The trial of former Enron bosses Ken Lay and Jeff Skilling will shift into a new gear next week when the prosecution calls its star witness, former chief financial officer Andrew Fastow.
Mr Fastow, who ran a complex web of financial partnerships that concealed the disastrous state of Enron's finances, pleaded guilty in January 2004 to two counts of conspiracy. He has agreed to serve the maximum 10-year sentence for the crimes and has been co-operating with prosecutors in the case against Mr Lay and Mr Skilling.
Mr Fastow skimmed about $60 million (€49.8 million) in management fees for running the partnerships, which were created solely to buy Enron assets and conduct other deals for the energy company.
Mr Lay and Mr Skilling have blamed Mr Fastow for Enron's fraudulent financial dealings and manipulation of earnings, claiming that they knew nothing of his illegal activities.
Defence lawyers will seek to portray Mr Fastow as a crook whose thefts, when revealed, triggered the loss of confidence that sent Enron's share price through the floor and precipitated its bankruptcy. Prosecutors hope his testimony will connect Mr Lay and Mr Skilling more closely to the fraudulent practices that concealed Enron's massive losses and manipulated earnings. This week saw Kevin Hannon, former chief executive of Enron's disastrous broadband unit, testify that Mr Skilling told top executives "they're on to us" after a small Wall Street analyst firm questioned the company's earnings. Mr Hannon, who has pleaded guilty to a conspiracy charge, said that Mr Lay and Mr Skilling believed the analysis showed "the market was starting to understand how Enron was making money".
Mr Hannon claimed that Mr Skilling made six false statements to analysts about the broadband division in March 2001, claiming that the division was doing well after Mr Hannon had told him that the opposite was the case.
David Delainey, the former head of Enron Energy Services, the company's troubled retail energy division, told the court that he had worried in 2000 if it was proper to use off-the-book financial structures backed by Enron shares as insurance against losses. He said that Mr Skilling and Mr Fastow both insisted that the practice had been approved.
"I was definitely concerned about the Enron stock part of it," he said. Mr Delainey admitted that he lied repeatedly to employees and investors about Enron's motives in folding its loss-making retail energy division into its profitable wholesale division. The company claimed that the move was a straightforward act of consolidation but Mr Delainey said that, at a meeting in Mr Skilling's office in March 2001, executives made clear that Enron's true purpose was to hide $200 million in losses from investors.
"I wish on my kids' lives that I had stepped up from that table and walked away," Mr Delainey said. Under cross-examination, he said that when he first heard of the plan to transfer losses from one division to another, it seemed like a good idea.
The trial in Houston, Texas, has moved along at such a swift pace that prosecutors now expect to wrap up their case by the end of March, two months ahead of schedule. Until now, defence lawyers have undermined the testimony of many prosecution witnesses by pointing out that they were testifying in the hope of receiving more lenient sentences for their own crimes. The lawyers have highlighted inconsistencies between what such witnesses said before they reached a pleas deal with prosecutors and their testimony in court. This tactic could prove fruitless when Mr Fastow takes the stand next week because he has already accepted the maximum sentence for his crimes and has nothing to gain by testifying. It will be the first time that Mr Fastow, who pleaded the Fifth Amendment to avoid testifying to a congressional inquiry, will have spoken openly about his criminal activities at Enron.
Mr Fastow was a central figure in constructing the elaborate house of cards that was Enron's financial structure. His testimony will be crucial to the prosecution case that Mr Lay and Mr Skilling knew the true state of Enron's finances and deliberately lied to investors about it.
