The Enron trial and its link to Sarbanes-Oxley.

As you read this, the long-awaited trial of former Enron Corp. CEOs Ken Lay and Jeff Skilling is likely to be in full swing. Ken Lay is charged with seven counts of conspiracy and fraud, while Skilling is charged with 31 counts of fraud, conspiracy and insider trading. As we are all well aware, Enron's demise, as well as other scandals, such as the accounting blowups at WorldCom Inc. and HealthSouth Corp., led to the passage of the Sarbanes-Oxley Act of 2002.

The results of the trials completed for previous top executives have been mixed. The government's track record from its crackdown has included wins, losses and a few mistrials. At this point, only a few of the top executives accused of corporate wrongdoing have been sentenced to prison. Bernie Ebbers, former CEO of WorldCom, is going to jail for 25 years. Yet, Richard Scrushy walked. (Not only was he acquitted last year, but now he is suing HealthSouth for severance pay!)

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Still, this Enron trial is really the capstone event, and its outcome will impact the perception of how Sarbanes-Oxley and other reforms are working. If Lay and Skilling go to jail, the perception will be that the new law is working as intended, even though, technically, they are not being tried under Sarbanes-Oxley, which was passed after Enron's collapse. If they walk, the perception may be that Sarbanes-Oxley is not enough (I shudder to think!).

It is interesting to point out that in most cases, the financial executives have pled guilty and received lesser sentences for cooperating in the prosecution of their former bosses. These former finance executives have proved to be the key prosecution witnesses.

Causey Plea Changes the Dynamic

In Enron's case, former Chief Financial Officer Andrew Fastow pled guilty and received a sentence of 10 years in return for his testimony. Just before the trial was scheduled to begin, Richard Causey, Enron's former chief accounting officer, agreed to a plea with a reduced sentence of seven years, which could drop to five years, depending on how useful he is as a witness in this trial.

The fact that Causey has pled guilty and will not be tried alongside Lay and Skilling could change the whole dynamic of the trial. It cuts out the need for the prosecution to elicit long days of complex accounting testimony. The focus can be on what Lay and Skilling knew about the company's finances and when--rather than be dragged down into the technical intricacies of complex accounting. This could significantly shorten the trial.

The prosecutors can focus on non-disclosure of material facts, rather than fraudulent accounting. In addition, Causey may be a more credible witness for the prosecution than Fastow, the former CFO; unlike Fastow, Causey didn't skim millions for himself from the company.

It is going to be difficult for Lay and Skilling to show that they were competent enough to run the company but didn't understand the financial intricacies and relied on subordinates and outside professionals. This may be a tough sell, particularly since the Bernie Ebbers verdict sent a message that if you are going to use the "head in the sand" defense, the jury may not buy it.

From Basic Math to Advanced Algebra

However, the accounting and financial issues are extraordinarily complex in the Enron case. I heard one pundit say that if WorldCom was basic math, Enron is advanced algebra. If the defense can confuse the jury, the jurors might buy the argument that no one could have understood the shenanigans that Fastow and others pulled off.

And, as the trial of Richard Scrushy showed, complex financial prosecutions are tough to win. (Albeit, Scrushy had the advantage of being in front of the jury pool on a daily basis, evangelizing on local television in Birmingham, Ala.)

There was no smoking gun in any of the previous cases, and there doesn't appear that there will be one in the Enron trial, either. As in the earlier trials, heavy reliance will be placed on the testimony of others, principally former finance executives, who have already pled guilty. In the end, as indicated by the previous trials, the fate of Lay and Skilling, and the perception of how the reforms are working, lie in the hands of the jury.