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Executives Resisting Enron Prosecutors

Dec 28, 2002 | 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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