Risk & Compliance

Enron’s Koenig under Cross-examination

Previously, during questioning by prosecutors, the former head of investor relations describes the difference between the information available to ...
Stephen TaubFebruary 6, 2006

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Daniel Petrocelli, the attorney for former Enron chief executive officer Jeffrey Skilling, on Monday began his cross-examination of Mark Koenig, the company’s onetime head of investor relations, by challenging Koenig’s credibility.

“You’re still in a mode of trying to protect yourself,” asserted Petrocelli, according to the Houston Chronicle. “No,” Koenig reportedly replied.

Noting that during his testimony last week, Koenig stated that he still had $5 million in assets, Petrocelli reportedly continued, “You’d like to protect that money, wouldn’t you?” Responded Koenig: “I would like to, but I don’t have a chance of protecting that money. I’m in 14 civil lawsuits. I would love to keep the five, but I don’t have a chance of keeping it.”

Last week, in the first days of the trial of Skilling and former Enron chairman Kenneth Lay, Koenig testified that the two top executives were clearly in charge, well aware of the company’s financial problems, and did what they could to prop up the share price.

On Monday, during the conclusion of direct examination by prosecutors, Koenig described the difference between the information on business-unit performance that was made available to executives like Skilling and Lay and the information served up to investors during conference calls and meetings, according to the Chronicle.

For example, he testified that in the second quarter of 2001, Enron’s wholesale business sold a number of natural-gas-fired power plants for $418 million — more than half the unit’s earnings. Koenig reportedly elaborated, however, that when Enron reported its results, the company did not specify the return from this one-time event since this “was not consistent with the story that earnings were based on steady volumes and earnings margins.”

In fact, according to the Chronicle, Koenig testified that when a Goldman Sachs analyst asked for a break-out of the revenues from the power-plant sales, Skilling said, “We don’t even track that.”

Koenig also stated that during the third quarter of 2001, Enron’s balance sheet miscategorized $1.3 billion as one-time losses, according to Bloomberg. In reality, the losses came from Enron’s water-trading business, its retail division, its broadband unit, and various investments. “Had even a small portion been listed as recurring losses, clearly the company would have been well below analysts’ expectations,” he reportedly added. “We had seen even a penny or two would have a detrimental effect on the stock price.”

Koenig also testified that at a two-day managers’ meeting led by Lay, on September 5 and 6, 2001, former chief financial officer Andrew Fastow and former chief accounting officer Richard Causey defended the company’s accounting under questioning by other managers, the wire service reported. Koenig, who reportedly attended that meeting, testified that Fastow’s and Causey’s position was that “the accounting was aggressive, but it benefited a lot of the people at the table.”

Koenig also addressed side partnerships and other off-balance-sheet entities created by Fastow, who has claimed that they were approved by Enron’s board and the company’s accountants. According to Bloomberg, Koenig said that Lay and Enron’s public relations staff discussed how to handle questions raised by investors. Koenig testified he was upset that the other individuals were “trying to talk our way out of” any concern about the partnerships. “Just saying it was approved by the board and accountants wasn’t going to cut it,” Koenig reportedly stated.

At one point, prosecutor Kathryn Ruemmler read from the company’s 2000 “Code of Conduct,” which urged employees to act with “honesty, candor, and fairness” in their business dealings. “While you were at Enron, were you encouraged by Mr. Lay to conduct your relations with investors with honesty, candor, and fairness?” Ruemmler reportedly asked. “At times, no,” responded Koenig, according to Bloomberg.

Prosecutors concluded their direct examination Monday morning, and Petrocelli, who began his cross-examination immediately, resumed his questioning after lunch. According to the Chronicle, Petrocelli asked Koenig whether he “knew for a fact” that Skilling was aware he was lying on a July 12, 2001, analyst call, during which the former CEO allegedly said that Enron did not track how much it made from the sale of certain power plants.

“There’s no way I can know for a fact what he had in his head,” Koenig reportedly responded.

“So you made an assumption that he knew because of availability of information you had?” continued Petrocelli.

“That I and others had,” said Koenig.

And so it went.

Petrocelli’s cross-examination of Koenig will continue on Tuesday; followed by questioning by Lay’s attorney, Mike Ramsey.