Like so many other ex-Enron employees suddenly left without a paycheck more than four years ago, Deborah DeFforge has moved on. She’s more caught up in today than in the past.
But she’ll be among those watching Monday’s start of the fraud and conspiracy trial of Enron founder Kenneth Lay and former CEO Jeffrey Skilling.
“I plan to keep a pretty close eye on it, just out of sheer curiosity if nothing else, and closure. It will be good to finally see it come to fruition and move on with our lives,” said DeFforge, now a bustling Houston real estate agent.
After a dozen jurors and four alternates are chosen from a pool of more than 100, the once-celebrated former executives will begin the journey that will gain them freedom or decades in prison.
Enron’s December 2001 flameout was the first in a string of corporate scandals that spawned another string of prosecutions. The criminal case against its former top two executives is the biggest to emerge from the rubble.
“The government’s prosecutions of corporate fraud will be judged based on the verdict in this case,” said Jacob Frenkel, a former federal prosecutor. “If there is an acquittal, the government’s corporate fraud prosecutions will be deemed at best a modest success. To the extent the government is being tested, this is the final exam.”
U.S. District Judge Sim Lake, in the final pretrial hearing this past week, advised participants to rest up for what is expected to be a four-month marathon.
“You all get some rest over the weekend. This is going to be a long trial,” the judge said.
Skilling, 52, faces more than 30 counts of fraud, conspiracy, insider trading and lying to auditors. Prosecutors allege he conspired with minions to hide Enron’s wobbly financial state from investors through falsely rosy public statements and misleading regulatory filings. He also is accused of selling more than $62 million in Enron shares inflated by the hype.
On Friday, prosecutors asked Lake to approve their request to drop four wire fraud counts against Skilling that had been related to charges pending solely against Richard Causey, former chief accounting officer. Causey was slated to go to trial alongside his former bosses until he pleaded guilty to securities fraud last month. If approved as expected, Skilling will go to trial facing 31 criminal charges.
Lay, 63, faces seven counts of fraud and conspiracy. The government alleges he perpetuated the ruse after Skilling abruptly resigned in August 2001, less than four months before the company careened into bankruptcy in December that year.
Both have pleaded not guilty. Both insist Enron was not rife with corruption despite guilty pleas obtained from 16 ex-Enron executives, including former finance chief Andrew Fastow and Causey.
And both say Enron was a strong, vital company undermined by loss of market confidence and the only crimes they know of involved Fastow and a few others in finance skimming millions of dollars from otherwise lawful deals.
“I can understand what they need to do,” Skilling told The Associated Press in a recent interview regarding his former friends and colleagues who have pleaded guilty. “Their families are at risk. Their lives are at risk. I can understand where they’re coming from.”
But other than those who skimmed, “I do not think they are guilty,” Skilling said.
Lay and his legal team have expressed the same sentiment.
Fastow is expected to be a chief prosecution witness, along with former heads of investor relations as well as broadband and retail energy units. Causey isn’t on the government’s witness list, but could be added later.
The government contends Lay and Skilling repeatedly assured investors all was well or would improve when they knew Enron’s purported success largely depended on fragile structured finance deals either hidden or revealed in deliberately oblique disclosures. The unsustainable structures eventually fueled the company’s crash.
“For the government, there’s much more at stake than the conviction of Skilling and Lay because the government’s corporate fraud prosecutions on the whole have arisen from the Enron investigation,” Frenkel said.
Enron’s crash and the subsequent scandals roiled Wall Street, sent investors fleeing, prompted stiffened white collar penalties and upped regulatory scrutiny over publicly traded companies.
Former WorldCom head Bernard Ebbers awaits a 25-year prison term for orchestrating the $11 billion accounting fraud that bankrupted the company. Martha Stewart did five months in prison and more time confined to work and home for lying about a stock sale. Adelphia Communications Inc. founder John Rigas and his son got double-digit prison terms for robbing the company till.
HealthSouth Corp. founder Richard Scrushy bucked the trend with his acquittal last year of fraud charges despite five former finance chiefs pointing the finger at him in a $2.7 billion scheme to inflate earnings.
The government has a mixed record on Enron.
The U.S. Supreme Court last year overturned former Enron auditor Arthur Andersen LLP’s 2002 conviction of obstruction of justice, saying vague jury instructions allowed jurors to convict without finding criminal intent behind mass shredding of Enron documents as investigations began.
Four former Merrill Lynch & Co. executives and a former midlevel Enron finance executive are in prison for helping push though a loan disguised as a sale to help Enron manipulate earnings, while a former in-house Enron accountant was acquitted. And five former executives accused of fooling Wall Street into believing Enron’s defunct broadband unit was viable face retrials this year after their first trial ended with jurors hung on most charges.
Tamar Frankel, a professor of law at Boston University, said the outcome of Lay and Skilling’s trial will illustrate “how far we will legitimize what Enron management has done.”
“This trial is testing our legal system and our regulation of people who have forgotten that they control other people’s money,” Frankel said.