First Enron trial will provide a window to what’s coming

Kristen Hays

Wednesday, June 2, 2004 | 9:17 a.m.

HOUSTON -- The first criminal trial involving former Enron Corp. executives involves no notorious defendants. The alleged shady deal at its center didn't fuel the company's crash.

Even the judge presiding over the June 7 trial has defined it as "not a big, high-profile Enron case."

But the conspiracy trial of a former Enron finance executive, a former in-house accountant and four former Merrill Lynch & Co. executives will mark the first time federal prosecutors try to persuade jurors to convict people who once worked at the scandal-ridden, bankrupt company, and defense attorneys are wary that their clients could be held responsible for the entire mess.

"It's not about Andy Fastow, it's not about Jeff Skilling, it's not about Ken Lay. But I think the public thinks that it is. It's about a very discreet transaction, and we are concerned that the public understand this is not about the demise of Enron," said Dan Cogdell, who represents former Enron accountant Sheila Kahanek.

Former finance chief Fastow, former CEO Skilling and former chairman Lay are the most recognizable of former top executives of the company that imploded in December 2001 amid revelations of hidden debt, inflated profits and accounting skullduggery.

Fastow has pleaded guilty to engineering schemes to manipulate Enron's books and enrich himself. Skilling has pleaded innocent to 35 counts of fraud, conspiracy and insider trading. Lay, who maintains his innocence, has not been charged.

Of the three, only Fastow is alleged to have played a role in the deal at issue in next month's trial.

The indictment alleges Enron, with Merrill Lynch's knowledge, booked a profit from a sham December 1999 sale of Nigerian barges to appear to have met earnings targets. Prosecutors say Fastow wiped out the deal's legitimacy with a secret promise that Enron would buy back the barges at a premium within six months. One of his partnerships bought them six months later.

The deal might not have killed Enron, but that type of alleged behavior to manufacture earnings might have foreshadowed what later fueled Enron's 2001 collapse, experts said.

"It's hard to argue that this is not a significant Enron case," said David Berg, a civil litigator and author of "The Trial Lawyer: What It Takes to Win." "It's indicative of the kind of dirty pool Enron was capable of."

Each of the six defendants in the so-called "barge case" is charged with conspiracy for allegedly playing a role in pushing the deal through or hiding the secret buyback promise.

In addition to Kahanek, the defendants are: Dan Boyle, a former finance executive on Fastow's staff; Daniel Bayly, former global head and chairman of investment banking; James A. Brown, former head of Merrill's Strategic Asset Lease and Finance group; Robert Furst, former managing director who answered to Bayly; and William Fuhs, former vice president who answered to Brown.

Brown and Fuhs also are charged with lying to investigators and a grand jury in Houston.

Prosecutors have yet to say whether Fastow will testify. If he does, it will mark his debut as a prosecution witness. He pleaded guilty in January to two counts of conspiracy, and agreed to help prosecutors pursue other cases and testify when needed.

According to a July 2003 report by Neal Batson, former examiner in Enron's massive bankruptcy, the saga began in December 1999 when then-Enron treasurer Jeffrey McMahon approached Furst about buying an interest in the barges so Enron could book a profit. McMahon, who has not been charged, promised Merrill's "hold" on the barges would last six months or less, and that Merrill would be bought out at a premium.

According to Batson's extensive report, Furst supported the deal in a memo to Bayly. Brown, who questioned whether it could be booked as a sale and was concerned that the buyback deal wasn't in writing, helped convene a committee to examine the deal after Furst's then-boss, Schuyler Tilney, said it was important to the brokerage's desire to secure more lucrative deals with Enron.

Tilney, Furst, Bayly and Tilney's former boss, Tom Davis, are named in a pending Securities and Exchange Commission complaint regarding the barge deal. Merrill fired Tilney and Davis in September 2002 when both refused to cooperate with investigators. Neither Tilney nor Davis has been charged.

Internal Merrill e-mails revealed further that after Davis approved the transaction, Bayly called Fastow, secured verbal assurances of the buyback, and told Brown to close the deal. Brown assigned Fuhs to get it done.

The indictment alleges that in January 2000, Kahanek "severely reprimanded" an Enron colleague for putting the deal and its buyback agreement in writing and ordered the document destroyed.

And in June 2000, Boyle told Fuhs that Enron had found a buyer at the "agreed upon" price after Fastow and others arranged for one of Fastow's partnerships, called LJM2, to buy Merrill's interest, the indictment said.

In early 2001, Brown sent an e-mail to Merrill colleagues regarding a deal with a different company that included a verbal side deal, noting, "We had a similar precedent with Enron last year, and we had Fastow get on the phone with Bayly and lawyers and promise to pay us back no matter what. Deal was approved and all went well."