Risk & Compliance

I Would Have Challenged WSJ, Says Lay

Testifies that advisers talked him out of confronting a damaging story about Enron's accounting practices.
Stephen TaubApril 25, 2006

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On his second day of testimony, Kenneth Lay told jurors that he wanted to respond to Wall Street Journal inquiries before the newspaper published what turned out to be a damaging story about Enron’s accounting practices, but his advisers talked him out of it.

The former Enron executive testified that on September 26, 2001, he met with former chief financial officer Andrew Fastow and head of public relations Mark Palmer to look over the Journal’s questions, reported the Houston Chronicle.

Lay reportedly testified that at the time, he was told that the questions were no longer pertinent because Fastow had sold his interest in the controversial LJM partnerships several months earlier. Lay recalled that Palmer thought the questions were “very biased, very judgmental” and that “he was convinced they didn’t have anything and that they were trying to make a story.” Palmer was insistent, he reportedly added, that Enron not cooperate with the paper because “it would just be a one-day story and it would go away.”

According to the Chronicle, Lay told jurors that this strategy contrasted with his personal policy of engaging rather than avoiding the press, to “get your viewpoint across” and “make some impact on that article.” He reportedly testified that he told Palmer, “Even though it is against every bone in my body, I will agree with your recommendation.”

Instead, noted the Chronicle, Enron sent the Journal a written response that was overseen by its outside law firm, Vinson & Elkins, whose investigation had concluded that the LJM partnerships were above board.

Addressing the partnerships directly, Lay reportedly told jurors that there was nothing inherently wrong with them, that they were well vetted by accountants, in-house counsel, and outside counsel, and that the company made sure “every transaction was fair to Enron and an arm’s length transaction.”

“It brought capital to the company that otherwise would not be available,” he reportedly added, and helped Enron save money on banking fees.

Lay also asserted that the LJM partnerships “in no way changed Andy’s fiduciary duty to Enron.” When Fastow sold his interest in June 2001, it “closed the books on LJM,” he reportedly added.

“We thought The Wall Street Journal was on a witch hunt for Andy Fastow and maybe Enron,” Lay told jurors, according to the Chronicle. Everything about LJM and the Raptors “was done very appropriately,” he reportedly added, insisting that the Journal caused investors to lose confidence in Enron and that “the company was doing extremely well.”