It took prosecutors just over four years to work their way up the Enron food chain, but now the failed energy company’s top former executives, Kenneth Lay and Jeffrey Skilling, are facing a jury in a federal criminal fraud trial expected to last at least four months.

How can each side best present a complex story that involves exotic derivatives products, off-books accounting and strange subsidiaries with names like Raptor? Experts say they should apply lessons learned in the other high-profile corporate fraud cases of the Enron era: Keep it simple.

“I think the best strategy for the prosecution is to focus on those issues that are very simple and the jury can understand — namely, that these guys are liars. Everyone understands what a liar is,” says Wharton professor of legal studies and business ethics William C. Tyson, adding that because the burden of proof is on the prosecution, the case’s complexity favors the defense. But the defense, too, should try to leave jurors with a clear, simple impression. “The defendants’ strategy is to go out and find people who will say good things about Enron and what happened at Enron,” Tyson states.

While it has long been established that crimes were committed at Enron, the government has to show that Skilling and Lay were involved in activities they blame on subordinates, says Robert E. Mittlestaedt Jr., former vice dean of executive education at Wharton and currently dean of the W. P. Carey School of Business at Arizona State University. But the government does have common sense on its side, giving the defense a tough task, he adds. “It’s going to be very hard for them to say, somehow, that the two most senior executives of the company were not responsible.”

Enron, a Houston energy supplier and trading company that mushroomed in the 1990s to become the country’s seventh largest corporation, went bankrupt in December 2001 after it became clear that the firm had concealed enormous debt and inflated reported profits. Part of the case involves a string of “special purpose entities,” a type of subsidiary created by Enron’s chief financial officer, Andrew Fastow, and used to remove debt from Enron’s books.

Fastow is among approximately 30 former Enron executives who have pleaded guilty or been convicted of various crimes. Now, in a trial that began January 30, he and many of the others are scheduled to testify against former chairman Lay and former chief executive Skilling.

“I think the prosecutors’ best strategy may be to hammer home the fact that a parade of witnesses will be testifying that there was criminal wrongdoing at Enron, and that several of the witnesses themselves were participants,” suggests David Skeel, a professor at the University of Pennsylvania Law School.

Prosecutors accuse Lay and Skilling of participating in an elaborate accounting fraud that caused unsuspecting shareholders, including thousands of Enron employees, to lose billions, while Lay and Skilling protected some of their holdings by selling millions of dollars in stock before Enron went bankrupt. Lay faces seven counts of fraud and conspiracy, while Skilling faces 31 counts of fraud, conspiracy, insider trading and lying to auditors. If convicted on all charges, each man could be sentenced to decades in prison.

Lying, not Accounting

In such a complicated case, the prosecution is wise to “keep it simple, stupid,” says John Coffee, securities law professor at Columbia University. Prosecutors, he notes, have had less-than-perfect results in other high-profile corporate fraud cases, with acquittals and hung juries mixed in with convictions. “I think they have learned from that and already are applying it in their opening statements. There is a desire to radically streamline the case.” Prosecutors, quite rightly, are telling jurors, “This is not about accounting; it’s about lying,” Coffee says.

In opening arguments, the defense said the two men did nothing wrong and were themselves victims of Fastow and two other former executives who were lining their own pockets. The company’s collapse, according to the defense attorneys, was caused by an unjustified panic among investors, like an old-fashioned run on a bank, after the first accounting irregularities surfaced.

But Mittlestaedt notes that it will be hard for the defense to argue that Fastow was a rogue executive keeping Lay and Skilling in the dark, considering that Enron’s board of directors voted to waive conflict-of-interest rules so that Fastow could set up his special purpose entities — the four Raptors — which made him millions. “You cannot say those guys didn’t know there were some strange and shady business practices going on relative to conflict of interest.” 

While prosecutors described “accounting hocus-pocus” and called Enron “a ticking time bomb,” the defense said Enron’s business practices were “as common as grass” and asserted that “failure is not a crime.” But according to Skeel, “Lay and Skilling are defending by arguing that, with a couple of small exceptions, Enron wasn’t doing anything illegal. That doesn’t square well with all the folks detailing Enron’s aggressive accounting and willingness to break the rules.”

Facing the long lineup of prosecution witnesses, defense attorneys argued in opening statements that many of these individuals are cooperating in hopes of receiving reduced sentences for their own Enron crimes. “The defense’s best strategy, in my view, is to point out that many of the prosecution witnesses have a vested interest — lower prison sentences — in portraying Enron as having been involved in crime,” Skeel says. In addition, many of the prosecution witnesses did not work directly with Lay and Skilling, “so it’s hard for them to show that Lay and Skilling were violating laws.” The defense should also “repeat the refrain that Lay and Skilling created a climate of innovation but simply weren’t committing crimes.” However, Skeel notes, it may be difficult for the defense to say the two men did not violate any laws while at the same time portraying them as pushing the envelope.

In opening statements emphasizing the defendants’ alleged lies, one prosecutor played a tape of comments that Skilling made to Enron employees on March 15, 2001, explaining the redeployment of 240 people who had worked for the company’s troubled broadband unit. “The whole revenue opportunity we saw in this marketplace is gone,” Skilling said at that time. Then the prosecutor played a tape made eight days later, when Skilling told a group of investors that the broadband unit was “looking good” and that the employee redeployment was “good news,” not bad.

“Sinking Ship” Argument

To counter evidence of duplicity, the defense is likely to employ a “sinking ship” argument — that the top executives were simply doing what leaders are expected to do in a crisis, Tyson says. “Some people think that the officers have a little more leeway to say half-truths to keep the ship afloat. I don’t buy the sinking-ship exception, but that is a strategy the defense could use.”

This strategy, according to Coffee, may work better for Lay than for Skilling. “Lay is a much more difficult case” for prosecutors, he notes. While Lay made many public statements that now seem overly optimistic and rosy, any new CEO brought in from outside to rescue the company would likely have done the same — and not been accused of fraud. “That’s what you expect from a CEO, much like the captain of a ship: Quell the panic.”

Skilling will have a harder time with this strategy, Coffee suggests. Although he had been with the company since 1990, Skilling was promoted from president and chief operating officer to CEO just six months before stepping down. His abrupt departure in August of 2001, a few months before the December bankruptcy filing, suggests that he realized the company was in a crisis, making his positive statements to investors look less like rallying cries and more like deliberate lies, Coffee says.

In addition, the government says Skilling sold $62 million in Enron stock before the bankruptcy made it worthless. “I think it’s intuitively clear to most juries that if you are the CEO and you resign suddenly after only six months in office, and then you sell millions of dollars worth of stock, that’s strongly consistent with the story that you were aware the company was in mortal peril,” Coffee notes.

While the stakes are obviously high for the two defendants trying to avoid prison, this also is clearly a big case for a government trying to show it is tough on white-collar crime. “This trial is really important because it is a test of whether or not we can enforce Sarbanes-Oxley, and whether the government can make very complex issues simple enough that you can get a jury to understand them,” Mittlestaedt says, referring to the corporate clean-up law passed after the Enron collapse.

Last June, he recalls, prosecutors failed to win a fraud conviction against former HealthSouth CEO Richard Scrushy. “I haven’t talked to a single person who thought Scrushy was innocent. If you get a similar outcome in this Enron trial, you are going to have a serious lack of confidence in the ability to [win] complicated cases which amount to theft….And that’s not going to help the public’s view of capitalism.”

Adds Tyson: “It’s important to win because it’s so high profile. This is the capstone case. This is what everything has been building up to. If the prosecutors lose this, it’s going to look like everything was in vain.”