updated 10/17/2004 11:25:57 PM ET 2004-10-18T03:25:57

The trial of an alleged fraudulent sale by Enron Corp. to Merrill Lynch ended its fourth week with a discussion of rudimentary accounting principles by the last of six defendants on trial for conspiracy and fraud.

Sheila Kahanek, a former in-house Enron Corp. accountant on trial, said a seller cannot promise to repurchase investor equity if the seller wants to book a gain.

Kahanek is the last of six defendants to present a defense in the case entering its fifth week regarding Enron’s alleged year-end 1999 sham sale of three power plants mounted on barges to Merrill Lynch & Co. Her testimony will continue Monday.

“It’s Accounting 101 on guarantees,” she told jurors under questioning from her attorney, Dan Cogdell. “You cannot have a guarantee.”

Kahanek is accused of being part of a conspiracy linking her, a former Enron finance executive and four former Merrill executives to a plan to make a loan from the brokerage look like a sale of interest in the barges in the last days of 1999 so the energy company could book a $12 million pretax profit critical to meeting earnings targets.

Sale phony, government alleges
The government contends the sale was phony because Merrill executives knew Enron needed the deal to book earnings and former finance chief Andrew Fastow and former treasurer Jeff McMahon verbally promised Merrill’s $7 million investment would be resold or bought back for $7.5 million by June 2000. A Fastow-created and controlled partnership, LJM2, bought the barges for that amount in late June that year.

The defendants say Enron was never obligated to resell or buy back the barges.

Cogdell, underscoring Kahanek’s position as a cog in the Enron machine, asked her last week if she’d ever met company founder Kenneth Lay, who faces 11 counts of fraud, conspiracy and lying to banks in a separate case.

“I think I saw him one time crossing the street to the parking garage,” Kahanek replied.

Prosecutors have presented jurors with numerous e-mails written by three of the Merrill defendants and former Enron finance executive Dan Boyle intended to bolster the government’s contentions. Jurors also have partial transcripts of testimony from the fourth Merrill defendant, Daniel Bayly, to a congressional committee claiming no knowledge of an unwritten buyback guarantee.

Kahanek is different. While some of the notable e-mails were sent to her, the government hasn’t presented any that she allegedly wrote or any previous testimony.

No evidence against defendant
Gary Brown, a securities lawyer who served as special counsel for the Senate investigation of Enron’s collapse in 2002, said the lack of such evidence against Kahanek could distinguish her from the other defendants.

“The biggest danger she’s in is being lumped in with the crowd,” he said.

Several government witnesses have testified as to Kahanek’s alleged role in the deal, including:

  • Amanda Colpean, a former executive above Kahanek in Enron’s hierarchy. She said Kahanek stormed into her office in January 2000 and ordered her to remove buyback language from an internal barge deal approval document or outside auditors wouldn’t approve the gain Enron booked. Colpean and 10 other executives — including Boyle, but not Kahanek — signed the alleged sanitized document, saying she couldn’t remember signing it while noting she feared being fired if she didn’t.
  • Eric Boyt, a former in-house accountant who answered to Kahanek. He testified she told him they would justify the oral promise if questioned by noting it wasn’t binding. He also said he signed the same internal deal approval document as Colpean and Boyle at Kahanek’s request when she, as his superior, would normally have signed it. Unsigned drafts of the document shown to jurors showed Boyt — not Kahanek — as the signatory.

Boyt said he lied to the FBI about whether he knew of a buyback promise in August last year when only Boyle had been indicted. But in February this year, after the other five including Kahanek had been indicted, Boyt again met with the government and signed a deal to tell the truth and avoid prosecution.

Kahanek’s former boss, Cassandra Schultz, informed Cogdell last week that if summoned to testify in Kahanek’s case, she would invoke her Fifth Amendment right against self incrimination and decline to answer questions. Schultz received many of the same e-mails as Kahanek.

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