Risk & Compliance

Enron Witness: Partnerships Were Proper

But conflicts of interest between officials at LJM and the broadband unit were apparent.
Stephen TaubFebruary 16, 2006

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The former head of Enron Corp.’s broadband unit has testified that one of the off-balance-sheet transactions created by former chief financial officer Andrew Fastow was proper, reports Bloomberg.

In a second day of cross-examination, Mark Holscher, a lawyer for Jeffrey Skilling, attacked Kenneth Rice’s earlier testimony in which he said he sold $90 million of fiber-optic cable to LJM — one of the partnerships created by Fastow — because no other company would buy it at a profit, according to Bloomberg’s account. Earlier in the week, the prosecution tried to make the case that the fiber-optic sale was designed to boost Enron’s earnings or remove debt from the company’s balance sheet.

However, when Holscher asked Rice whether he thought the LJM transaction was improper, Rice responded, “It was a negotiated, arm’s-length transaction.” This is significant, given that defense lawyers for former chairman Kenneth Lay and former CEO Skilling have been arguing that their clients are being prosecuted for normal business transactions.

Rice also testified that heated negotiations took place between officials at the broadband business and LJM over the fiber-optic deal, and that executives at Enron Broadband feared that the arguments would affect their future bonuses since Fastow held sway over the bonus awards.

Reportedly such conflicts of interest caused Rice and other executives to question the company’s dealings with the partnerships. However, Rice testified that Skilling tried to allay their concerns by pointing out that Enron’s board, lawyers, and accountants had approved the transactions, as well as Fastow’s participation in them, according to the wire service.

In other testimony on Thursday, Rice said Skilling instructed him to create an optimistic, misleading picture for the Enron board of directors that was consistent with false statements Rice said he had already made to financial analysts in 2001, noted the Associated Press. But Rice conceded he had no documents and “only my recollection” to back up a conversation he had with Skilling prior to the May 2001 meeting. “What I took from meeting with Mr. Skilling was he wanted me to put a presentation together that was more consistent with the analyst conference and less [directed] on some of the challenges we were facing at EBS,” Rice said, according to the AP.

Although Enron Broadband Services was spending $100 million per quarter and generating little revenue and business, Rice reportedly told the board that his unit was successful. “What I presented to the board was inconsistent with what was going on at EBS,” Rice reportedly said.

During his three days of testimony, Rice has continually stopped short of saying Skilling lied to investors about Enron’s health, stressed the AP. “I knew that Mr. Skilling and I had misled investors on a number of occasions on the prospects of our business within EBS,” Rice said when being cross-examined by Holscher.

Rice also conceded he did not express concern to Skilling about any of the misleading statements, describing Skilling as “very hard working.” In fact, he said Enron was worse off right after Skilling’s abrupt resignation in August 2001, which was less than four months before Enron collapsed.