Enron Case Shapes Up As Tough Legal Fight
By Carrie Johnson
Washington Post Staff Writer
Monday, February 18, 2002; Page A01
The calamitous fall of Enron Corp. was a scandal. But was it a crime?
That central question still hangs over the proceedings after three weeks of congressional hearings, disclosures of document shredding, a scathing internal report from Enron and numerous leaks documenting the Houston company's mysterious financial dealings.
As the case unfolds, a consensus has emerged in much of the legal community, including academics, former prosecutors and criminal defense lawyers, that a Justice Department task force is likely, eventually, to seek criminal indictments against some former executives at Enron and perhaps its outside auditing firm, Arthur Andersen.
But legal experts suggest that it may be difficult to make the charges stick.
"I have lived through these hysterical cases before," said John Dowd, a Washington lawyer who defended Sen. John McCain (R-Ariz.) during the Keating Five influence-peddling scandal in the 1980s.
"Despite all the huffing and puffing, it's not always as easy as it appears," Dowd said. "There are going to be some problems for the government, I think. There are an awful lot of accounting and attorney defenses in this case."
If charges are eventually filed, they could range from securities fraud or mail and wire fraud to perjury, criminal conspiracy, obstruction of justice or racketeering, lawyers said.
The key Enron figures in possible legal jeopardy are former chief executive Jeffrey K. Skilling, former chairman Kenneth L. Lay, former chief financial officer Andrew S. Fastow and Fastow's former associate, Michael J. Kopper. All but Skilling invoked the Fifth Amendment right against self-incrimination and declined to testify before Congress and all have denied wrongdoing through their attorneys; Skilling declared to a House panel that he knew of no efforts to inflate profits or conceal losses from investors.
As with many Washington scandals, legal experts said, the steps taken after one becomes public, such as destroying evidence or lying to federal investigators, are often the easiest for prosecutors to pursue.
At Andersen, some officials -- including David Duncan, who oversaw the Enron account and who since has been fired by the accounting company -- could be subject to obstruction of justice charges over shredding of documents. The destruction allegedly occurred even after the Securities and Exchange Commission opened an investigation into accounting practices at Enron. Attorneys for Duncan have suggested that he was acting on the advice of an Andersen lawyer.
In its inquiry, the Justice Department may rely heavily on the road map of wrongdoing laid out by the report prepared for Enron's board of directors by William Powers Jr., dean of the University of Texas School of Law. His investigation found that a handful of top managers covered up nearly $1 billion in losses in the 15 months that ended last September, a period during which senior executives sold millions of dollars worth of Enron shares.
The Powers report describes Fastow as the primary creator of Enron's deceptive finances, while criticizing Lay for being inattentive. Skilling's involvement is in dispute, the report said, while Kopper "enriched himself substantially at Enron's expense."
Although only Skilling has spoken publicly since the report's release, aspects of the executives' likely defense have now emerged.
Lay has told investigators that he feels betrayed by his underlings, especially Skilling and Fastow, and knew little about the accounting maneuvers.
Skilling told Congress he was unaware that Fastow, Kopper and other Enron officials personally collected more than $40 million from off-the-books partnerships.
Fastow's friends have said that everything he did was with the knowledge of the board and his superiors, and point out that Enron's board had approved a waiver of ethics rules to allow Fastow to participate in the partnerships. Kopper's position is not known yet.
Further clues to the direction of the Enron probe might be found in the last case overseen by the prosecutor who is now chief of the department's Enron task force, Leslie Caldwell.
Caldwell was an aggressive assistant U.S. attorney for the Northern District of California, in charge of its securities fraud division. She most recently oversaw the indictments of top executives at health care firm HBO & Co., who were charged in 2000 with securities fraud, conspiracy, mail fraud and wire fraud for allegedly doctoring financial statements before a merger with McKesson Corp., a drug wholesaler. The executives, who have yet to go to trial, were blamed for $9 billion in losses, one of the biggest corporate fraud cases in history before Enron.
In an interview last spring, Caldwell said that the "go-go atmosphere" of the late 1990s created a "casino atmosphere" inside many corporations.
"I don't think people thought for a second that they could be held criminally responsible for these kind of things," she said at the time. "The very top management of some companies are actively engaging in pretty brazen fraud. We're not talking about gray-area accounting issues here."
Similar to HBO, the case for fraud at Enron turns on how well investigators can unravel the complex transactions that led the company to file the nation's largest bankruptcy case, and whether they can document that any Enron official acted with intent to mislead investors and regulators. That requires prosecutors to painstakingly sift through documents with an eye toward proving what a person knew about errors in financial statements and when they knew it.
Simply using partnerships to move debt off corporate balance sheets, as Enron did, is not necessarily illegal if there was no intent to defraud, said Peter Romatowski, a white-collar defense attorney at Jones, Day, Reavis & Pogue in Washington.
Some companies have been caught in violation of securities laws by booking revenue from one quarter into another to artificially inflate their earnings. Enron pursued a complex web of measures to shift its debt and inflate revenue, many of which were blessed by their auditors, Romatowski said.
"We're a long way from yet seeing described anything so simple and raw and clearly intentionally fraudulent" as booking revenue in the wrong year, Romatowski said.
In their pursuit of intent, prosecutors could be helped by future disclosures at ongoing congressional hearings. And a few of the players may decide to cooperate with prosecutors down the road, offering fresh evidence in exchange for leniency.
Legal observers said Skilling took a risk with his decision to testify before Congress. He could be vulnerable, they said, to perjury charges if prosecutors can find inconsistencies in his statements then and in future accounts he gives to federal investigators or others while under oath.
In his congressional testimony last week, Skilling denied that the purpose of Enron's partnerships was to conceal the company's financial problems and he denied knowledge of much of the self-dealing alleged in the Powers report. "The financial statements issued by Enron, as far as I knew, accurately reflected the financial condition of the company," Skilling testified.
Members of Congress who questioned Skilling and other witnesses last week later publicly questioned his veracity.
John Coffee Jr., a corporate law professor at Columbia University, cited congressional testimony by former Enron treasurer Jeffrey McMahon, who said he met with Skilling to discuss concerns about the partnerships and the profits reaped by Fastow reaped. Coffee also pointed out testimony by Enron lawyer Jordan Mintz, who said he sent Skilling documents about the partnerships.
"There are ways of attributing knowledge to Skilling," Coffee said. "Both Mintz and McMahon were trying to put him on notice."
Sherron Watkins, an Enron executive who first raised concerns internally about the company's finances last August, also contradicted Skilling in testimony before a House subcommittee Thursday. She said Skilling was aware of the ramifications of the partnership deals and that he was required to sign forms showing he had reviewed partnership transactions. In his own testimony, Skilling said he did not sign the forms and did not believe his signature was required.
Skilling's attorney, Bruce Hiler, said Watkins was offering opinion and hearsay, not fact.
A potential case against Lay may be more difficult to mount because he has denied knowing about day-to-day workings at Enron. Proving that Lay willfully flouted the law without more evidence than is currently public will be difficult, lawyers said.
A former prosecutor noted that when a person's motive or intent is in question, federal courts sometimes instruct juries that defendants who are aware of a high probability of illegal conduct cannot purposely avoid knowing about it to escape punishment. This concept, known as the "ostrich instruction," has been accepted by most federal courts.
"You don't necessarily have to have a smoking gun," said Michael Dooley, a corporate law professor at the University of Virginia. "In both Skilling and Lay's case, [proof of] recklessness could satisfy the intent requirement. You cannot sit by and willfully ignore things."
Defendants can always claim, however, that they were actively misled by their underlings or that they sought and won approval for their actions, said William Moffitt, past president of the National Association of Criminal Defense Lawyers.
"You could say, 'We cleared it through the board of directors, the accountants told us to do it this way,' " Moffitt said. " 'I'm not an accountant. That's why I hired these people.' Somehow that works better than the ignorance-at-all-costs defense."
The Powers report faulted Lay for not keeping close tabs on the company's financial dealings and said he bore "significant responsibility for those flawed decisions" to create the partnerships.
The prospects of Fastow and Kopper are also uncertain, but based upon the Powers report Fastow could ultimately face wire and mail fraud, securities fraud, and conspiracy charges for his role in the accounting scandal, some legal experts said. Fastow built many of the partnerships now under examination and personally gained at least $30 million, not including his Enron salary and stock options, the report said. Kopper was managing director in Enron's Global Equity Markets Group, earning millions without the board's approval through his work with partnerships set up by Fastow, according to the report.
Prosecutors employ mail and wire fraud laws any time a person uses the mail or interstate telephone lines to commit a fraud, such as sending out a misleading press release or filing other documents that deprive investors of their property or the right to know the truth about a firm's financial condition.
Mail or wire fraud is somewhat easier to prove than a violation of the securities act. And while many violations of the securities laws do not carry the prospect of jail time, mail and wire fraud typically carry penalties of up to five years in prison, said Coffee, of Columbia University.
Among the allegations related to Fastow that could trigger mail and wire fraud charges: submitting false financial statements that covered up the $1 billion in losses and profiting from the partnerships at the expense of Enron and its shareholders.
If prosecutors can prove that more than one person engaged in such acts and then tried to conceal them, conspiracy charges also could come into play.
More than one mail fraud violation opens the door for even more serious charges under the Racketeer Influenced and Corrupt Organizations Act (RICO), a federal anti-racketeering law enacted in 1970 to prevent broad criminal conspiracies
"If you can prove mail fraud or wire fraud, it's only a short step to a RICO violation," said Ira Robbins, an American University law professor. "RICO involves jail time and treble damages."