Executives resisting Enron prosecutors
Dec. 28, 2002, 9:59AM
chron.com
By PETER BEHR and CARRIE JOHNSON
The Washington Post
Federal prosecutors, preparing to expand their case against Enron
Corp. next month, are running into resistance from a small group of
senior executives who occupied key positions at or near the top of the
Houston energy company, people close to the investigation said.
Richard A. Causey, Enron Corp.'s former chief accounting officer, is
not cooperating with prosecutors seeking his testimony against the
company's former chief executive, Jeffrey K. Skilling, and its former
chairman Kenneth L. Lay, the sources said. By pleading guilty and
agreeing to testify, Causey could receive a promise of leniency.
But Causey -- who approved the huge secretive financial deals that
helped topple Enron -- maintains that he did nothing wrong and will
defend himself if he is indicted, which is expected to happen by the
middle of January, lawyers in the case said. Causey's lawyer, Reid
Weingarten, had no comment on Causey's response to the Enron
investigation. He has said previously that Causey did not violate
accounting regulations when he approved Enron deals.
A second former high-ranking executive, Kenneth D. Rice, likewise
says he broke no laws when he headed Enron Broadband Services,
which Skilling promoted heavily two years ago, shortly before the unit
collapsed.
Prosecutors have sought to incriminate Rice through the testimony of
his subordinates. Several of Rice's deputies have been told that they
are targets in the investigation, and at least one of them is
cooperating with prosecutors, lawyers in the case confirmed.
Former chief financial officer Andrew S. Fastow, who was Skilling's
key deputy, pleaded not guilty to fraud and conspiracy charges and
has not cooperated with investigators, lawyers said.
The pressure on Enron executives is intense, more in the style of
organized-crime prosecutions than white-collar crime cases, some
lawyers said. "Prosecutors are putting the squeeze on family
members" of potential defendants by going after their financial assets,
said former U.S. Attorney Daniel K. Hedges, a Houston lawyer.
Justice Department spokesman Mark Covallo would not discuss
specifics of the Enron case. Corporate-fraud investigators are
determined "to bring the greatest amount of pressure to bear on
white-collar criminals, " he said.
The willingness of Causey and some former colleagues to challenge
prosecutors reflects a hardened stance by those insiders, lawyers
said. Without their help, the government would have to convince
juries that Enron's financial reports were systematically distorted by
improper -- and bewildering -- accounting maneuvers approved at the
top of the company.
"The government frightened these guys," said a lawyer for the former
executives. "Now, it's getting to the substance of the case and these
people are catching their breath and saying, `OK, show me what I
did.'"
Any leverage the executives gain by resisting prosecutors could shrink
if evidence accumulates against them in the coming year. In Causey's
case, the next few weeks are pivotal. A pretrial conference is
scheduled for Jan. 13 in the government's case against Fastow.
The Enron task force said it expects to expand the Fastow indictment
then, and lawyers in the case believe that Causey will be added as a
defendant if he does not decide to cooperate before that date.
Prosecutors are seeking testimony implicating Enron's top officials in
accounting fraud that led to the company's collapse and huge losses by
shareholders. If prosecutors get no such help from key lieutenants,
they are prepared to make a more circumstantial case that accounting
fraud was so widespread that Enron's top executives had to have
known about it, lawyers said. For example, sources said, the task
force is looking into whether Enron used improper accounting methods
to inflate the value of pipeline and power plant assets, as a report by
Enron's interim chief executive indicated last April.
Testimony from high-level subordinates is invaluable in prosecuting
chief executives in white collar criminal cases, especially if
incriminating documents that reached the chief executive are not found, Hedges said. Such
testimony "is tremendously important. If you don't have a good paper trail, that is about all
that is left," he said.
Investigators in the Enron investigation and one into WorldCom Inc.'s $9 billion accounting
scandal, have not found such documents clearly implicating the top executives.
In the WorldCom case, five former executives, indicted or charged with fraud, are cooperating
with prosecutors. Former finance chief Scott D. Sullivan is the only one of the five who met
frequently with chief executive Bernard J. Ebbers. While Sullivan has reportedly described
conversations with Ebbers about the company's accounting manipulation, his account doesn't
establish a clear case against Ebbers, the Wall Street Journal reported last week.
In its search for links to Skilling, the Enron prosecutors are pursuing allegations that Rice
and his Internet broadband team allegedly produced greatly inflated projections for their
projects. Skilling presented those projections to securities analysts at a January 2001
conference and the analysts' excited response gave Enron stock a strong if temporary boost
while some executives were selling millions of dollars worth of Enron shares.
Skilling boasted to the analysts that Enron's broadband strategy of distributing first-run
movies via the Internet would be worth than $20 a share to investors before the end of the
decade -- roughly equivalent to $20 billion in annual cash flow. The venture was dead six
months later, which caught Enron by surprise, Skilling has said.
Edward S. Smida, one of Rice's subordinates in the broadband venture, is a cooperating
witness and supports allegations that Rice's staff purposefully produced a vastly exaggerated
projection for use at the analysts' meetings, people close to the case said. Smida's lawyer,
Philip H. Hilder, declined to comment.
Witnesses have told the grand jury that Rice's team -- using a similar projection -- helped
Enron "manufacture" $110 million in projected earnings from the broadband venture that
were included in financial statements in 2000 and 2001, sources in the case said. A crucial
question is whether members of Rice's team have evidence or persuasive testimony that Rice
asked for and accepted inflated projections about the broadband business, lawyers said.
"Ken Rice did nothing improper, much less illegal," said his lawyer, William D. Dolan.
Lay, the former Enron chairman, has also been under scrutiny by the grand jury. A thick
binder on in the grand jury room in Houston's federal courthouse this month was labeled "Ken
Lay exhibits," according to one participant.
Prosecutors are trying to determine whether Lay violated securities laws by assuring
shareholders that the company was in good shape in the fall of 2001, when he was still selling
stock. The issue is whether Lay knew a collapse was looming, but hid the information -- which
Lay denies. The much larger amount of Enron shares that Lay did not sell is evidence that he
thought the company would rebound, Lay's attorney Michael Ramsey said. "They are definitely
investigating that (the stock sales)," said Ramsey. "They haven't asked me about his past
statements." Ramsey said that he has no indication that prosecutors plan to indict Lay next
month.
Some details of the government's case against Causey appeared as part of the indictment of
Fastow in October.
According to two prosecution witnesses cited in the indictment, Fastow and Causey had a
secret understanding -- called the "Global Galactic" deal -- that Fastow's private partnerships
would not lose money in any transactions with Enron. Such an agreement would have violated
accounting rules, the government charged, implicating both executives in deceptive conduct.
Causey maintains there was no such agreement, associates said.
On Fastow's and Causey's office calendars for Aug. 30, 2000, is a meeting scheduled for the
two executives concerning a "Global Galactic" agreement, according to evidence before the
grand jury. The calendar entry does not say more than that. Lawyers in the case say the
agreement was not written down; if it existed, it was based on a handshake understanding
between the two executives. At this point, the evidence such an agreement existed has not
brought Causey to the government's side in the case.
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