Enron: U.S. close to winding up case
Prosecution expects to finish its side of the trial within the next couple of weeks.
HOUSTON (CNNMoney.com) - The government expects to wrap up its case against Enron founder Kenneth Lay and former chief executive Jeffrey Skilling within the next two weeks, a federal prosecutor said late Tuesday.
Sean Berkowitz told presiding Judge Sim Lake after the jury had been excused for the day that the government expects to complete its side of the case by the week of March 27. Then Skilling and Lay's defense team will have their shot at discrediting the government's case, although Skilling's lead attorney Daniel Petrocelli asked the court to potentially grant the defense a "couple of days to regroup" before their first witness takes the stand.
The prosecution sped through three witness testimonies Tuesday, starting with former Enron employee Christopher Loehr, who one served as an analyst at LJM -- the special-purpose entities designed to move high-risk, underperforming assets off of Enron's balance sheet.
Loehr attempted to corroborate the testimony of former financial chief Andrew Fastow as he described an atmosphere in which employees of both LJM and Enron -- including management and company accountants -- chose to "see no evil, hear no evil."
Loehr testified that he had been told by Fastow and other senior management that LJM had received assurances from Enron that the company wouldn't incur any losses even as it increasingly took on high-risk, poor-performing assets to help Enron make its earnings targets -- although he admitted upon cross-examination that he couldn't provide the name of the person from whom Fastow had received these assurances.
Global Galactic recall
Throughout his testimony, Loehr never named either defendant. But he said Fastow assured him that LJM would recoup its investment and see a hefty profit from the deals. During his testimony last week, Fastow said he entered side agreements with Skilling that he documented in a handwritten list called the Global Galactic documents.
Loehr said LJM employees had been aware of the Global Galactic documents but had never seen them. He said Fastow had told him that he and Enron's former accounting chief Richard Causey had laid out the terms of the side agreements in the document. He also testified that he believed that Fastow and Causey retained copies of the Global Galactic documents -- a point contrary to Fastow's adamant testimony on the stand that he was the only one who had a copy.
"Fastow told you that Rick Causey had a copy?" Petrocelli asked. "Yes," Loehr responded.
The defense has made a point of trying to discredit the Global Galactic list, claiming that it was created for the benefit of the Enron Task Force, and has accused Fastow of forging Causey's initials on the pages. The inconsistency between Fastow's testimony and Loehr's recollection that Causey had a copy is likely to be rehashed by the defense in order to fuel more doubt on the authenticity of the list.
Loehr, who helped oversee the legal documents related to the dubious deals, said he had been ordered by Fastow to take out any references to the financial side agreements because the language would prohibit the accounting treatment that Enron desired. He said accounting firm Arthur Andersen had warned LJM that such a deal wouldn't be considered a true third-party sale.
When pressed on cross-examination, Loehr conceded that he had no documents with the original clause that Fastow asked to be removed.
He said the company embarked on these transactions with no due diligence, based on assurances that LJM would earn money. But he said that its management and employees knew the dealings were questionable and in fact were reluctant to put down details related to the transactions in e-mails, according to an e-mail shown by the government.
"I thought I was aiding others in breaking the law," he said, adding that within the company, the "conduct was open and notorious. It was not a big secret what we were doing."
Loehr said he entered an agreement with the government in 2002 in which he will avoid prosecution "as long as I tell the truth."
"I committed crimes and aided others to commit crimes while at LJM and Enron," he said, adding that his agreement with the government was his way of "accepting responsibility for that."
The testimony follows four days of intense scrutiny for Loehr's one-time boss, former Enron financial chief Andrew Fastow, in which the prosecution's key witness described a corporate culture of greed within Enron and the special-purpose entities known as the LJM partnerships.
Unlike many of the former employees who have testified for the prosecution, Loehr was never charged with a crime, which made it more difficult for the defense team to challenge his testimony.
The defense has maintained that there were no crimes committed at Enron, aside from Fastow's dubious dealings. Furthermore, the defense has challenged previous witnesses who cut deals with the Enron Task Force, saying that they were coerced into admitting that they participated in criminal activities in order to avoid high legal costs and prison time.
In the afternoon, the prosecution called Vince Kaminski, a former managing director at the company who specialized in risk management. Kaminski testified that he objected in early June of 1999 to the formation of the LJM partnership, saying that it presented too many concerns regarding conflict-of-interest and credit instability. He said he approached Enron's chief risk officer, Rick Buy, to voice his concerns and was told that there was a lot of pressure to move forward with the transaction. LJM was approved by the board of directors by the end of June.
Kaminski added that he later received a call from Skilling transferring his research group out of Enron's risk and analysis control division because he had received complaints that those in his group "were acting more like cops and preventing people from executing transactions than helping them."
He stayed on with the company and worked on the special financing vehicles known as Raptors that were used as hedging tools for the company. By October 2001, he once again raised objections to the transactions to Buy and Lay, saying his group wouldn't sign off on Raptor's valuation because they had discovered improper activity within the vehicle.
At a meeting of managing directors on Oct. 22, after Fastow and his LJM partnerships came under fire, Kaminski said he told the room that "I believe what Andrew Fastow did was improper and terminally stupid," and added that "Enron should come clean."
He said he was contacted by the head of human resources later that day and was under the impression that he would be fired. The next day, in an employee meeting Lay told employees that all the managing directors were unified in support of Fastow -- a clear misrepresentation.
Defense attorneys will have their chance to cross-examine Kaminski Wednesday. Then the government will call Sherron Watkins, a former executive in the company's Global Finance division that blew the lid on the shaky accounting at Enron and wrote a prescient, anonymous letter to Lay in which she predicted that the company "will implode in a wave of accounting scandals."
Enron was once the seventh-largest corporation in the United States. It declared bankruptcy in December 2001, costing thousands of employees their jobs and resulting in millions in losses for investors.
Johnnie Nelson, a former pipeline worker at Enron who lost his entire retirement savings when Enron's stock crashed, also briefly testified Wednesday, providing a human element in a sea of accounting technicalities and complicated financial structures.
Nelson testified that he had previously respected Lay's leadership and trusted that he was telling employees the truth when he said Enron's fundamentals were "the strongest they had ever been" in October 2001.
When asked by Lay's defense if he knew of any laws Lay had violated, Nelson retorted "He violated my trust, that's all I know."
For CNNMoney.com's complete coverage of the Enron trial, click here.
More home markets around the country are looking 'extremely overvalued' -- full story here.