updated 4/4/2006 7:26:41 PM ET 2006-04-04T23:26:41

Defense witnesses in the fraud and conspiracy trial of former Enron Corp. chiefs Kenneth Lay and Jeffrey Skilling picked away at parts of the government’s allegations Tuesday, disputing earlier testimony that partnerships run by the company’s former finance chief got special treatment for buying problem assets.

Other witnesses also countered prosecution testimony that layoffs were disguised as reassigned jobs and that a troubled power project in India helped spell financial disaster.

While none of the witnesses so far have launched an encompassing attack on the government’s case, they were intended to counter portions of prosecution testimony as a lead-up to the main event — the defendants on the witness stand.

Lead Skilling lawyer Daniel Petrocelli said Tuesday his client likely will begin testifying Thursday — a day later than he originally expected — because two witnesses are expected to be on the stand all day Wednesday.

Testimony continued without Lay’s lead lawyer, Michael Ramsey, who was undergoing tests in advance of surgery at a Houston hospital to unclog the carotid artery in his neck. A stent was placed in an artery in his heart last month.

Lay said he and the rest of his legal team would carry on without seeking to interrupt or postpone the trial, and they were confident Ramsey would return to court before the case ends.

“Certainly he will be out of pocket for a few days,” Lay said, noting that Ramsey was communicating regularly with the team. “I fully expect him to be back before the trial is over. We’re going to proceed ahead.”

In court Tuesday Mark Metts, a former top executive in mergers and acquisitions for Enron, sought to counter testimony from former Chief Financial Officer Andrew Fastow that Skilling knew Fastow used personally lucrative partnerships to help the energy company hide losses and manufacture earnings.

Fastow told jurors last month that the second of the partnerships, LJM2, was created to warehouse failing Enron assets and investments so the energy company could book income and rid its ledgers of debt. In return, Enron ensured LJM2 didn’t lose money, the ex-CFO said.

Metts testified Tuesday that in April 2001 he was trying to sell an Enron wind power business to UBS Warburg when Fastow approached him saying LJM2 wanted to bid. But Fastow balked when asked to sign the same paperwork and conduct the same process as UBS.

Metts said the ex-CFO called him, screaming that he was trying to help Enron by purchasing a loser business and threatened to talk to Skilling.

Metts said he’d never gotten the impression that Skilling favored LJM2 over other asset buyers. When he later discussed the blowup with Skilling, he told jurors, “Jeff agreed with me that the only way LJM would participate in the wind process was if LJM played by the same rules as everybody else.”

“He was frustrated with Fastow’s attempts to essentially get involved?” Skilling lawyer Mark Holscher asked.

“We were all frustrated,” Metts replied.

However, under cross-examination, Metts acknowledged he hadn’t encountered LJM until the wind deal came up. Enron had done many other deals with LJM throughout the previous year and emerged with profits, according to earlier testimony from Fastow.

Metts also acknowledged that the UBS purchase fell through, and weeks after the confrontation with Fastow, he was demoted and the ex-CFO became his boss.

“I wasn’t there for long anyway, so it didn’t matter,” Metts said.

Metts also sought to vouch for a lofty plan in 2000 to sell Enron’s international assets — which Skilling had valued at half the $10 billion on Enron’s books — to wealthy Middle Eastern investors for $7 billion. So-called Project Summer crumbled when the main investor fell ill.

The assets to be sold as part of that deal included some money-losing properties that LJM had bought, Fastow testified earlier, with unwritten assurances from Skilling that the partnership wouldn’t lose money.

On cross-examination, prosecutor Sean Berkowitz sought to show Project Summer, however close executives may have believed it came to going through, did not actually go through as no agreements were ever signed.

“You know a deal is never a deal until it is signed up?” Berkowitz asked.

“That is my nature,” Metts replied.

Earlier Tuesday, former Enron human resources supervisor Sarah Davis testified Tuesday that people who moved from its struggling broadband venture in March 2001 were given opportunities to shift assignments, disputing earlier testimony that most were laid off or targeted to be laid off.

Marla Barnard, the human resources supervisor for the broadband division, also told jurors the movements were “redeployments” rather than layoffs — which matched how Skilling explained the head count changes to Wall Street analysts that same month.

In February Kenneth Rice, the division’s former chief executive officer, testified for the prosecution that Skilling told him to characterize layoffs at the unit as redeployment so some 250 employees would believe they would keep their jobs and analysts who influenced the company’s stock would remain bullish on the weakening venture.

Asked by Skilling lawyer Mark Holscher if Rice or anyone else at Enron told her the cutbacks were “a ruse to lay people off,” Davis replied: “No. It was redeployment.”

Another witness, Wade Cline, Enron’s current general counsel, told jurors about his efforts to help the company recoup its $1.2 billion investment in a 2,184-megawatt Dabhol power project in Western India in 2001. His testimony was intended to counter that of Fastow and former Treasurer Ben Glisan Jr., who both said they warned Lay in August and October 2001 that the Dabhol project was overvalued and could contribute to multibillion-dollar write-offs.

The Dabhol project was shut down in June 2001 after a dispute over electricity tariffs between Enron and its only customer, the Maharashtra State Electricity Board. The dispute also halted construction of a second plant at the site.

Cline said Enron negotiated to recoup at least its investment in the project and expected to prevail. But the dispute remained mired in arbitration until June last year — long after Enron sought bankruptcy protection in December 2001. Cline acknowledged on cross-examination that Enron — after bankruptcy — recouped only $20 million.

Skilling faces 28 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay faces six counts of fraud and conspiracy. Last week, Lake approved prosecutors’ request to drop three counts against Skilling and one count against Lay to streamline their case.

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