(FORTUNE Magazine) - They stand together against the world: the poster boys of corporate malfeasance, the yin-and-yang former CEOs of Enron finally coming to trial in a drab federal courtroom in downtown Houston. But in truth, Ken Lay and Jeff Skilling never much cared for one another. The charming Lay wasn't comfortable with Skilling's sharp edges; the brainy Skilling considered Lay a lightweight glad-hander. And each has, at various points, sought to cast some measure of blame on the other for the 2001 bankruptcy of what was once the seventh-largest company in America--an implosion that wiped out 4,500 jobs and $70 billion of investors' money while Lay, Skilling, and other top executives walked away with hundreds of millions of dollars.

Since that time, a SWAT team of prosecutors, FBI agents, and other experts have been trying to answer the question, Whose fault was it? So far they have charged 34 defendants and obtained 16 guilty pleas--including those from several key former Enron executives. But all that was prelude to the trial of Lay, 63, and Skilling, 52, which is set to begin on Jan. 30. The two men who were never friends are now locked together in deep mutual need--if convicted, the pair, once widely acclaimed as visionaries, could spend the rest of their lives behind bars. The trial, which may last into the summer, will be a critical event in American business history. The investigation has been the most exhaustive examination of a corporate crime scene ever conducted, and it is Enron--not Tyco, not WorldCom, not Martha Stewart--that has come to stand as shorthand for everything that went wrong in corporate America. The verdict will send a clear message about the accountability--or lack thereof--of those at the very top of a company. With only a modicum of hyperbole, Skilling's lead lawyer, Daniel Petrocelli, calls the impending showdown the "most important, most high-profile, most must-win case that [the U.S. government] has ever prosecuted."

For Lay and Skilling, there is even more at stake than guilt or innocence. They are seeking not just acquittal but public redemption. In most criminal trials the prosecution and defense have divergent views of reality, but in this case the difference is extreme: Lay and Skilling will argue not just that they weren't hiding anything, but that there was nothing to hide. In an extraordinary speech last month, Lay declared that Enron was a "strong, profitable, growing company"--a "great company"--even into the fourth quarter of 2001. Enron, the two men say, was brought down by the actions of a rogue officer--former CFO Andrew Fastow, who has already pleaded guilty.

The trial will also be a fitting finale to the Enron saga, because in the end, the whole story is about betrayal. There is, of course, Enron's betrayal of its investors, employees, and customers. But there will also be the spectacle of former executives, once united behind a smooth corporate façade, turning against one another. Already, onetime friends have accused one another of lies and deception, and people's versions of the truth have proved to be surprisingly malleable. Take Rick Causey, Enron's former chief accounting officer who, as a co-defendant with Lay and Skilling, long swore to one version of reality and then--with a shocking, last-minute guilty plea just after Christmas--suddenly swore to quite another one.

Parts of the trial will doubtless be painfully dull, since much of the evidence will concern technical accounting issues. But it will be suspenseful right to the end, because convictions in white-collar criminal cases can be surprisingly hard to obtain (see following story). With Lay and Skilling's high-priced legal talent, the complexity of Enron, and the mixed results in the criminal trials to date, there will be plenty of Twilight Zone moments when it will be hard to know what to think. So it may be helpful to recall, on the eve of the trial, four pivotal events that brought us to this bleak crossroads in American business.

AUG. 14, 2001

Skilling Takes a Hike

THE BEGINNING OF THE END at Enron actually dates back almost four months before the company's bankruptcy filing--to the day when Jeff Skilling publicly announced he was quitting as CEO. For many people, both inside and outside Enron, that was when it became clear something was seriously wrong at one of America's biggest companies. After all, men who have worked and schemed for years to reach the top don't just quit after six months on the job. Enron's stock fell 6% the next day, to $40.25. It would never close that high again.

Aug. 14 will probably loom large at trial, as prosecutors challenge Skilling's longstanding claim that he was bolting entirely for "personal" reasons and had no idea Enron was on the brink of collapse. Despite later acknowledging that he was also rattled by the sinking share price (for Skilling, the value of the stock was personal), he has clung to that story, through a memorable 2002 public grilling by U.S. Senators until today.

But that's not all. At trial, his defense team will try to show that Skilling--by many accounts a brilliant man who was calling the shots at Enron for years--believed what he has so often said: that Enron was "in great shape" when he left. Prosecutors are likely to point to his abrupt departure and his sale of 500,000 Enron shares just a month later as signs that he knew the company was going down.

Like Skilling, Ken Lay has presented himself publicly as both clueless and blameless. And like Skilling, he has insisted that, except for Fastow's criminal misdeeds, there was nothing really wrong at Enron.

Those who knew Lay and Skilling at Enron have been struck by the irony of seeing them now marching in lockstep. The two men have never been close in business or temperamentally--Lay cultivated a conspicuously self-effacing charm; Skilling proudly wore his bristling intelligence like a set of spikes. During Enron's glory years Skilling made little secret of his disdain for Lay, voicing his ultimate slight among colleagues: Ken just didn't "get it." The two men couldn't even manage the events surrounding Skilling's departure. While Lay publicly professed disappointment and shock at the news ("I certainly didn't expect it," he told reporters afterward), he had in fact known for weeks that Skilling was determined to go. And while Lay later claimed he did everything possible to get Skilling to change his mind, Skilling has told friends he was willing, if asked, to remain for six more months to ease the impact of his departure, but Lay made no effort to persuade him to stay.

Of course, but for Skilling's resignation, Lay would never have reassumed his position as Enron's CEO, and he probably would not be facing a criminal trial. After all, Lay's indictment focuses on acts that occurred after he reassumed the role of CEO in August 2001. Prosecutors say that's when he took over the ongoing scheme to mislead the world about Enron, because he learned the company was in deep trouble ("Lay was briefed by numerous Enron employees on Enron's mounting and undisclosed financial and operational problems," according to Lay's indictment), and he was desperate to cover it up. It's hard to imagine that Lay doesn't blame Skilling for his current predicament. Skilling, in turn, has privately blamed Lay for failing to move decisively to save the company; as Enron spiraled downward, he unsuccessfully urged Lay to bring him back, arguing that he was the only man who could save the business. Their defense teams fought hard to have them tried separately. It will be riveting to watch these two peculiar bedfellows to see if any of the simmering tension breaks through the carefully composed picture of unity.

OCT. 24, 2001

Fastow Becomes the Enemy

TO KEN LAY AND Jeff Skilling, Enron's CFO wasn't always the bad guy. Indeed, Fastow was a longtime Skilling protégé, and Lay had always viewed him as indispensable. In fact, after Lay became CEO again, one of his early moves was to negotiate a lucrative extension of Fastow's contract.

In his recent Houston speech, Lay repeated his claim that it was Fastow who had done in Enron, that it was the revelation of the CFO's larcenous behavior--"the stench of possible misconduct by Fastow"--that had triggered the "run on the bank" that sank the company. This argument simply rewrites history. Fastow was indeed lining his pockets far more than Lay or Skilling knew--as it turned out, in illegal ways, to the tune of $60.6 million. But it wasn't what Lay and Skilling didn't know that panicked Wall Street. It was what the two men did know, and had repeatedly authorized: the notion that Enron's CFO was doing private deals with his own company, and what those deals might be hiding about Enron's financial condition. During the fall of 2001 investors weren't worried about how much money Fastow had made or even stolen. They were panicking about how Fastow's private off-balance-sheet partnerships might be inflating Enron's earnings and hiding its debt. And rightly so.

Until late October, all of the Enron executives' interests were aligned. Indeed, when a series of Wall Street Journal stories began spotlighting Fastow's role running two partnerships known as LJM1 and LJM2, Lay vehemently defended Fastow and the arrangements in the face of a growing outcry. "I and the board of directors continue to have the highest faith and confidence in Andy and believe he is doing an outstanding job as CFO," Lay declared during an Oct. 23 conference call with Wall Street analysts and investors.

The very next day, Fastow was gone.

So Oct. 24, 2001, marks the moment when Fastow's interests finally began to diverge from those of Skilling and Lay. In early 2004, Fastow pleaded guilty to two counts of conspiracy and agreed to a ten-year jail sentence. But in his much-expected prosecution testimony--the first full airing of Fastow's account--he is unlikely to embrace his former bosses' version of reality. People who know Fastow, a temperamental man, say he is furious about the public efforts to blame him for Enron's collapse. He will probably note that on three separate occasions Lay, Skilling, and the Enron board voted to waive the company's code of conduct so that Fastow could run the partnerships. We may also hear Fastow repeat what he claimed in an internal meeting before he left Enron, that the private partnerships were Skilling's idea.

JULY 30, 2004

Ken Rice Breaks Ranks

AMONG THE 77 PEOPLE on the list of potential witnesses for the prosecution, no one was closer to Jeff Skilling than Kenneth Duane Rice. A high school wrestler from Broken Bow, Neb., Rice broke into Skilling's inner circle with a billion-dollar gas deal in 1992 that helped launch Skilling's revolutionary ideas for energy markets.

In the years that followed, Rice became one of Skilling's go-to men for key assignments, and a confidant who helped him lead daredevil expeditions--such as a 1,200-mile dirt-bike race through Baja, Mexico--that became symbols of Enron's macho, risk- taking culture. But it was Rice's reluctant role as CEO of Enron's broadband business (accepting the job, he later said, was "probably the biggest mistake I could have made") that placed him onstage in the investigation of Enron.

In commonsense terms, what happened at broadband was perhaps Enron's most brazen illusion. Prosecutors have focused on a January 2000 analysts' meeting at which Skilling touted broadband as the company's hot new business, projected billions in operating profits, and declared that it merited a huge premium for Enron stock. Though Enron's shares soared 26% that day, the company's broadband business really wasn't anything more than a grand, untested plan.

Using financial machinations, Enron had made its broadband business appear to be a valuable enterprise when it really wasn't. In May 2003, Rice was among seven broadband executives charged in a 218-count criminal indictment that alleged conspiracy, securities and wire fraud, money laundering, and insider trading. (While the broadband hype helped Enron shares skyrocket, Rice had sold more than $53 million worth.) And for a year, Rice and his lawyers swore he'd done absolutely nothing wrong.

Then, on July 30, 2004, Rice cut his deal. Pleading guilty to one count of securities fraud for misleading securities analysts at the January 2000 meeting, he agreed to serve up to ten years in prison, forfeit $13.7 million in cash and property, pay a $1 million fine, and tell all.

That positioned Rice as a voice in court against his old dirt-biking buddy. Rice testified that it was at Skilling's urging that he lied about the state of Enron's broadband network to pump up the company's stock--and that Skilling lied too. Skilling, he said, was determined to use broadband to add $10 billion to $20 billion to the company's market value--"one way or another."

Then something peculiar happened, illustrating how commonsense reality may be hard to explain in the courtroom. The broadband case was billed as a "mini-preview" for the showdown against Lay and Skilling, and Rice was the star witness against five former Enron executives who had refused to strike deals with the government. After three months of testimony focusing on technical questions about the state of Enron's broadband technology and what analysts were led to believe, the case ended in a mistrial when the jury acquitted the men on some counts and hung on the rest, without rendering a single guilty verdict. The defendants are scheduled to face retrial on the remaining counts later this year.

The broadband case offers a clear message: What looks like deception may not amount to criminal fraud in a jury's eyes, whether because the details are simply too complex or because one thing is not really the same as the other.

DEC. 28, 2005

The "Pillsbury Doughboy" Jumps the Fence

FOR NEARLY TWO YEARS after FBI agents first led Richard Causey, Enron's former chief accounting officer, into the federal courthouse in handcuffs, he asserted his innocence, claiming that there was nothing wrong with Enron's accounting. In doing so, he provided a valuable buffer for Lay and Skilling, who will insist they relied on his expertise--as well as that of outside lawyers and accountants--in concluding that everything Enron was doing was proper.

But three days after Christmas everything changed when Causey agreed to plead guilty to a single count of securities fraud, cooperate with government prosecutors, and serve up to seven years in prison. Was it a simple case of a CPA engaged in calculation, as attorneys for Lay and Skilling insisted? Causey, they asserted, committed no crime but knuckled under to government pressure, wishing to avoid the financial burden of defending himself at trial and the possibility of a much longer jail term away from his family. Or had he undergone a change of heart, recognizing that what he had done amounted to fraud?

Either way, Causey's plea changes everything. For starters, it is addition by subtraction for the prosecution: By cutting out Enron's chief numbers man, it makes the trial both shorter and simpler, minimizing the quantity of mind-numbing accounting testimony. Second, it adds Causey--known at Enron as the "Pillsbury Doughboy"--as a credible, likable witness against Lay and Skilling, with whom he had extensive personal contact.

What Causey has admitted, in a brief plea agreement, embraces the broad sweep of the government's overarching claim against Lay and Skilling--that he conspired with the company's "senior management" to inflate the company's stock by lying to investors about Enron's true financial condition. More specifically, Causey acknowledges signing financial statements that he knew misled investors about two transactions. One falsely characterized a one-time $85 million gain as the result of Enron's recurring operations. In the second case Causey admits helping hide hundreds of millions in losses in Enron's retail energy business by shifting them into the company's highly profitable energy-trading unit. Both admissions involve criminal charges the government has filed against Skilling.

And this, certainly, is not all. Causey's signed plea agreement characterizes the document as merely "a summary of facts that make me guilty," adding, "It does not include all of the facts known to me concerning criminal activity in which I and other members of Enron senior management engaged." In fact, Causey may well have something to add on most of the charges facing Lay and Skilling. No one was more in the thick of things, more intimate with Enron's desperation, quarter after quarter, to make its Wall Street numbers. And no one was more versed in the tactics it employed--legal and otherwise--to do so.

EVEN BEFORE the company's collapse it was always difficult at Enron to separate reality from illusion. What happens in the months to come in a Houston courtroom will provide, if not clarity, at least an ending. REPORTER ASSOCIATE Doris Burke

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