees, Hueston said Lay sold $24 million in stock and bought back a mere $6 million to show employees that he had faith in the company.

"Each time he sold stock, he had key information that common investors didn't have," Hueston said.

Skilling likewise sold 500,000 shares netting $15 million dollars on Sept. 17, 2001. When later questioned by SEC investigators, Skilling said "I was scared after September 11" and denied there was any other reason for selling the stock.

But the prosecution played an audio tape from Sept. 6 indicating that Skilling had originally tried to sell 200,000 shares before the attacks on New York and Washington but didn't have the proper paperwork on hand to complete the transaction.

"Lay put his own interests ahead of investors," Hueston told jurors. "So did Skilling."

Petrocelli said Skilling didn't steal a nickel from Enron, but that former CFO Fastow stole from the company, with the help of former treasurer Ben Glisan and Fastow aide Michael Kopper. Petrocelli said that what they stole was hidden from Skilling and Lay.

Petrocelli told the jury, "I want to make something clear: Fastow did not bring Enron down." But, he added, "he sure didn't help them."

Lay's attorney Michael Ramsey, told the jury that Fastow stole "peanuts and crumbs," and that what he really stole was Enron's good name. "He was a crook, a liar and a thief."

He told the jury that Lay was accused of being greedy, then noted that Lay and his wife Linda gave $25 million to charity over three years.

On Wednesday the government will call its first witnesses, former Enron head of investor relations Mark Koenig and Kenneth Rice, the former head of Enron's broadband division. Both men have already pleaded guilty to securities fraud.

So far, 16 people have struck deals with the government regarding their roles at Enron, and five others, including four former Merrill Lynch employees, have been found guilty at trial.

One Enron accountant has been acquitted and five other executives at its broadband unit avoided convictions in a trial last year, although they will be tried again this year because their jury could not reach a verdict on some charges.

Fastow pleaded guilty to two counts of wire and securities fraud in 2003 and was sentenced to 10 years in prison in return for his expected testimony.

Causey pleaded guilty in December but it's unclear whether he will testify at the trial.

The bankruptcy filing by Enron, once the nation's seventh-largest company, cost 4,000 employees their jobs and many of them their life savings, and led to billions of dollars of losses for investors.

--- CNN Producers Winnie Dunbar and Brian Vitagliano contributed to this report.

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