Wednesday, February 22, 2006

Witness: Skilling Ordered Earnings Changes

Yahoo! News
Witness: Skilling Ordered Earnings Changes
By KRISTEN HAYS, AP Business Writer

Former Enron Corp. Chief Executive Jeffrey Skilling ordered last-minute changes to at least two quarterly earnings reports so the company could meet or beat analysts' expectations, a former vice president of investor relations testified Tuesday.

Paula Rieker, 51, was poised and articulate, often addressing the jury directly, when she described the chaos and high emotions as what was once the nation's seventh-largest company descended into bankruptcy proceedings in December 2001.

The government's fourth witness in the fraud and conspiracy trial of Skilling and Lay, Rieker recalled the board of directors were "outraged" upon learning in February 2002 that Enron founder Kenneth Lay had sold more than $70 million in Enron stock back to the company in 2001.

Even a board member who supported him, John Duncan, accused Lay of using the company "like a damn ATM machine," testified Rieker, whose last position was corporate secretary, answering to Lay.

Lay is not charged with any offenses related to illegal stock sales. But he is accused of lying to investors about Enron's health in the months after Skilling's abrupt mid-August 2001 resignation until the company failed.

Rieker testified earlier on Tuesday that she learned in January 2000 from her then-boss, former Enron investor-relations chief Mark Koenig, that Skilling ordered a penny increase in company earnings-per-share figures for the fourth quarter of 1999 to match analysts' expectations of 31 cents.

She also said Koenig told her Skilling ordered a two-cent increase to reported earnings per share in the second quarter of 2000 — hours before they were officially released, so Enron could top expectations and generate Wall Street enthusiasm for its stock.

Rieker's testimony was stronger than that of Koenig, the prosecution's first witness. While she said Koenig told her Skilling ordered the changes, Koenig stopped short of saying his boss explicitly issued such an order, testifying only that Skilling was authorized to do so.

Neither Rieker nor Koenig addressed what accounting methods may have been behind the changes. Rieker also said nothing about hearing any such orders from Skilling directly.

In an example of how Lay allegedly hid bad news from investors, Rieker said he told the company's directors in October 2001 that Enron's highly touted retail-energy unit had undergone "lots of retooling" to address chaotic billing and paltry cash flow.

Those issues included up to $1 billion in uncollected bills because of the company's chaotic billing procedures and lack of cash flow. Rieker said Lay told the board "there had been lots of retooling" with "good progress" in solving problems.

But, she said, Lay neglected to disclose the unit's issues days later to Wall Street while praising its reported profitability upon announcing more than $600 million in third-quarter 2001 losses and a $1.2 billion writedown in shareholder equity.

Her testimony appeared to contradict Lay's oft-repeated claim that he believed Enron was strong when he resumed the CEO position. She became corporate secretary in September, and in that role she maintained board meeting minutes and answered to Lay.

Six weeks after announcing the losses, Rieker said Enron's board met several times a week — sometimes more than once a day — instead of its usual five times a year.

Three days after the earnings announcement, Rieker said Lay told directors his biggest concern was how much money Enron Chief Financial Officer Andrew Fastow pocketed from running two partnerships, LJM1 and LJM2.

Fastow had sold his interest in the partnerships by then, but questions had arisen in the press about the propriety of a CFO running entities that conducted transactions with his main employer.

On Oct. 23, Lay publicly expressed to analysts the "highest confidence" in Fastow's abilities as CFO. Fastow was ousted the next day, and it was later disclosed he had pocketed about $60 million.

Fastow pleaded guilty to two counts of conspiracy in 2004 for using those partnerships to manipulate Enron's earnings while skimming millions for himself. He is expected to be a chief witness against Skilling and Lay.

Bad news kept coming, Rieker said. Enron had little cash and potentially billions in debt coming due that it couldn't pay. Smaller rival Dynegy Inc. sought to buy Enron, but backed off, leaving it with no course but bankruptcy court.

In those last months, Rieker said, Lay repeatedly drew down millions from a line of credit from Enron, and repaid the loans with Enron stock. He said he sold stock back to the company because he needed cash to repay bank loans collateralized by his Enron shares.

Lay lawyer Bruce Collins tried to show his client didn't have to disclose sales of stock back to the company until later in 2002, and hid nothing from the board, which had approved his credit line.

"I can't comment on the legal duty," Rieker said. "I can only comment on what the board thought was right or wrong when they heard about it."

Collins' cross examination was to continue Wednesday, followed by questioning from Skilling's lawyers.

Rieker is among 16 ex-Enron executives — including Koenig — who have pleaded guilty to charges and are cooperating with prosecutors. She pleaded guilty in May 2004 to insider trading for selling stock based on inside information that Enron's broadband unit lost more money than anticipated.

Skilling faces 31 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay faces seven counts of fraud and conspiracy. If convicted, both face decades in prison. Both sold millions of dollars in stock before Enron went bankrupt, but only Skilling faces allegations of improper stock sales.


Associated Press Writer Michael Graczyk contributed to this story.