Enron defense: What side deals?
Witness testifies that former CEO Skilling didn't favor Andy Fastow's special entities over others.
By Shaheen Pasha, CNNMoney.com staff writer

HOUSTON (CNNMoney.com) - In its second day at bat, the defense team in the Enron trial hammered away at testimony from former executives presented by the prosecution about alleged side deals between former CEO Jeffrey Skilling and ex-financial chief Andrew Fastow that put Fastow's LJM partnerships' interests before Enron's.

Mark Metts, former executive vice president in Enron's corporate development unit in charge of mergers and acquisition, testified that Skilling was increasingly frustrated with Fastow in the spring of 2001 as Fastow aggressively tried to buy Enron's wind assets for LJM -- a special purpose entity that Fastow claimed was created to help Enron move poor performing assets off its balance sheet.

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Metts said he informed Skilling of Fastow's attempts to procure special treatment in the bidding process for the wind assets.

"At any time did you get the impression that Mr. Skilling favored Mr. Fastow and LJM over any other unrelated third party?" defense attorney Mark Holscher asked. "Not at all," Metts replied.

Metts added that Skilling was most concerned with Enron being able to get the highest possible bid for the wind assets and said that Skilling agreed that "LJM had to play by the same rules as everybody else."

During testimony last month, Fastow said he entered secret side deals with Skilling in which LJM would buy poor performing assets for a premium, with no risk of losing money. Fastow added that Skilling was enthusiastic about LJM's role in helping Enron to hit its numbers, but only showed hesitation if there was a question of how the disclosure of a sale to LJM would appear to the public.

On cross examination by government prosecutor Sean Berkowitz, Metts admitted that Skilling had been concerned about the disclosures if Enron sold LJM the wind assets when the issue was discussed.

He added that when Fastow was turned down, he was irate and had a private conversation with Skilling. And while LJM didn't buy the asset, Metts was demoted shortly after that conversation and wound up reporting to Fastow.

Earlier in the day, the defense also tried to refute claims made by former top executives on matters related to the company's troubled broadband unit as well as its interest in an Indian power plant.

Marla Barnard, a former vice president in Enron's human resources department, backed up assertions made by former Enron employee Sarah Davis that the company didn't lay off a large number of workers in its broadband unit in the spring of 2001 but "redeployed" them to other divisions within the company.

Job cuts characterized

During the government's case, Kenneth Rice, the former chief executive of Enron Broadband Services, testified that Skilling told him to characterize job cuts of about 250 people as redeployment so that Enron's stock wouldn't take a hit on concerns of troubles within the business unit.

Barnard said she had never been told by anyone at the company to classify layoffs as redeployment, although under cross examination by government prosecutor Berkowitz, Barnard admitted that having the word layoffs used would have been a negative for the company within the market place.

Barnard followed the testimony of Wade Cline, the former chief executive of Enron India, who testified that the company, and Enron founder Kenneth Lay in particular, were committed to the project although it suffered some setbacks along the way.

During the government's case, prosecutors presented testimony from Fastow and former Treasurer Ben Glisan that Enron considered Dabhol to be a troubled unit, full of embedded losses and considered selling the unit to the Indian government at a loss.

The executives painted a picture of a plant being "encroached by vines" -- a description the defense ridiculed as a massive exaggeration.

Cline testified that the plant was well maintained and in good shape, and said there was never any discussion of writing off Dabhol as a loss in 2001, refuting the testimony provided by the prosecution.

"Mr. Lay was very committed to the project," Cline said. "He had a special place in his heart for India."

But under cross examination by prosecutor Kathryn Ruemmler, Cline acknowledged that he lived in India at the time and wasn't involved in any finance committee meetings with the board of directors in which executives may have expressed concerns about the potential for large losses at Dabhol. He said the company was considering a buyout of Dabhol but denied that there had been any serious consideration to selling the plant at a loss.

He added that the ultimate decision to sell the plant and recover only $20 million of the $1.2 billion invested in Dabhol was made after Enron went bankrupt and was at the mercy of its creditors.

Cline was the second witness of the day following Davis, a former employee within the Enron's corporate human resources department. Davis said she was proud of Enron and called Lay "a gentleman and a general" who stepped in to save the company in its hour of need after Skilling resigned in August 2001.

The defense is speeding through its witnesses as all eyes are turn towards Skilling, who is expected to take the stand by Thursday.

The Skilling gambit

Legal experts said while the defense is setting up a framework for Skilling and Lay's testimony by putting on mild testimony in its first few days, there is some feeling that the decision to put Skilling on this week could be a sign of trouble for the defense. Skilling was originally slated to take the stand late next week.

"Normally when a defendant is going to testify, his lawyer will try to hold that person back until the end," said Thomas Ajamie, a securities law expert. "It says to me if you're calling Jeffrey Skilling so soon there aren't that many witnesses available to testify on his behalf."

In fact, Skilling's attorney Daniel Petrocelli has bemoaned the resistance among former top executives at Enron that have stated they will invoke their Fifth Amendment rights if called to the stand.

The defense team contends that there was no crime committed at Enron, with the exception of a few misdeeds committed by Andrew Fastow and a handful of cohorts. And defense attorneys have accused the prosecution of pressuring witnesses into admitting guilt.

Petrocelli has said that nervousness surrounding the Enron case has made it difficult for the defense to call the witnesses it needs.

'Surgery' for Lay's attorney

The start of the Skilling and Lay's defense suffered another setback due to health issues involving Lay's lead attorney Michael Ramsey. Ramsey's spokeswoman, Kelly Kimberly, confirmed that he is having "invasive surgery" Tuesday as a result of difficulties with a stent in his heart. She said the defense team is optimistic that he will return soon.

Kimberly would not speculate on whether Lay will testify or if the defense team plans to replace Ramsey.

"If a quarterback is injured in a big football game, the game doesn't stop," said Jacob Frenkel, a former federal prosecutor. "But it is disruptive and a significant distraction on a professional level because Lay and Ramsey have developed a relationship."

Frenkel said Lay has a large enough defense team to pick up the slack from Ramsey's absence but it could become a factor in the case if he is out for a long time.

Legal experts were hesitant to suggest that Ramsey's health problems could wind up being cause for an appeal if Lay is convicted. But on a psychological level, it's a definite blow for Lay, who faces a second trial for fraud as soon as the jury goes to deliberate on the first.

Combined both Lay and Skilling face almost three dozen fraud and conspiracy charges accusing them of lying to investors about the company's financial state while they enriched themselves by selling millions of dollars in stock.

Enron was once the seventh largest corporation in the U.S. It declared bankruptcy in December 2001, costing 4,000 employees their jobs and resulting in millions of dollars in losses for investors.

-- CNN's Maria Gavrilovic contributed to this report.


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