Risk & Compliance

Alleged Skilling Quote Shocks Courtroom

"It seemed to indicate the investment community was beginning to understand how Enron made money," an ex-broadband executive charges.
Stephen TaubMarch 3, 2006

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In what could wind up being the turning point in the trial of former Enron chiefs Ken Lay and Jeff Skilling, a former top executive stunned the courtroom during the last ten minutes of testimony on Thursday when he testified that Skilling told other top executives ”they’re on to us,” according to the Associated Press.

Skilling’s statement allegedly came in response to a published note by a research analyst that was critical of the company’s sales to partnerships run by then-CFO Andrew Fastow, according to the Associated Press. Fastow is expected to testify next week.

Kevin Hannon, then chief operating officer of the company’s struggling broadband unit, told jurors that several minutes before Skilling made that seemingly incriminating statement at a May 2001 meeting of senior Enron executives that was also attended by Lay, he said that he had ”brought Andy here” to talk about the partnerships, which were called LJM1 and LJM2, according to the wire service.

At the meeting, ”Fastow said, ‘LJM is a good deal for me,”’ Hannon reportedly told the court. ”As I remember, (Fastow’s comment) was met by stunned silence.”

Prosecutor Cliff Stricklin then asked Hannon: ”Did Mr. Skilling say anything?”

”Yes. He said, ‘They’re on to us,”’ Hannon replied, according to AP. ”It seemed to indicate the investment community was beginning to understand how Enron made money.” Hannon is expected to continue to testify on Monday, when he will most likely be cross-examined.

Earlier on Thursday, Hannon said several company officials briefly mulled the idea of trying to buy WorldCom to help prop up the financials of one of the energy giant’s struggling units.

During a brainstorming session on March 7, 2001 held at Houston’s St. Regis Hotel and attended by Skilling, Enron Broadband Service (EBS) officials were desperately seeking relief from Skilling from a first quarter earnings target that wasn’t going to be met because business was much weaker than anticipated, according to the Houston Chronicle.

“We talked about doing acquisitions of [another] company … we looked at the potential of buying WorldCom,” Hannon said, according to the paper. However, the discussion didn’t last long, as the idea was scuttled. Hannon told jurors that Skilling said buying WorldCom was a “non-starter,” according to the paper.

Rather, Skilling recommended folding part of EBS into the profitable wholesale division, which the paper noted was a strategy described earlier this week during the trial. “It would hide the problem,” Hannon said, according to the Chronicle.When prosecutor Cliff Stricklin asked if this tactic would have solved the problem, Hannon replied, “No, I think it would have made it worse.”

Earlier in the day, David Delainey, a top former Enron Corp. executive, described a structure dubbed “Raptors,” as “odd.” He said Raptors involved placing Enron stock into several off-balance-sheet partnerships to serve as reserves that could be tapped to offset potential losses, reported the Associated Press.

However, Delainey, testifying for his third and final day in the trial, said that then-Chief Financial Officer Andrew Fastow convinced him to go along with the plan, according to the report. Delainey referred Raptors, as “a pot of money we used to manipulate our income statement,” according to the report. “I was definitely concerned about the Enron stock part of it,” Delainey reportedly said. “I certainly relied on what I heard from Mr. Fastow at the time.”

Delainey had headed the very profitable Enron wholesale trading unit, Enron North America, before moving over to the struggling retail business segment, EBS in 2002, said the AP. Delainey testified that he asked Skilling about placing company stock into the side structures, adding, “He said it had been approved. I relied completely on the presentation by Mr. Fastow in a board (of directors) meeting and the affirmation by Mr. Skilling.”

When Delainey said that he discussed the matter with Skilling to put himself at ease, Skilling lawyer Daniel Petrocelli—described by the AP as looking incredulous—questioned why Delainey needed comfort if he was admittedly involved in massive fraud. “I just wanted to understand if the senior management team was aware of it, that’s all,” Delainey reportedly replied.

Earlier in the day, former Enron employee John Sides, whose 401(k) was destroyed by Enron’s collapse, testified that he partly chose not only to keep his money in Enron stock but added to it as well because of statements made by Lay about the company’s good health in August 2001. “It was very important to me that it (Enron Energy Services) be successful … [and] becomes a core business, it wasn’t a startup company anymore and we were using that same business model to go into things like broadband and possibly other items as well,” Sides said, according to the Chronicle

When Sides was asked whether he was aware that the energy services company had been losing money, as previous witnesses had detailed, the one-time employee reportedly said he had not, adding, “To me that would have meant the value of the stock was going to drop … so I would probably want to diversify my funds.”

Sides also acknowledged that Lay talked about some negative developments at the company, such as losses incurred at an India-based plant. “He gave us both the good stories and the bad,” Sides said, according to reports.

However, Sides also said that in the fall of 2001, shortly before Enron collapsed, he and other employees were told to ignore negative press reports about Enron’s condition and listen to the top executives instead. “At Enron, we’d basically been told by management that articles in newspapers were rumors and we should look to the company to get facts about the true condition of the company,” Sides said, reported the Chronicle.

Sides, a 22-year company veteran, was an interesting witness because unlike most of the government’s witnesses so far, he did not plea guilty to a crime and had nothing to gain by testifying.

Sides acknowledge that in the fall of 2001 he moved all of his mutual funds into Enron stock. As a result, about 75 percent of his 401(k) retirement account was invested in Enron stock. Asked when he liquidated, Sides reportedly said it was not until the end of the year, after the company had filed for bankruptcy and the stock price had collapsed. As for his 401(k): “Basically it had evaporated,” Sides told the court.

There were a few light moments in the courtroom on Thursday. For example, the AP noted that many of the jurors came to the courtroom dressed in Western garb—especially the men, who wore cowboy shirts. The wire service noted that the world’s largest rodeo, The Houston Livestock Show and Rodeo, began its three-week run this week.

In another clothing related incident, Skilling defense attorney Petrocelli was stopped by prosecutor Kathryn Ruemmler before he began to cross-examine Delainey, said the Chronicle. Petrocelli’s suit jacket was caught up in back, and Ruemmler advised him of the clothing malfunction. Petrocelli then “jokingly” asked Delainey to help fix the jacket. Eventually, Ruemmler adjusted the back of his suit to what the paper described was “much good spirited laughter.”