Lay and skilling trial

In the wake of Enron's downfall, federal investigators discovered evidence of corporate arrogance, greed, and fraud of an unprecedented level. In , the two highest ranking Enron executives involved in the scandal, Ken Lay and Jeff Skilling, facing charges of fraud, insider trading, and conspiracy, would have their fates determined by a Houston jury.

Prosecutors hoped their verdict would send a message to corporate America Enron Stock Chart. Fastow's Plea Agreement. The "Global Galactic" Document. Employees of Enron's auditor, Arthur Andersen, shredded thousands of pages of Enron documents at the urging of Andersen executives in Chicago. Six months after Enron's bankruptcy, the firm was convicted of obstruction of justice though the U. Supreme Court reversed the conviction in because of a flawed jury instruction.

The Enron debacle finished Arthur Andersen, formerly one of the nations "Big Five" accounting firms, putting its 85, employees out of work. Andersen argued that its audits technically complied with the law, at least in instances where they were not lied to by Enron employees.

But the firm's argument ignores the big picture: Andersen knowingly helped present to the world, as described by Bethany McLean and Peter Elkind in The Smartest Guys in the Room , a "completely illusory picture of Enron's financial health. Many analysts retained a "Buy" recommendation for Enron stock right up to the day the company sought bankruptcy protection.

Investment banks, including J. Morgan and Citigroup, eagerly and with a wink and a nod, provided the financial participation that made Enron's scandal possible, but refused to accept responsibility.

Even Enron's own Board of Directors, who failed to ask the tough questions that might have prevented much of the damage, refused to shoulder blame for the collapse. In response to criticism from Congress, the Board issued a report stating that they had "in good faith Caldwell filled the team with both experienced white-collar prosecutors and prosecutors with experience trying mafia cases. One member of the special task force, John Kroger, suggested the decision to include mafia prosecutors recognized that organized crime cases provided the best training ground for a case that required attorneys who were tough, aggressive, and understood how to handle complex cases.

The task force's investigation, which consumed four years, and which eventually resulted in charges against thirty-three individuals, required careful study of Enron's public statements going back several years--its quarterly and annual reports, its press releases, Skilling's testimony in before a committee of Congress, and transcripts of its presentations to stock analysts.

To the extent the public statements showed an inconsistency between what the top executives knew about the company's financial situation and what they were telling people outside the company, the statements could provide support for a charge of securities fraud.

When dozens of FBI agents descended on Enron's headquarters, they carted away hard drives and hundreds of boxes of documents. The task force had an onerous task: making sense and a criminal case out of approximately ten million documents. Enron had entered into 3, separate transactions with banks and investment funds that were designed in one way or another to hide Enron's financial reality, and each had its own often strange Enron code name, such as Braveheart, Grayhawk or Chewco.

Investigators struggled to make sense of transaction diagrams with jargon like "unwind swap sub hedge. In addition to Enron's documents, the task force interviewed former Enron employees.

For the most part, the investigators encountered a wall of corporate silence. Sherron Watkins, the whistle-blower who first confronted Ken Lay with evidence of accounting irregularities, provided help, but Watkins was not a member of Enron's inner-circle.

They also needed witnesses who had the ability to help jurors understand transactions that at first seemed mind-boggling in their complexity. Investigators focused considerable attention on the activities of Chief Financial Officer Andy Fastow who, they realized, was the central figure in Enron's illegal activities. Although it was not a crime, however ethically troubling, for someone in Fastow's position to have created his own personal investment company, LJM, to buy underperforming and often near worthless assets of Enron in order to get them off the company's financial reports, it was a crime for him to secure promises from Enron that the assets would later be bought back from him at an inflated price to protect him from any financial risk.

Prosecutors came to see Fastow, someone close to Skilling and Lay and in a strategic position within Enron, as the possible star witness in any prosecution of the firm's two top executives. In the words of one member of the DOJ task force, "In mafia cases, you flip capos against bosses. Fastow, we believed, was an Enron capo. On Halloween Day , a grand jury indicted Andy Fastow on seventy-eight counts of fraudulent conduct, but prosecutors' hopes that Fastow would quickly agree to plead guilty and cooperate were soon dashed.

His attorneys signaled that they planned to dig in and defend their client in a trial. But prosecutors have means of applying pressure. In Fastow's case, prosecutors decided that filing criminal charges against his wife, Lea, might provide the pressure they needed to convince Fastow to plead guilty. Fastow, they believed, might conclude that a plea agreement was preferable to having his two young sons raised by others while the Fastows served potentially lengthy prison terms.

The basis for the charge against Lea Fastow was the tax form she signed identifying two checks she received as "gifts" rather than investment income. The checks related to Andy Fastow's "RADR transaction" in which he received an above market rate of interest on a loan and obtained kickbacks from a co-conspirator were disguised in the form of Hanukkah "gift checks" in the names of his wife and children. Although Lea Fastow was a bit player in a scheme wholly designed by her husband, prosecutors charged her with criminal tax evasion for knowingly signing the fraudulent joint tax return.

Normally, tax evasion of the magnitude involved here would result in a civil settlement with the IRS, involving payment of back taxes and a fine. Although a strong argument can be made that the hardball tactic used by prosecutors was unethical, it worked.

On January 14, , in Houston's Federal District Courthouse, Fastow stood before the bench next to his lawyers as Judge Kenneth Hoyt asked, "I understand you will be entering a plea of guilty this afternoon?

Fastow's decision to plead guilty would make him the star witness for the prosecution in the trial of Lay and Skilling. In the years between Enron's collapse and their trial, Ken Lay and Jeff Skilling took different approaches.

Lay laid low and made no public statements. Through his surrogates, however, he made clear his view that he was a victim undone by corrupt subordinates and now unfairly hounded by the media. Skilling, on the other hand, took the offensive. In testimony before Congress in , Skilling claimed that Enron suffered from "a liquidity problem" and "people got scared," sending the company's stock into a tailspin.

All of the talk about fraud, he said "is ridiculous. On February 18, , a Houston grand jury indicted Jeff Skilling on thirty-five counts, including charges of fraud, insider trading, and conspiracy. Skilling's lawyer, Daniel Petrocelli best known for representing the family of Daniel Goldman in their successful civil suit against O.

Simpson waved a copy of the indictment in front of reporters and pronounced it "sixty pages of nothing. The grand jury returned an eleven-count indictment charging him with conspiracy to commit securities fraud, four counts of securities fraud and two counts of wire fraud, one count of bank fraud and three counts of making false statements to a bank. Lay was brought to a holding cell for three hours before his scheduled arraignment.

During his brief stay in his cell, a fellow prisoner asked him for investment advice. Jury selection began on January 30, at the federal courthouse in Houston the defense, claiming that area residents were prejudiced against Enron, had unsuccessfully sought a change in venue. Skilling added that he and Lay tried to meet for up to an hour once a week, but they didn't socialize. Skilling insisted he was never aware of anyone committing crimes at Enron during his time with the company.

The ex-CEO, in his third day on the stand in his fraud and conspiracy trial, continued addressing prosecution testimony that painted him as an earnings-obsessed leader so intent on wowing Wall Street that his subordinates resorted to fraud with his knowledge. He addressed one of the most notorious elements of the scandal that included Enron's swift descent into bankruptcy protection in December — partnerships created and run by former chief financial officer Andrew Fastow to conduct deals with the energy company.

The indictment against him alleges Skilling knew Fastow and former Enron chief accounting officer Richard Causey hatched side agreements guaranteeing that Fastow's personally lucrative LJM partnerships wouldn't lose money on deals with Enron.

Fastow testified last month that Skilling gave him verbal "bear hugs" approving two deals, and said Causey assured him Skilling knew about other side deals the ex-CFO memorialized in a handwritten list. On Wednesday, Skilling denied that he was ever told about the list or gave any verbal assurances that would have eliminated any risk to LJM, making the purported asset sales disguised loans. Fastow has testified that Enron turned to the partnerships to buy its poor assets and investments so the energy company could hide debt and boost earnings.

But Skilling said Fastow pitched the partnerships as quick buyers for Enron assets, which the ex-CEO thought would help the energy company manage risk while benefiting shareholders.

Skilling's lawyer told the judge Tuesday that the direct examination would go on for a few more days, reports CBS News legal analyst Andrew Cohen.