INTRODUCTION: CHALLENGES POSED BY THE SKILLING AND LAY INVESTIGATIONS
As the trial of Kenneth Lay and Jeffrey Skilling loomed in early 2006, (1) prosecutors struggled with fundamental weaknesses that we knew might lead to acquittals. (2) As persuasively argued by defense counsel at trial, no "smoking gun" documents implicated either defendant. (3) Electronic mail, normally a repository of unguarded comment and slips of the tongue, was of little use: Lay made no use of email; Skilling only sparingly. The prosecution's most incriminating document, the so-called "Global Galactic" document, was a tally sheet between former Chief Financial Officer Andrew Fastow and former Chief Accounting Officer Richard Causey, representing existing agreements between Enron and LJM, a partnership set up by Fastow largely to accommodate Enron's need to accomplish end-of-quarter transactions. Although the Global Galactic document outlined undocumented side deals that violated accounting rules, only Fastow and Causey initialed the document. (4)
In a trial involving allegations of earnings manipulation and disputes over the defendants' respective understandings of the application of often arcane accounting rules, proof of criminal intent was of critical importance. Assembling such evidence proved challenging, however, as both Skilling and Lay clearly relied on the advice of inside and outside counsel, as well as their auditors. For instance, although Skilling resigned from Enron for "personal reasons" after a mere six months as C.E.O. and only four months prior to the company's bankruptcy in December 2001, he later took steps seemingly inconsistent with alleged criminal intent. Prior to Enron's collapse, he offered to return to the company as its steward, and in the weeks prior to bankruptcy he took several steps toward engineering and personally financing a private buyout. As forcefully argued by his counsel at trial, what fraudster would seek to return to what he understood was a collapsing house of cards? (5)
The case against Lay suffered from the same shortcomings and posed additional obstacles. Unlike Skilling, who most Enron employees would describe as "hands on," Lay rarely delved into details, and appeared more interested in larger-scale regulatory and political issues affecting the energy industry than the nuances of Enron's finances and accounting practices. Although Lay served as C.E.O. for almost the entire relevant period, in reality Skilling was Enron's active steward for all but the final four months of the company's existence. The indictment itself alleged that Lay assumed control of the conspiracy only in August of 2001. (6)
As Lay's counsel argued at trial, the former C.E.O. appeared to respond when clearly confronted with evidence of troubling issues at Enron. When Sherron Watkins sent him the initially anonymous notice that Enron "was about to implode in a wave of accounting scandals," Lay forwarded the memorandum to James Derrick, his General Counsel, and requested an inquiry. (7)
Like Skilling, Lay argued that it defied the notion of criminal intent for him to return as C.E.O. in August of 2001 if in fact he knew that Enron was a corrupt enterprise. Although Lay sold $70 million in Enron stock in 2001, disclosure of which caused a national public outcry for his indictment on insider trading charges, the relative amount of the sales and his apparent motives for selling arguably constituted evidence of loyalty to the company. As suggested by Kurt Eichenwald of the New York Times in October 2003, (8) Lay held many Enron shares until bankruptcy, and lost the equivalent of hundreds of millions of dollars. According to Eichenwald's review of documents provided in large part by Lay's counsel, the evidence appeared to reflect that Lay sold only as much Enron stock in 2001 as was compelled by a financial crisis born of his loyalty to the company: specifically, Lay sought to hold as much Enron stock as possible by pledging the stock as collateral for large lines of credit. Only when the value of Enron stock dropped consistently and precipitously did Lay sell. As the value of the Enron collateral for his lines of credit began to evaporate, prompting banks to issue margin calls for additional capital, Lay sold his collateral as necessary. (9)
From hundreds of witness interviews, we also understood that Lay would appeal personally to the jury. In stark contrast to the reaction of most former employees to the brash and unvarnished management style of Jeff Skilling, employees liked the avuncular Lay and found it difficult to believe that he had involved himself in wrongdoing. In addition, we knew that Lay would present the jury with a Horatio Alger story of a man born in poverty to a Baptist minister, who worked his way through public schools and distinguished government service before rising to the top of one of the most celebrated companies in American history. (10)
A. Key Investigative Breakthroughs
Without smoking guns, clear and corroborated witness testimony was essential to building a criminal case beyond a reasonable doubt. By late 2003, prosecutors had the benefit of a patchwork of witness testimony from various Skilling or Lay lieutenants, most of whom had cabined responsibility within Enron and limited personal interaction with the defendants. As is typical with cooperating white collar defendants, the testimony of many cooperating witnesses evolved in erratic fashion from reluctant and partial truths to more comprehensive recollections as the witnesses fully accepted responsibility and refreshed their memories with documentary evidence. By December of 2003, prosecutors believed they had gathered sufficient evidence to indict Skilling on a difficult, but triable case. The Lay case, however, which had been built to that point as a possible insider trading prosecution, was deemed at a virtual dead end, due primarily to the apparent difficulties in proving Lay's motive for selling Enron stock in late 2001.
The cooperation of Andrew Fastow offered tantalizing but as yet uncorroborated insights that, standing alone, failed to materially improve the cases against either Skilling or Lay. As the former C.E.O., Fastow's guilty plea provided the Task Force with a "seat on the 50th floor," or executive suite, of Enron. (11) Specifically, Fastow's cooperation provided a global perspective of Skilling and Lay's knowledge of earnings manipulation schemes, as well as the underpinnings of a false statements case.
Although Fastow was scrupulously consistent in debriefings with the government, providing insight, for example, into Skilling's knowledge of the Raptor frauds and Lay's awareness of Enron's true financial state during the final months before bankruptcy, his credibility as a cooperating witness was saddled by a heartstopping history of self-dealing. (12) Generally, a case cannot be proven beyond a reasonable doubt on the basis of testimony by a cooperator who casts a longer criminal shadow than the defendants themselves. Accordingly, while the trial of Skilling and Lay presented the challenge of translating a complicated earnings manipulation scheme to a Houston jury, Fastow's transgressions, by contrast, could and would be reduced to an apparently distinguishable and easy coda of fraud: Andy stole from the house. (13)
With Fastow's as-yet uncorroborated testimony that Lay was aware of the true financial state of Enron at the same time he was making glowing pronouncements to outsiders, and with no additional high-level Enron executives likely to plead guilty, the Lay investigation seemed to be drawing to a close. Only a cooperator with a status comparable to Fastow's, but without a record of self-dealing, could provide the key corroboration necessary to build a potentially winning criminal case. In a critical breakthrough, we obtained precisely such corroboration in the form of compelled testimony from Ben Glisan, Enron's former Treasurer.
In light of difficulties the Task Force had faced in building a criminal case against Lay, the prospect of securing Glisan's cooperation was a long shot at best. Indeed, the prosecution had made little headway in the first year after Enron's collapse: on his popular CNN report, television personality Lou Dobbs had taken to posting a daily "scorecard" reflecting the paucity of indictments, guilty pleas or trials. (14) As is typical in white collar investigations, criminal targets carefully assess the progress of the investigation and maintain a unified wall of silence if it is perceived that the investigation is faltering. It is at this time that prosecutors are willing to make their most generous deals in order to generate momentum and to break the wall of silence.
Glisan, the creator of the Raptor finance vehicles, seized the moment. Facing over twenty years of imprisonment if found guilty of earnings manipulation, he brokered a deal in September 2003 that called for a maximum of five years imprisonment and no cooperation. (15) The government hailed the guilty plea as a major development; the first Enron executive to receive prison time, Glisan headed to jail with the prospect of release in four or fewer years. (16)
Now in early 2004 and lacking more conventional means of developing additional evidence, prosecutors subpoenaed Glisan to the grand jury. A cooperation deal that offered a powerful incentive for Glisan's assistance was of little use, because even if helpful, Glisan would be subject to vicious impeachment as someone who was merely "singing for his supper." As an enlisted cooperator with only marginal credibility, he would add little heft to Fastow's anticipated testimony.
To maximize Glisan's potential credibility, we offered no deal for his testimony; instead, we merely compelled him to appear before the grand jury under a grant of immunity. Likewise, we decided not to meet with Glisan prior to his appearance in order to avoid the appearance of coaching...
Behind the scenes of the Enron trial: creating the decisive moments.
|Author:||Hueston, John C.|
|Position:||Twenty-Second Annual Survey of White Collar Crime|
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