Enron case demonstrates reliance on professional advice as defense

A month into the Houston fraud and conspiracy trial of Enron Corp. founder Kenneth Lay and former chief executive Jeffrey Skilling, their defense teams were hammering away at a consistent theme: Complex financial structures and deals that prosecutors allege hid the company’s failing health were blessed by in-house and outside lawyers and accountants.

The so-called reliance on professional advice defense is viable if Lay and Skilling, neither of whom is an accountant or a lawyer, reasonably counted on those blessings and therefore lacked criminal intent, according to experts.

“The government is trying to paint this as a clear case of right vs. wrong,” said Robert Mintz, a former federal prosecutor and a white-collar defense attorney with McCarter & English. “What the defense is doing is suggesting this case is not nearly as black and white as the government is trying to suggest.”

Critical facts
But that tactic could cause defense headaches if prosecutors can show critical facts were concealed from professionals to gain those approvals.

“The reliance on professional advice defense depends on a full disclosure of the relevant facts,” said Sam Buell, a professor at the University of Texas School of Law and a former prosecutor with the Justice Department’s Enron Task Force.

“It’s not just a question of whether all the facts to one transaction were disclosed, but also whether a professional is being asked to give the advice within the right factual context,” Buell said.

Repeatedly lying
Lay and Skilling are accused of repeatedly lying to investors about Enron’s financial health when they allegedly knew complicated financial structures and accounting maneuvers propped up weak businesses before the company sought bankruptcy protection in December 2001.

The two men contend that no fraud occurred at Enron other than by a few executives who stole money, and negative publicity that siphoned market confidence fueled the company’s failure.

Four government witnesses have testified in as many weeks: former investor relations chief Mark Koenig; former broadband unit chief Kenneth Rice; former No. 2 investor relations executive and corporate secretary Paula Rieker; and Terry West, an in-house accountant who remains employed at Enron.

Corporate goals
While West has been the only accounting professional so far to testify, she was primarily a conduit to present budget documents to jurors as she explained how the company developed spending and profit plans to meet corporate goals of 15 percent annual earnings-per-share gains.

Defense attorneys also highlighted how Koenig, Rieker and Rice –all of whom have pleaded guilty to crimes and are cooperating with prosecutors — lacked expertise to know whether deals or disclosures were illegal or up to accounting snuff.

“They’re there to say what happened,” said Andrew Weissmann, former director of the Enron Task Force who will go into private practice with Jenner & Block next month. “Whether it’s illegal or not is something the judge will instruct the jury about.”

Former accountants
But next up will be two former in-house accountants: Wes Colwell, the chief accounting officer for Enron’s once-envied trading operation; and Wanda Curry, an accountant who dug into problems at the company’s highly-touted retail energy unit and found contracts overvalued by hundreds of millions of dollars.

Colwell in 2003 paid the Securities and Exchange Commission $500,000 to settle allegations that he and others manipulated Enron’s earnings by using trading profits to offset retail-unit losses and squirreled away higher-than-expected income to smooth earnings in later quarters. He neither admitted nor denied the allegations, and has not been charged with a crime.

On deck after Curry is David Delainey, former head of the retail unit, and Don Black, a former retail employee. Delainey pleaded guilty in October 2003 to insider trading.

The government’s witness list also includes other in-house Enron accountants and lawyers as well as two former external accountants who once handled Enron’s books. The defense witness list of nearly 200 people includes more outside accountants and outside lawyers, though they may or may not actually testify.

Merrill Lynch backfire
The reliance-on-professionals strategy backfired in the 2004 fraud and conspiracy trial of four former Merrill Lynch & Co. executives and two former midlevel Enron executives.

Five of those defendants were convicted of participating in a sham deal in late 1999 to help Enron disguise a loan as an asset sale to help the energy company appear to have met earnings targets. On paper, the deal involved Enron’s sale of three power plants mounted on barges to the brokerage.

But the sale came with a promise that Enron would resell or buy back the barges at a premium within six months. Enron came through when LJM, a private equity partnership run by then-Enron Chief Financial Officer Andrew Fastow almost exclusively to conduct deals with Enron, bought the barges in mid-2000. Fastow pleaded guilty to two counts of conspiracy in 2004 and is expected to be a key witness against Lay and Skilling.

Lawyers for Daniel Bayly, former head of investment banking for Merrill, called an in-house lawyer for the brokerage to the witness stand to testify that she discussed the deal with Bayly.

But she knew only that Enron had verbally promised to try to find another buyer for the barges after the deal closed. On cross-examination she said she would have “felt it was a sham” and blocked it had she known of a buyback promise.

“The key there is what did the professionals know, and what were they approving,” Weissmann said.

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