Former Enron CEO Lay arrives at federal court with wife Linda in Houston
Lee Celano  /  Reuters
Former Enron CEO Kenneth Lay arrives at the federal court with wife Linda for opening statements in the Enron trial in Houston Tuesday. Former company executives are facing conspiracy and fraud charges connected to the downfall of the energy giant.
updated 1/31/2006 6:43:53 PM ET 2006-01-31T23:43:53

Lawyers for former Enron Corp. chiefs Kenneth Lay and Jeffrey Skilling insisted Tuesday the men were guilty of no crimes, arguing the company was never infested with fraud and instead fell victim to a sudden crisis of market confidence.

Lay and Skilling were pioneers in the energy trading industry who deeply loved their company — which stands to this day, Lay lawyer Michael Ramsey said, as “one of the finest free-market institutions the world has ever seen.”

A federal prosecutor laid out a different version of events, telling jurors in opening statements in the men’s trial that they lied to Wall Street and their own employees to cover up the crumbling finances that drove what was once the nation’s seventh-largest company into bankruptcy protection in December 2001.

Daniel Petrocelli, arguing for Skilling, went so far as to suggest 13 of the 16 Enron executives who have pleaded guilty to federal crimes were innocent but caved in to intense pressure from zealous federal prosecutors.

“This is not a case of hear-no-evil, see-no-evil,” Petrocelli said, at times animatedly jabbing his finger at the jury. “This is a case of there was no evil.”

Directly countering four years of negative publicity that turned the very name Enron into a symbol of accounting chicanery, Petrocelli said, “There’s no evidence any books were cooked at Enron.”

But federal prosecutor John Hueston said Skilling and Lay sold Enron stock before a massive fraud was exposed.

“This is a simple case,” Hueston told jurors, pacing slowly before the jury. “It is not about accounting. It is about lies and choices.”

Hueston, part of the Justice Department’s Enron Task Force, said Lay and Skilling sold Wall Street, auditors and their own workers a story of a “simply magical ability” for Enron to record consistently impressive growth.

“But inside the doors of Enron, something was terribly wrong,” he said.

The dramatically different portrayals before a jury of eight women and four men kicked off what could be a four-month trial of Lay and Skilling, who are accused of fraud and conspiracy and could face prison for the rest of their lives if convicted.

The Enron trial is perhaps the most closely watched of the corporate fraud cases that followed the implosion of the Houston energy-trading giant more than four years ago.

Ramsey described Lay as “bone-solid, churchbound all his life,” and highlighted his millions of dollars in philanthropy. While Lay accepts responsibility for the bankruptcy of Enron, Ramsey said, “Failure is not a crime. Bankruptcy is not a crime. If it were, we would have to turn Oklahoma back into a penal colony.”

Later, noting Enron had boldly entered international markets and transformed its industry rather than losing market share like some American automakers, the defense lawyer asked: “Do you want a Chicken Little at the helm of a company like Enron?”

Both defense lawyers suggested the company was the victim of market panic in 2001, and Petrocelli said Enron behaved like Nasdaq stocks that tanked when the dot-com bubble burst. He called Enron’s bankruptcy a tragedy and said the company “was the victim of an immediate, unexpected and temporary drain on its liquidity.”

Ramsey said market trust in Enron was eroded in the bear market of late 2001, and he blamed former Enron finance chief Andrew Fastow for stealing from the company.

“What happened was the odor of the wolf got into the flock, and the flock stampeded,” Ramsey said.

When Skilling resigned as Enron CEO in August 2001, turning the reins over to Lay, “He left a sound, vibrant and wonderful company,” the defense lawyer said. Lay had been CEO and chairman of the company from 1986 until his resignation in January 2002, except for the six months when Skilling was CEO.

Petrocelli blamed three men — Fastow, former Fastow aide Michael Kopper and former Treasurer Ben Glisan Jr. — for stealing from Enron. All three have pleaded guilty to federal crimes.

But he said the other Enron executives who have struck plea deals with the government were “hooked” by prosecutors, and he challenged jurors to find the true facts about Enron and ignore four years of “opinion” about its collapse.

“They’re not guilty of the crimes they pled guilty to,” he said, referring to those executives.

Petrocelli promised Skilling would testify in his own defense, saying he could not keep his client off the witness stand even if he wanted to. Lay has said he will testify as well.

Earlier in the day, Hueston had sought to draw out contradictions between what the two chief executives told employees and stock analysts and the realities of Enron’s increasingly crippled balance sheet.

In one example, he said Lay received a memo from former Enron Vice President Sherron Watkins on Aug. 15, 2001, warning him that the company could “implode in a wave of accounting scandals.” Yet just five days later, in an interview with Business Week Online, Lay was quoted as saying there were “no accounting issues” at the company, and that “there is no other shoe to fall.”

Brandishing a penny before the jury, Hueston said Skilling had ordered up $14 million in adjustments to Enron’s books in the second quarter of 2000 alone so the company could beat Wall Street earnings estimates by 2 cents per share.

“Accounting hocus-pocus,” the prosecutor concluded. “Corporate trickery. Cooked books.”

Skilling sat calmly, with his right hand clasped over his left in his lap, for most of Tuesday morning’s opening statements. Lay made occasional notes on a pad. Both wore serious faces.

The first prosecution witness Wednesday is expected to be Mark Koenig, former head of Enron’s investor relations department, who worked with Lay and Skilling on quarterly conference calls with analysts. He has pleaded guilty to aiding and abetting securities fraud.

Earlier this month Koenig revised his plea agreement to attribute to Skilling a statement that Koenig originally said he made on a 2001 call to mislead analysts about why Enron folded its money-losing retail energy unit into the company’s profitable trading unit.

Prosecutors said the next witness would be Kenneth Rice, a former top Enron trader and Skilling ally who later ran the company’s money-losing broadband unit. Rice testified in last year’s trial of five former broadband executives that he, Skilling and others lied to investors and analysts about capabilities of Enron’s broadband network to inflate company stock.

Rice pleaded guilty in July 2004 to securities fraud and forfeited $13.7 million in cash and property.

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