Get ready for a long haul
The prosecution accomplished what it intended with its first witness -- and so did the defense. But they've barely begun.
 NEW YORK (FORTUNE) - As former Enron investor relations chief Mark Koenig finally steps down this morning after eight days on the stand, what's striking is how much ground the government's first witness has covered. Prosecutors put Koenig in the lead-off spot with the aim of using him to introduce key issues to the jury -- and he has done precisely that. We've heard, in telling detail, about Enron's obsession with meeting Wall Street's quarterly earnings targets, the fungibility of its reported numbers, and listened to the company's two CEOs, fraud defendants Ken Lay and Jeff Skilling, reassure investors that Enron was in great shape during the last year of its life.
We've heard testimony about "lies" served up to analysts and investors on the numbers: one-time gains booked as organic earnings, and losses cast as "non-recurring" events -- or stashed where no one would see them. The jury has learned about Enron's core wholesale business -- in particular, how Enron held itself out as a "logistics company," immune from the volatility of market price swings, and thus got Wall Street to award it a premium stock multiple, unlike "riskier" trading shops such as Goldman Sachs. Finally, we've gotten the first glimpse of how Enron's highly touted new retail and broadband businesses weren't all they were cracked up to be. It was, to be sure, an overview. Dozens of government witnesses will follow, as prosecutors start to fill in the many parts of their story beyond Koenig's view -- inside the company's separate business units, and inside the accounting department. That will start today, when former broadband division CEO Ken Rice -- who, like Koenig, has pled guilty and is cooperating with prosecutors -- takes the stand to talk about how his highly touted operation had no profits and few real customers. More importantly, Rice -- a former Skilling confidante -- is expected to testify that Skilling privately encouraged him to lie about the state of broadband, as the government seeks to tie Skilling directly to acts of fraud. David Delainey, former CEO of the retail Enron Energy Services division and another cooperating government witness, will testify about his business. And company accountants will also testify. (Though he's not on the government's witness list, count on seeing chief accounting officer Rick Causey -- who avoided trial with Lay and Skilling by cutting a last-minute deal with the government to plead guilty and cooperate -- before the trial is over.) To a surprising degree, Koenig was also a vessel for a first airing of the defendant's case. During four days of cross-examination, defense attorneys, in addition to picking away at Koenig's credibility, won permission to replay hours of company conference calls, show video of entire employee meetings, and read the entire text of media articles. While drowning the jury with information -- a classic defense approach -- they showed Lay and Skilling in command of the giant company, discoursing on the complex details of Enron's global business. But the tapes also showed Enron slipping into freefall, with angry analysts finally confronting Lay during an October 23, 2001, call, accusing the company of "hiding something," as one put it, including details about former CFO Andy Fastow's private LJM partnerships. This flew in the face of defense arguments that LJM had been fully disclosed to Wall Street. The defense also hammered away at its theme that Enron was done in by an unholy alliance between the media and villainous short-sellers, and, among other arguments, sought to blunt Koenig's specific accounts of earnings manipulation with the assertion that such behavior was "business as usual" in corporate America and was done in shareholders' interests. With Koenig, the defense also took a first whack at convincing the jury of its claim that all of the 16 government "cooperators" who have pled guilty and might testify -- all, that is, except for Fastow and two deputies -- really committed no crimes at all, but caved to government pressure. Defense questioning on this point brought Koenig to the brink of tears, as he passionately rejected the claim, insisting that he pled guilty because he really was guilty. All this, of course, was just a preview of the defense arguments as well, in a trial that now seems likely to stretch beyond the original projection of four months. |
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