Skilling down the rabbit hole
Over the last six days it has become clear just how wildly different Skilling's view of reality is from that of the prosecution.
 HOUSTON (FORTUNE) - "Maybe I'm Alice in Wonderland here." That's what Enron prosecutor Sean Berkowitz, who is cross-examining Jeff Skilling, pointedly said to the former Enron CEO during Monday's testimony. For those of us in the courtroom, Monday already feels like a long time ago. (Even the occasional flare-ups of Skilling's infamous temper - more on that later - didn't make those wooden benches any softer.)
But the feeling Berkowitz voiced of having fallen down the rabbit hole only grew stronger on Tuesday for some of us in the courtroom. During Skilling's six days on the witness stand, it has become clear just how wildly different Skilling's view of reality - on matters large and small - is from that of the prosecution. While the defendant sometimes does have a convincing explanation, there are moments that make you feel like the courtroom has become Wonderland. One such moment came on Tuesday morning, when Berkowitz was quizzing Skilling about Enron's so-called "merchant assets." These were seemingly random investments that Enron made in everything ranging from high-tech companies to oil and gas properties. Many of them were disastrous. "Sir, isn't it a fact that the merchant asset portfolio, over half of it was poorly performing?" Berkowitz asked. "No, I don't think that's a fact," responded Skilling. Then Berkowitz turned to an internal report Skilling had commissioned. "You asked RAC [Enron's vaunted internal Risk Assessment and Control group] to perform a 'lessons-learned' presentation, didn't you?" "I don't believe I asked for that, no," Skilling replied. With that, Berkowitz first showed the jury a June 2000 e-mail from Rick Buy, the head of RAC (, which began, "Skilling has asked me (RAC) to put together a 'lessons learned' meeting..." The resulting documents, which were sent to Skilling, noted that "61 percent of originally expended capital is not meeting expectations" and asked, "Why are 109 deals comprising 50 percent of our investment portfolio not performing according to expectations?" The document also noted that "earnings pressure at Enron causes deals to be done 'at any price.'" 'A highly speculative venture capital fund'
Skilling, who seemed taken by surprise by the document - which was itself surprising given his testimony about the years he's spent preparing for his defense - quickly recovered. He said, of the portfolio's record, "this would [not] be unusual for a highly speculative venture capital fund - 90 percent of investments do not work and the 10 percent that do are the ones that make the differences." Oh. But...since when was Enron analogous to a "highly speculative venture capital fund?" And while it may indeed be acceptable for a venture capital fund to have lots of dogs if it also scores a few home runs, no venture capital fund with Enron's overall track record of investing would have stayed in business long. (The document also tartly asked: "Would you recommend that your mother invest her IRA in an energy and industrial fund of 90 investments where an acceptable return is contingent on the performance of 6 key assets since the remaining 84 assets average less than a 5 percent IRR?") Investors would have yanked their money out, and the fund would have closed up shop. Hmmmm. Come to think of it, isn't that sort of what happened at Enron? As Berkowitz pointed out, many of those poorly performing assets ended up in the Raptor vehicles - the vehicles that on direct testimony, Skilling swore were set up for "really the opposite" of hiding losses. "There were no losses to hide. There were gains to protect," he said. On this, Berkowitz and Skilling went round and round. "Isn't that a fact [that the Raptors were set up] to protect against losses?" Berkowitz asked. "That's not a fact," replied Skilling. Berkowitz then showed an Enron board presentation advising the directors that the goal of the Raptors was to "reduce downside earnings exposure" and that they had "mitigated $460 million of equity losses." Gains, losses...whatever. Another Alice moment came when Skilling testified that the big write-off Enron took in the fall of 2001 was immaterial, because it was "non-cash." Of course, all of those gains that were locked in (or losses that were avoided, or however you want to describe it) by the Raptors were also non-cash - and Enron spent countless man-hours devising that structure. Why bother if cash were the only currency that mattered? Berkowitz jumped on this after Skilling repeated this notion for the second or third time. "I guess I don't understand that, Mr. Skilling," he said. "You keep talking about 'non-cash' as if it's not a big deal." "Yes," replied Skilling. "It's true, sir, that the earnings that Enron was making on its trading portfolio were largely non-cash earnings; correct?" "That's correct," said Skilling, who then argued that "as long as the company is growing, there will typically be a gap between their earnings and your cash..." Suggesting that Skilling was trying to have it both ways, Berkowitz also noted that Enron "didn't tell the marketplace, you know, that 'these earnings aren't a big deal, they're non-cash, everybody' - you didn't tell the marketplace that, did you?" Hot under the collar
Skilling was clearly closer to the edge of losing his temper during most of Tuesday. He was often red-faced and plucking at his collar, and frequently tried to take control from Berkowitz. "Y'all are talking over each other," reprimanded Judge Sim Lake at one point when both men were talking. At times, Berkowitz would allow Skilling to give a wordy answer, but he mostly quashed the defendant, telling him that he could go into more detail on his redirect, and tried to force him into yes or no answers. Skilling: "You asked me a question, and what you've asked me is incorrect, and I am trying to correct..." Berkowitz: "I don't know how the question could be incorrect. You can say yes or no, you can say that's not correct, and if that's your answer..." And then, in the afternoon, Skilling snapped. After a long line of questions about Enron's use of reserves to meet earnings, he grew extremely agitated, telling Berkowitz that he was "misrepresenting" things. Said Berkowitz, "I know it is difficult for you to sit here and answer questions, Mr. Skilling. And I know that you at times overreact to people who are critical of the company, but..." At that, there was a low, but audible, growl from the Skilling row. (Skilling's sister, two brothers, and ex-wife were present, but his current wife, Rebecca Carter, was nowhere to be seen on Tuesday.) Daniel Petrocelli, Skilling's lawyer, who was doing everything he could to protect his client from his worst moments, popped up from his seat, "I object to...just ask questions, please," he said. Indeed, there were also a few Mini-Me moments between Skilling and Petrocelli, who frequently objected to what he claimed was the government's selective use of material. "There's a lot more to these," said Petrocelli at one point. "Yeah, there's a lot more to these," echoed Skilling from the stand. Indeed, Skilling was intensely argumentative throughout the day, reluctant to yield an inch of ground, refusing to even routinely acknowledge he'd been present for presentations where written minutes showed he was there - or that he'd read or received key documents or e-mails that had been sent to him. When presented with such evidence, he'd often reply "I don't recall" or that his memory of a particular event was "fuzzy." It's risky to try to gauge the jury's reaction to all of this. Still, you can't help wondering if Skilling's combativeness and verbal slipperiness worked to his advantage or disadvantage: there's probably a fine line between sowing confusion and sowing doubt - and between seeming certain and seeming dishonest. In this trial, a lot will hinge upon Skilling's personal credibility - and, during two days of cross-examination, it has already taken some serious blows. Wednesday: More tough questions for Skilling
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