Chicago Tribune

CHICAGO – The Enron Corp. trial opening Jan. 30 in Houston is shaping up to be the biggest test yet of the so-called idiot defense.

Former Enron chief Kenneth Lay has vowed to tell jurors from the witness stand that he knew nothing about crimes committed at the energy company.

And while last Wednesday’s plea bargain by co-defendant Richard Causey, a former top Enron accountant, is a blow to the defense, it is unlikely to change a defense strategy that boils down to a simple theme: Blame Fastow.

In a campaign of public appearances since his indictment last year, Lay has conceded only that he erred in trusting Andrew Fastow, the ex-Enron chief financial officer who is cooperating with the government against him.

No chief executive “knows everything going on in his company,” Lay said in one of his speeches, so no one should expect him to take responsibility for the crimes of an executive he portrays as Enron’s chief villain. “I did not know what he was doing.”

It’s a risky approach, legal experts say. In the crackdown on corporate fraud, claiming innocence by virtue of ignorance has a checkered history. Also known as the “dummy” or “ostrich” defense, it has led to the convictions of such high-profile corporate criminals as Adelphia’s John Rigas and WorldCom’s Bernard Ebbers.

It worked, however, for HealthSouth’s Richard Scrushy, who was found not guilty in a jury trial last year even after a slew of former insiders pointed the finger at him.

Though the seven conspiracy and fraud counts against Lay are much narrower than the 35 charges faced by his co-defendant, former Enron executive Jeffrey Skilling, Lay by his own admission faces a high hurdle of skepticism.

In a 2004 news conference, Lay lamented that finding a fair-minded jury would be difficult in Enron’s hometown of Houston, where his trial is being held, because “so many people” had made up their minds against him.

Last week’s plea by Causey could rekindle the public’s bad memories, and defense attorneys are expected to renew calls for a change of venue, given the negative publicity on the eve of jury selection.

Yet even with Causey available to corroborate parts of Fastow’s testimony, the case against Lay will be no slam-dunk for the prosecution.

The government must prove decisively that Lay knew what was going on in the months leading up to Enron’s failure, said Greg Jones of Chicago’s Grippo & Elden, a former federal prosecutor not involved in the case.

“Saying, “It was obvious,’ and “He had to know’ isn’t going to do it. You want Fastow to say Lay knew of this stuff and authorized it. You want a direct, dirty conversation,” Jones said.

That might be impossible to achieve. The case against Lay focuses on public statements he made as the company collapsed in autumn 2001, after he took back the CEO post that he had briefly relinquished to Skilling, whose charges cover a considerably longer time period.

What Lay knew and when he knew it is the crucial element in the cover-up he is accused of leading.

In September 2001, the indictment alleges, Lay knew he had sold $24 million in Enron stock through private transactions, but he told Enron employees that he and other top officers were snapping up the supposedly bargain-priced shares.

In October 2001, Lay knew that Enron’s water business was failing but claimed it was growing to avoid the financial consequences of the truth, the indictment alleges.

Later in October, Lay described a huge operating loss as an unusual, one-time event, and an overvalued Brazilian power plant as “a good asset.” He touted an energy-services unit riddled with hidden losses, and he grossly inflated the value of Enron’s international portfolio.

Addressing Wall Street analysts as Enron stock plunged, Lay knowingly concealed “numerous dire facts,” while claiming to be “disclosing everything,” the indictment alleges. According to the indictment, on that same day he lied to his 28,000 employees again, telling them the sinking company had plenty of cash. In the end, thousands of employees lost both their jobs and retirement benefits based on worthless Enron stock.

Finally, on Nov. 12, Lay told analysts that Enron had nothing to hide though he knew its financial problems were much bigger than disclosed.

Lay has said Enron was a solid company until Fastow’s thieving drove it under.

Unlike Fastow, who has admitted to diverting Enron’s money to himself, Lay is not accused of benefiting directly from the fraud. He did, however, reap more than $200 million in profits from stock sales and almost $20 million in salary and bonuses between 1998 and Enron’s 2001 bankruptcy, the indictment says.

“You could simply say, “I relied on other people for this information, and they lied to me,’ or “I just didn’t understand these statements were misleading,”‘ said David Ruder, Northwestern University law school professor and a former Securities and Exchange Commission chairman. “The burden is on the government in these cases to show knowledge.”