Jurors in the Enron fraud trial began to hear about some of the financial tricks and gimmickry that kept the company flying high before its spectacular collapse in late 2001.
And many of these tricks, former Enron investor relations chief Mark Koenig testified on Wednesday, were done with the full knowledge of the top executives of the company, Kenneth Lay and Jeffrey Skilling, whose trial opened this week.
Koenig, the first witness in what is expected to be a four-month trial, recounted the last-minute redrafting of at least two Enron quarterly earnings reports in order to meet or beat profit targets set by Wall Street analysts.
Koenig said the earnings release for the second quarter of 2000 was rewritten after a meeting with Skilling, who was Enron president at the time, and other top executives.
The report originally showed Enron profits amounting to 32 cents a share, the same as the “consensus” estimate of Wall Street analysts. But it was subsequently rewritten to show a profit of 34 cents per share.
“We had a desire at Enron to beat the consensus estimate by two cents … we thought it would maintain or increase the stock price,” Koenig said under questioning from federal prosecutor Kathryn Ruemmler.
Asked who had the authority to make the change, Koenig answered, “Mr Skilling.”
“Were those his instructions?” he was asked, to which he replied, “Yes.”
Koenig said the earnings report in January 2000 of results for the fourth quarter of 1999 also was rewritten at the last minute to avoid missing the Wall Street profit target.
He said he discussed the revision with Lay the following day and that Lay indicated, “he went to bed and [the profit] was 30 cents (per share) and when he woke up it was 31 cents.”
Koenig said the revision was “wrong,” because “the results of the operations of the company were 30 cents, not 31 cents.” He noted that meeting of exceeding these estimates was critical to keeping Enron’s stock price from falling.
The ruddy haired, square-jawed executive did not offer further details of how the earnings reports were changed. He was to continue testifying on Thursday in the trial presided by United States District Judge Sim Lake.
Koenig, a member of Enron senior management but considered a bit player in the Enron saga so far, has pleaded guilty to aiding and abetting securities fraud in a deal with prosecutors — one of several deals criticised by defence lawyers in the case.
Koenig also said Lay and Skilling were apprised of key issues at the company ahead of Enron’s financial implosion.
“Mr Skilling was very involved in the day-to-day running of the business” during his tenure as chief executive in 2001, Koenig told the court.
Lay, who was chairperson and resumed the duties of CEO after Skilling’s departure in August 2001, was less involved but nonetheless was “highly involved in the running of the business”.
Koenig went on to explain a series of telephone conference calls with analysts in which he and Skilling both withheld key information or lied to avoid revealing facts that might hurt Enron’s stock price.
On one occasion in 2000 when Skilling provided an incorrect figure on the details of Enron’s fledgling broadband trading system, Koenig said he made no attempt to correct the mistake.
“I was going along with the incorrect disclosure,” to avert an embarrassing impact on the company, he said.
Jurors heard tape excerpts in which Skilling touted the success of the unit called Enron Broadband Services even though, according to Koenig, its revenues were minimal — and some of those came from entities created by Enron itself.
Koenig said a true disclosure of the finances of the unit would “slow down the story of Enron Broadband Services with a negative effect on the stock price”.
The tapes were played over the objections of defence lawyers who argued the statements were being taken out of context.
Lay (63) and Skilling (52) face lengthy prison terms if convicted on multiple charges of fraud and conspiracy in connection with the Enron collapse.
Skilling faces 31 counts of conspiracy, securities fraud and insider trading. Lay faces seven counts of conspiracy and securities fraud. Lay also faces four counts of personal banking violations that will be tried separately later.
The spectacular collapse of Enron cost the jobs of most of the 20 000 global employees and wiped out $40-billion in stock value in a matter of weeks. – AFP