Special report: Enron on trial Full coverage
Skilling slips up
Monday was a damaging day for the former Enron CEO, who was presented with documents and other evidence refuting his testimony.

HOUSTON (FORTUNE) - "Mr. Berkowitz, you may question Mr. Skilling, if you wish," Judge Sim Lake offered, with a straight face, at the beginning of Monday's court proceedings in Houston.

And indeed, he did. It was a damaging day for former Enron CEO Jeff Skilling, who was caught (figuratively speaking, that is) with his pants down.

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

Known for his cool under pressure, 38-year-old Enron Task Force director Sean Berkowitz actually started out the day a little shaky, as he began the highest-stakes cross-examination, before the biggest crowd, since the Enron trial began. Among the spectators packing the courtroom were Berkowitz's brother and a half-dozen friends who had flown into town from Chicago.

Berkowitz regains his balance

During his first hour questioning Enron's former CEO, Berkowitz nervously misspoke several times; he seemed thrown off-stride by his own support team's inability to put exhibits up on the courtroom video screen when he needed them.

But he moved quickly to reset the stage. His first move was to puncture Skilling's declared posture of valiantly "standing up" for former Enron employees and shareholders, which was the ringing final note of Skilling's testimony last week.

Declaring that he wanted to put Skilling's claims in some "perspective," Berkowitz noted that in the many civil suits Skilling was facing - part of the battle he had vowed to fight "until the day I die" - it is actually Enron's former investors who are suing him.

Noting Skilling's statement that he'd worked for "years" to prepare for trial, Berkowitz suggested he had carefully crafted his story: "So you've had the opportunity, sir, to tailor your testimony, sir, to make it fit with everything that has come before it....?"

"Well, I think I have nothing to hide," Skilling replied. "I will answer your questions to the best of my ability."

Berkowitz later reinforced his suggestion that Skilling's testimony had been carefully packaged by striding over to his jury consultant, Reiko Hasuike, who has spent a good deal of the trial seated prominently in the courtroom, and noting that Skilling had conferred with her during breaks. "Do you want to identify her for the jury?" he asked.

Appearing taken aback by the maneuver, Skilling explained that Hasuike had been "very helpful" and that her job was to help him "simplify" his responses for the jury. "I tend to get technical," he said.

Displaying a page from her website, Berkowitz noted that she was a specialist in "juror perceptions" and "persuasive communications strategy." Prosecutors are betting that the jury will be irritated - or worse - to hear that their every reaction is being studied and played to.

Berkowitz spent much of the morning drilling Skilling with questions about stock trades. Skilling, who stands accused (among other charges) of illegally selling millions in Enron stock based on inside information, again fumbled questions about why he'd attempted to sell 200,000 shares of Enron on September 6, 2001, just three weeks after leaving the company.

In a sworn SEC deposition in late 2001, he discussed his sale of 500,000 Enron shares on September 17, but said he'd had no interest in selling Enron stock until after the attacks on the World Trade Center. Asked about this Monday, he offered no clear explanation of why he wanted to sell the shares before 9/11, and repeated his testimony that he'd simply "forgotten" about his earlier tape-recorded attempt to sell Enron.

(The September 6 sale never went through; after his broker expressed surprise at the request from the former CEO, Skilling withdrew the order and agreed to provide additional paperwork on his separation from Enron.)

Although both Lay and Skilling's calendars show a meeting between the two men on August 22, Skilling insists he knew nothing about the Sherron Watkins letter predicting that Enron would "implode" in a wave of accounting scandals.

He testified that Lay - who was actually scheduled to meet with Watkins later that very day - told him nothing about the letter, and their "very upbeat" discussion concerned only growth strategies for the company. This despite the fact that defense witnesses have testified that Lay took the Watkins letter "very seriously."

Berkowitz challenged Skilling's other sales, attacking his claim that he would routinely sell a block of shares around tax time, then "write a check" to the IRS, by noting that in April 2000, he'd sold millions in Enron stock but written no such check to Uncle Sam.

The prosecutor also introduced documents showing that two women in Skilling's life had sold big slugs of Enron stock in late 2000. Rebecca Carter, then his girlfriend (and now his wife) had sold 21,000 shares on November 28, netting $1.65 million. Ex-wife Sue Skilling, meanwhile, had sold 226,428 shares on October 4, netting about $14 million.

Skilling insisted he was unaware of either sale. "So it's a coincidence...?" Berkowitz asked. "Yes," Skilling replied. Skilling also denied suggestions that he'd personally sold shares after learning that a deal to sell Enron's troubled international assets had fallen through.

Conflicts of interest

But it was at 1:30 p.m. Monday when Berkowitz firmly seized control of the cross-examination, with a startling round of questioning.

"Let's move to conflicts of interest," Berkowitz began.

He soon led Skilling to acknowledge that he had a personal investment in a small Houston company called PhotoFete, an Internet photo-posting business. PhotoFete did business with Enron, but Skilling had failed to disclose it to the board of directors under the company's code of conduct.

At first, this matter seemed almost beneath notice. Skilling testified that he had invested $60,000 in 1998, but that the company had gone bankrupt a year or two later. Asked to put a dollar figure on the company's "small contract" with Enron, he replied: "I don't know - $30,000, $50,000, something like that."

Then Berkowitz noted that Skilling had told the SEC that PhotoFete had done only $3,000 in business with Enron. "It might have been $3,000," Skilling replied Monday. "I just don't recall." He said he hadn't disclosed it to the board because the investment was so small, really beneath notice - never mind that disclosure was still required. Then he suddenly recalled: "Actually, I may have mentioned it to Mr. Lay....I think I probably did talk to Ken about it."

That's when Berkowitz began introducing documents showing that virtually everything Skilling had said about the matter was untrue. It turned out that Skilling had actually invested $180,000 in PhotoFete, sending personal checks and a wire transfer to the company and its owner, a former Enron photographer named Jennifer Binder, in 2000 and 2001. It turned out that PhotoFete had received $454,408 from Enron.

And when Skilling said he didn't know how much business PhotoFete had done with Enron, Berkowitz presented a document that had been sent to Skilling showing that Enron represented about 76% of its revenues. Skilling said he didn't remember this document either.

Asked if this represented a conflict of interest, Skilling testified: "It may be" and said, "it didn't occur to me" to report the matter.

Then Berkowitz capped it off, asking Skilling to describe his relationship with Jennifer Binder. Skilling acknowledged a "personal relationship" with the woman, saying he had "dated her some prior to that in, I think, '98, something around that, '98, 99."

(Skilling half-heartedly suggested that his conversation with Lay may have satisfied his disclosure requirement, by notifying the "office of the chairman" - even though it failed to follow the code of conduct's requirements. This "notification" seems especially meaningless, given that Skilling suggested Lay may have made a similar investment in PhotoFete himself - a fact that Binder, in a phone interview with Wall Street Journal "Law Blogger" Peter Lattman - reportedly confirmed.)

The prosecutor and defendant sparred throughout the day. Although many are waiting for Skilling to lose his cool, he generally remained calm, even as Berkowitz jabbed at him. At times, Skilling tried to direct Berkowitz to look at different documents. "This will probably work a lot better if I do what I want to do," Berkowitz scolded.

Do you think this is funny?

Discussing Enron's troubled international assets, Skilling talked about how the risks of investing overseas are greater than in the U.S., but then, unable to contain himself, added: "unless you're in California."

"Do you think that's funny?" Berkowitz shot back, referring to the high prices and blackouts caused by the California energy crisis. "You were smiling. What happened out there, do you think that was funny?"

Skilling insisted that the regulatory environment in California was "not at all dissimilar" to that of Brazil" - and that he felt the state of California "was unfairly targeting Enron." Berkowitz asked him about an infamous joke he had told during a speech. Did he regret that joke? Skilling protested a bit, before finally responding: "Yes, now I do."

"You've been somewhat under control here, but you're not typically a timid man," Berkowitz noted at one point. Skilling acknowledged that was right. The prosecutor repeatedly cut Skilling off when he started to launch into extended responses. "Let me finish with some questions," he barked. "I sat and listened to your testimony for four days, objected very rarely, and I certainly want you to answer my questions, but I don't want to hear speeches."

Berkowitz challenged Skilling's account of conversations, noting - as the defense had with government witnesses - that there was little or no documentation of what he was saying. When Skilling insisted that he'd made a suggestion about the international assets to an executive session of the Enron board, where no minutes were taken, Berkowitz asked him: "Is that where all the secret stuff happens, Mr. Skilling"?

Berkowitz, who had earlier remarked "Maybe I'm in Alice-in-Wonderland here," noted Skilling's dramatic "differences of recollection" with multiple government witnesses. He slowly went down the list, and Skilling acknowledged, one by one, that he had factual disputes with at least a half dozen of them.

On several issues, internal documents raised doubts about Skilling's account. Skilling, for example had testified that he had no responsibility for reviewing LJM transactions, despite a September 2000 board committee presentation that suggested he did.

He testified that he was in and out of the meeting where the presentation was made - although there was no reflection of that in the meeting's minutes - because of a power failure at the hotel where the meeting was held. Berkowitz produced an internal draft of the board handout that had been emailed to Skilling and returned to the sender; it appeared that he had line-edited the document.

Asked about the internal Enron controversy over disclosing the amount of Fastow's compensation from LJM, Skilling said he knew and cared little about the matter. Berkowitz suggested that Skilling was eager to avoid any such public filing, and had been shown drafts of disclosure language for a company 10-Q that would reveal the amount Fastow had made on one LJM deal.

"I don't - I don't recall that," Skilling testified.

"Government exhibit 20903," Berkowitz shot back. "Take a look at it. It's an email to you."

Skilling stared at the note. "I don't recall receiving this document."

All of this will weigh on Skilling's credibility. "At the end of the day," noted Berkowitz early in the day, "isn't it your word, with respect to various conversations, your interpretations of things... that is at issue?"

"Well," Skilling replied. "I think it's really a question of figuring out what makes sense."

For complete coverage of the Enron trial, click hereTop of page

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