Risk & Compliance

Former Enron IR Exec: Earnings Fudged

Mark Koenig also testifies that Kenneth Lay and Jeffrey Skilling tried to exclude an analyst who asked especially critical and challenging question...
Stephen TaubFebruary 1, 2006

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In the first day of testimony in U.S District Court in Houston, Enron Corp.’s onetime head of investor relations made it very clear that former top executives Kenneth Lay and Jeffrey Skilling were clearly in charge, well aware of the company’s financial problems, and did what they could to prop up the share price.

Mark Koenig testified that the company changed quarterly earnings numbers in 1999 and 2000 so it could meet or beat Wall Street analyst expectations to prevent its share price from falling, according to published accounts.

According to the Associated Press, Koenig detailed several drafts of a July 2000 press release in which quarterly earnings were raised from 32 cents per share to 34 cents because Enron executives wanted to beat the consensus forecast by 2 cents. “We thought it would maintain or increase the stock price,” he testified.

Koenig also reportedly recounted how, on the morning of January 19, 2000, Lay told him that analyst estimates had been at 30 cents when he went to bed, but “when he awoke, he was watching one of the business stations, and he saw that it was 31 cents.” Koenig testified that Lay told him about receiving a voicemail explaining the change, according to the AP, and that Lay “understood the issue, fairly matter-of-fact.”

He also testified that Lay was aware that changes were hastily made several hours before the quarterly reports were to be released and that Skilling had the authority to alter them, according to the Houston Chronicle.

Asked by prosecutor Kathryn Ruemmler how he felt about changing the numbers, which enabled Enron’s share price to rise, Koenig replied, “It was wrong.”

Koenig also reportedly testified that Lay urged him not to invite Merrill Lynch analyst John Olson to meetings where earnings were discussed because he was too critical of the company. Olson is credited with asking especially critical and challenging questions with Enron executives, both in face-to-face meetings and in conference calls, months before the company’s problems were widely known.

“He was one of the few who went out on a limb in probing and had a negative opinion about the company,” Koenig reportedly stated. He added that after one February 2001 meeting, “Mr. Lay asked me if we even needed to invite him to future meetings, and I told Mr. Lay that we did. Koenig reportedly added that Skilling, too, asked whether they needed to invite Olson.

In the afternoon’s court session, prosecutors reportedly played an audiotape of a July 2001 conference call with investors in which Skilling hyped the success of Enron Broadband Services. According to the Chronicle, Skilling told investors that the division was successful in selling Internet bandwidth and that sales of unused fiber-optic cable amounted to only $50 million. Koenig reportedly testified that, as he later learned, those sales topped $150 million — and that, in fact, almost all of the division’s revenue from the quarter came from selling off infrastructure.

Koenig pleaded guilty in August 2004 to aiding and abetting securities fraud; he faces up to 10 years in prison and nearly $1.5 million in fines, according to the Chronicle. The newspaper noted that on Tuesday, defense attorneys argued that the testimony of Koenig and other former Enron employees who pleaded guilty has “zero” value because they were frightened into cooperating with the government.