Special report: Enron on trial Full coverage
No Skilling, but plenty of lawyers
The defense bogs down with former Enron general counsel and holds Skilling for next week.

NEW YORK (FORTUNE) - Well, they fooled us.

The big surprise at the Enron trial Thursday was who didn't take the witness stand -- namely, defendant Jeffrey Skilling.

Find out who you might have seen at the Enron trial, how they got involved, and what they're doing now.
Launch gallery

After a week that saw the defense case begin quickly, with eight witnesses rebutting narrowly targeted prosecution points in the first two days, the former Enron CEO was expected to start telling his story on Thursday.

The media crowd had more than doubled in anticipation, with reporters flying into Houston and the reconstruction of a media ghetto of tents and satellite TV trucks on the street outside the courthouse. Even Skilling's family was on the scene.

Alas, it was not to be -- and won't be until Monday.

Instead of Skilling, we got a day (at times it seemed like far longer than that) of testimony from former Enron general counsel Jim Derrick, 61, who had held that job at the company since 1991.

Lawyer saw nothing improper

Derrick was called to affirm that he'd never seen Lay or Skilling do anything improper, to detail the company's written procedures for handling internal complaints of improprieties, and to explain why the limited investigation that Enron commissioned in response to Sherron Watkins' provocative August 2001 letter really wasn't a whitewash.

And to be sure, he did just that.

Derrick testified that it was "perfectly legitimate" for people to question his actions on the Watkins matter, but that he did not believe "on the merits it's a valid criticism."

In particular, he defended the decision to hire Houston's Vinson & Elkins as a way to complete a preliminary review quickly, despite the firm's involvement in the very transactions Watkins had complained about, among other conflicts. These included his personal ties to the firm (he'd worked there for 20 years before signing on at Enron) and the fact that Enron, with $40 million in annual billings, was the firm's biggest client.

(On cross, prosecutors unsuccessfully tried to introduce a joking December 1997 e-mail from V&E's managing partner that celebrated Enron's contribution to the firm's bottom line, referring to him as "Jolly Jim Derrick, with a bag of year-end deals.")

Derrick wouldn't even directly acknowledge that Vinson & Elkins received more of Enron's legal work than anyone else. When asked by Lay lawyer George "Mac" Secrest whether any outside firm got more Enron work than any other, he responded: "Well, that's difficult for me to say. If memory serves me correctly, we used over a hundred law firms around the world."

Derrick, a lawyer for more than 35 years, is, by all accounts and appearances, a lovely man. But his testimony underlined one point above all: While Jeff Skilling's Enron was a highly aggressive company that harbored utter contempt for bureaucratic process, it was also a company whose control structures (and executives in control positions) provided the appearance of oversight, but were, in reality, weak and oddly passive.

Derrick, who never seemed to respond with one word when 30 words would do, spoke at length about the process for handling complaints under Enron's "code of business conduct," making repeated references to how any internal problems should have been reported and entered into the company's "tracking log."

Uninvolved in the internal investigation

But when it came to investigating the Watkins complaint, he testified that he essentially called up the managing partner of Vinson & Elkins, Joe Dilg, and turned the entire matter over to his firm -- even the question of whether the issue presented V&E with a conflict of interest (Derrick didn't think it did).

There was, of course, a critical meeting where strict limits were placed on the inquiry: There would be no hiring of outside accounting experts; no "forensic-type" investigation; no second-guessing of Arthur Andersen's work; no interviews of anyone outside Enron or Andersen.

Derrick participated in that meeting with two V&E lawyers, held in his 50th-floor office. But as he described it, he wasn't really responsible for the constraints on the investigation -- even though Enron was, of course, the client. (On this point, Derrick regularly employed the passive voice, at one point noting that the decisions to impose limits were "mutually made.")

Indeed, Derrick insisted it would be improper to dictate the types of lawyers investigating the matter or expand the scope of the investigation -- even if it made the inquiry more rigorous -- because the whole point was that Enron had turned the inquiry over to outsiders.

Derrick testified that the V&E review was intended only as a quick preliminary inquiry, to determine if further investigation was warranted. V&E, of course, concluded that it wasn't.

After Enron's bankruptcy, a special board committee headed by the dean of the University of Texas Law School would conclude that the V&E review's result was "largely predetermined by the scope and the nature of the investigation and the process employed."

Not part of the inner circle

While the general counsel in a company can be a powerful force -- using the weight of the law and his personal influence to stop bad decisions in their tracks -- it is clear that Derrick never played this role at Enron. He spent much of his time managing his "decentralized" legal department of 250 in-house lawyers, overseeing ongoing litigation, and the hiring of outside firms.

He joined Lay and Skilling regularly at only one large weekly management meeting -- and otherwise usually saw them only by "happenstance," in the hallways or elevators up to the 50th floor, where they all worked. He and his two most important clients, Lay and Skilling, communicated mostly by voicemail, Derrick testified.

In short, he was clearly never part of Enron's inner circle -- and that is something for which he is now quite likely grateful.


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