More from Alex's MDGM board:
Posted by: Alex Chory
In reply to: bartermania who wrote msg# 1347 Date:1/8/2006 3:19:11 PM
Post #of 1349
yes, well since I'm into the study of Accounting I always
come across this stuff, ,,,,,$$$$$
Sunday, January 8,2006
The 'Idiot Defense'
Will jury buy Enron chief's claims of ignorance?
BY GREG BURNS
CHICAGO - The Enron Corp. trial opening Jan. 30 in Houston is shaping up to be the biggest test yet of the so-called "idiot defense."
Former Enron chief Kenneth Lay has vowed to tell jurors from the witness stand that he knew nothing about crimes committed at the energy company.
And while the recent plea bargain by co-defendant Richard Causey, a former top Enron accountant, is a blow to the defense, it is unlikely to change a defense strategy that boils down to a simple theme: Blame Fastow.
In a campaign of public appearances since his indictment last year, Lay has conceded only that he erred in trusting Andrew Fastow, the ex-Enron chief financial officer who is cooperating with the government against him.
No chief executive "knows everything going on in his company," Lay said in one of his speeches, so no one should expect him to take responsibility for the crimes of an executive he portrays as Enron's chief villain. "I did not know what he was doing."
It's a risky approach, legal experts say. In the crackdown on corporate fraud, claiming innocence by virtue of ignorance has a checkered history. Also known as the "dummy" or "ostrich" defense, it has led to the conviction of such high-profile corporate criminals as Adelphia's John Rigas and WorldCom's Bernard Ebbers.
It worked, however, for HealthSouth's Richard Scrushy, who was found not guilty in a jury trial last year even after a slew of former insiders pointed the finger at him.
Last week, jurors were to resume deliberations in the criminal trial of Walter Forbes, who contends he knew nothing of the accounting fraud committed during his long tenure at the top of the public company now known as Cendant Corp.
Like Lay, Forbes blames subordinates. Like Lay, he pins the crime mostly on a CFO who is cooperating with prosecutors.
And like Lay, the key issue seems obvious: How could a seasoned executive paid lavishly over a long period know nothing about such an audacious rip-off?
"This wasn't minutiae in the case of Enron. This was fundamental, at the very highest levels," said Charles Elson, a corporate governance expert at the University of Delaware. "If the CEO isn't responsible for that, what is he responsible for?"
Michael Clark, a former federal prosecutor who has become a defense attorney, agrees. "It's a very difficult sell to say a person making that much money, who has been in a leadership role that long, could be that oblivious," said Clark, who participated in the criminal case involving Enron's broadband division. "This is a high-risk defense."
Though the seven conspiracy and fraud counts against Lay are much narrower than the 35 charges faced by his co-defendant, former Enron executive Jeffrey Skilling, Lay by his own admission faces a high hurdle of skepticism.
In a 2004 news conference, Lay lamented that finding a fair-minded jury would be difficult in Enron's hometown of Houston, where his trial is being held, because "so many people" had made up their minds against him.
The plea by Causey could rekindle the public's bad memories, and defense attorneys last week renewed calls for a change of venue, given the negative publicity on the eve of jury selection.
Yet, even with Causey available to corroborate parts of Fastow's testimony, the case against Lay will be no slam-dunk for the prosecution. The government must prove decisively that Lay knew what was going on in the months leading up to Enron's failure, said Greg Jones of Chicago's Grippo & Elden, a former federal prosecutor not involved in the case.
"Saying, 'It was obvious' and 'He had to know' isn't going to do it," Jones said. "You want Fastow to say Lay knew of this stuff and authorized it. You want a direct, dirty conversation."
That might be impossible to achieve. The case against Lay focuses on public statements he made as the company collapsed in autumn 2001, after he took back the CEO post he had relinquished briefly to Skilling, whose charges cover a considerably longer period.
What Lay knew and when he knew it are the crucial elements in the cover-up he is accused of leading.
In September 2001, the indictment alleges, Lay knew he had sold $24 million in Enron stock through private transactions, but he told Enron employees that he and other top officers were snapping up the supposedly bargain-priced shares.
In October 2001, Lay knew that Enron's water business was failing, but claimed it was growing to avoid the financial consequences of the truth, the indictment alleges.
Later in October, Lay described a huge operating loss as an unusual, one-time event, and an overvalued Brazilian power plant as "a good asset." He touted an energy-services unit riddled with hidden losses, and he grossly inflated the value of Enron's international portfolio.
Addressing Wall Street analysts as Enron stock plunged, Lay knowingly concealed "numerous dire facts," while claiming to be "disclosing everything," the indictment alleges.
According to the indictment, on that same day he lied to his 28,000 employees again, telling them the sinking company had plenty of cash. In the end, thousands of employees lost their jobs and retirement benefits based on worthless Enron stock.
Finally, on Nov. 12, Lay told analysts that Enron had nothing to hide though he knew its financial problems were much bigger than disclosed.
Lay has said Enron was a solid company until Fastow's thieving drove it under.
Unlike Fastow, who has admitted to diverting Enron's money to himself, Lay is not accused of benefiting directly from the fraud. He did, however, reap more than $200 million in profits from stock sales and almost $20 million in salary and bonuses between 1998 and Enron's 2001 bankruptcy, the indictment says.
"You could simply say, 'I relied on other people for this information, and they lied to me,' or 'I just didn't understand these statements were misleading,' " said David Ruder, Northwestern University law school professor and a former Securities and Exchange Commission chairman. "The burden is on the government in these cases to show knowledge."
Given the need to establish the defendant's state of mind and the complexities of the transactions involved, jury selection will be critical, said David Berg, a Houston trial lawyer. In the HealthSouth criminal trial, Scrushy benefited from years of charity to the black community in Birmingham, Ala., Berg said. "That was all about choosing the right jury."
Lay's philanthropy in Houston could help him overcome the notoriety of his case, Berg said. "There is a reservoir of support here."
But Lay is likely to face a more sophisticated panel in Houston than Scrushy did in Alabama, he added. "There will be some businesspeople on that jury."
Clark said directions given at the end of the trial could be critical, especially if U.S. District Judge Sim Lake provides an "ostrich instruction," telling jurors to convict if the defendants attempted to avoid knowing the obvious. That sort of "reckless indifference" could be a "real issue" for Lay.
At the same time, the length of the trial - an estimated four to six months - could work in Lay's favor. Over a long period, Clark said, jurors tend to "focus on the individual rather than the crime" and "begin to resent their lives are being disrupted."
CEO trials can be marathons. In the Cendant case, Forbes is being tried for a second time because a previous jury, subjected to months of testimony, deadlocked after 33 days of deliberations. The original panel convicted Forbes' No. 2, Kirk Shelton, who is free on bond after being sentenced to 10 years in prison.
No one disputes that accounting fraud occurred at CUC International, which merged with HFS Inc. in 1997 to form Cendant, a travel and real estate conglomerate. But while documents linked Shelton to the crime, the primary evidence against Forbes was the testimony of his ex-CFO, Cosmo Corigliano. Forbes claims he was a hands-off executive who knew little about his company's finances and operations, trusting to subordinates and auditors. He has denied ever discussing the fraud with Corigliano.
Prosecutors countered that Forbes made a fortune while lying to investors about results that he knew were phony. Jurors in Hartford, Conn., who have deliberated nine days so far without reaching a verdict, were slated to continue after the holiday break.