Skilling Time
Enron's ex-CEO takes the stand and scores some points. But will it be enough to keep him out of jail?
By BETHANY MCLEAN and PETER ELKIND

(FORTUNE Magazine) – HE LOOKS DIFFERENT now. His tan is gone, and he's put on some weight. But what really struck observers in the courtroom when Jeff Skilling finally took the stand on April 10 was how different he sounded.

As Daniel Petrocelli, his lead lawyer, began his four days of questioning, the former CEO of Enron came across as oddly nervous, even timid. It was a vast departure from the swaggering arrogance for which he and his company were infamous. He even seemed to choke up when he talked about the demise of Enron. And as his three children, younger brother, and first and second wives watched from the front row of the spectator gallery, he detailed the toll his long hours took on his family life. Ex-wife Sue Skilling looked emotional as he described how hard he'd worked as a teenager, and second wife Rebecca Carter seemed close to tears as he talked about Cliff Baxter, a former Enron executive who committed suicide after the company's bankruptcy.

Putting a defendant on the witness stand is always risky. The defense lawyer is trying to imprint a positive first impression on the minds of jurors. Or if not a first impression, exactly--the jury, after all, has been hearing about Skilling and watching him sitting at the defense table for months--then at least an introduction to him as a sympathetic character in a narrative radically different from the prosecution's.

Truth be told, for much of those four days of direct testimony, the narrative came together quite well. Skilling made the case that he passionately believed he was innocent, responding to Petrocelli's rhetorical leading questions about specific details of the indictment ("Did you lie about this? Did you steal? Did you have reason to engage in a vast criminal conspiracy?") by repeating, over and over and over, "Of course not" and "I am absolutely innocent."

He tackled the broad sweep of the government's case, detail by detail, offering a benign view of damning conversations--say, acknowledging exchanges but claiming they had been completely misinterpreted--or simply denying that they had ever taken place. Petrocelli skillfully led him through documents that suggested--in some cases, quite persuasively--that things just weren't as the government claimed. Skilling was most effective when he responded to questions with a sober, matter-of-fact tone.

When he was talking about the glory days building his beloved trading business, Skilling was almost giddy. He seemed especially happy when Petrocelli invited him to escape the witness box to stand at an easel, where he offered mini-lectures on Enron's "gas bank" and on how Enron's wholesale business really worked. There were moments when he seized control of his own direct examination, assuming the role of CEO of the courtroom, redirecting (or ignoring) Petrocelli's questions, and even seeking to engage in direct dialogue with both jurors and the judge. "Does that make sense?" he started to ask after yet another business presentation to the jury.

"They can't answer your question," Petrocelli interrupted. "Oh, I'm sorry," Skilling replied--as if jolted back to the realization that he was testifying for his life in a criminal trial, not presiding over a lecture to worshipful MBA students.

AT ITS CORE, Skilling's defense will now succeed or fail on the strength of his personal credibility as a witness. And for all the carefully crafted testimony, there were critical leaps of faith that both Skilling and Petrocelli must hope the jury makes with them. Skilling's personality seemed to strangely morph at least once a day, even under Petrocelli's deft handling, producing a number of curious moments. On Skilling's third day on the stand, his lawyer asked, "What would you have done if you had learned that Andy Fastow was stealing money?"

"I would have called the FBI," said Skilling, offering the answer you'd expect. Then he hesitated for a pregnant moment before spitting out, "I might have a little hesitation now about doing that."

It is, of course, a dangerous game for a criminal defendant to trash the cops in front of the jury. Almost from the day the trial began, this has been the elephant in the courtroom: Skilling's palpable rage at the very notion that anyone would think he had done anything wrong--much less charge him (and Ken Lay) with criminal fraud. "Welcome to North Korea" is how he has privately described the investigation by the U.S. Justice Department's Enron Task Force.

While admitting on the stand to two major business mistakes--Enron's failed broadband venture and his inability to unload its troubled international assets--Skilling passionately insisted that there was absolutely nothing fundamentally wrong with his company, which he calls the "finest corporation in the world." Indeed, he testified that when he left Enron in August 2001, Enron was "in great shape."

Of course, there could not have been a more dramatic contrast between what Skilling had to say and the testimony of the former Enron executives (many of whom have pleaded guilty to criminal wrongdoing) called by the prosecution. In Skilling's version, most of the former colleagues testifying against him are really innocent and lying when they say they committed crimes at Enron; short-sellers and the press deserve all the blame for Enron's fate, and it is our jackbooted federal government that is responsible for Skilling's woes.

In his view there was simply no reason to commit fraud because Enron never had any trouble making the profit numbers Wall Street expected. "You can always hit the earnings target," he testified at one point. "Just sell more of the business. It's not something you can say, 'I can't do that.' That's a management decision of whether you want to do that." That may have been an unintentionally revealing insight into how, in Skilling's Enron, financial wheeling and dealing made publicly reported numbers a fungible commodity.

IF SKILLING'S DEMEANOR ends up being one yardstick of his credibility in the jury room, the reasons for his abrupt departure from Enron and his personal stock trading may well be others. Skilling testified that he left Enron because he was "emotionally exhausted" and because he was "ready to go ... my head just wasn't in it"--not entirely convincing answers. (Under questioning by Petrocelli, he hinted at another reason. "Without getting into details, was there an issue with one of your children?" Petrocelli asked. "Yes," replied Skilling.) And after weeks of defense comments about sleazy short-sellers, it was surely shocking for the jurors to hear Skilling admit that right after leaving Enron, he himself shorted a rival energy company, AES, pocketing $15 million in a matter of weeks. Here, Skilling explained that "there's nothing wrong with an individual short-selling stock--in fact, I think it's beneficial to the marketplace," but that at Enron, short-sellers had colluded to "attack" the stock by spreading misinformation.

Skilling, charged with insider trading (among other offenses), also took a weak stab at explaining his attempt to sell Enron shares just three weeks after leaving the company. He had told the SEC he'd sold 500,000 shares on Sept. 17, but only because he was worried about the impact of the Sept. 11 attacks on the economy. ("I absolutely agonized over it," he told the SEC.) Then prosecutors discovered a tape-recorded conversation with his stock broker in which he'd tried to sell 200,000 shares on Sept. 6. (The sale didn't go through because his broker required additional paperwork.)

Using halting language ("I guess" and "apparently"), Skilling, whose recollection of many more distant details seemed precise, insisted he hadn't tried to lie during his December 2001 SEC deposition, but "didn't remember" the first attempt to sell Enron just three months earlier.

SKILLING'S version of the facts is sure to be harshly tested during his cross-examination, when the questions come not from his gifted handler, Petrocelli, but from Enron Task Force director Sean Berkowitz. While jurors seemed to warm to Skilling during his time on the stand, moving from avoiding his glance on day one to laughing with some of his jokes by day four, how they'll ultimately respond to him by the time all testimony and arguments are over is hard to judge. On the other hand, all it takes is one sympathetic listener (and there is at least one juror who seems to respond enthusiastically to Petrocelli) to hang the jury and cause a mistrial. While Skilling might not admit it, that would certainly qualify as a win for the defense.

On his final day of direct testimony, Skilling offered up some weird moments, becoming loosey-goosey and rambling in the afternoon. He offered investing advice to jury members, telling them, "Quite honestly if you ever sell stock, put a limit order on it." He figuratively got on the couch, after being asked to explain his assessment that Enron's international assets were overvalued by billions: "While we're sitting here confessing to frustrations or disappointments in our lives ..."

Earlier in the day he had declared that he'd been "devastated" because "a fine corporation was brought down, brought to its knees, in my view, unnecessarily" and "the horrific failure of the company has been made worse" by the prosecutions that followed. The government has engaged in the "rewriting of history," Skilling testified, and his own conclusions "would be very easy for someone to confirm ... if they had any interest in confirming that."

And then he delivered a soliloquy that he can only hope jurors take to heart. "Enron is now used as a term for everything wrong," Skilling declared. "That's a disservice.... There are a lot of people that worked at Enron ... that did a really good job and worked really hard and they believed in what they were doing, and unless someone takes a stand--and I think Ken and I are taking a stand--they're going to feel that they were tricked. They're going to feel that they were misled, and they're going to feel that they were part of something that wasn't good. And that's not the way it was. That is not the way it was. And, yeah, I'll fight this. And I will continue to fight this.

"And at the end I hope someday they'll write the history--they'll write the real books and ... if we don't do this, those books that get written will be wrong like the books that have been written so far, and no one will really understand what happened and they won't understand what people did and the sacrifices that they made." If Ken Lay takes the stand, he'll have a hard time topping that.

FEEDBACK bmclean@fortunemail.com and pelkind@fortunemail.com

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.