Witness says spike in Enron earnings should have raised concerns | VailDaily.com
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Witness says spike in Enron earnings should have raised concerns

HOUSTON – Enron Corp.’s most profitable division raked in “alarming” earnings that undercut top executives’ portrayal of the company as a steady growth machine rather than an energy trader vulnerable to market volatility, a former company vice president testified Wednesday.In her second day on the witness stand in the fraud and conspiracy trial of Enron founder Kenneth Lay and former Chief Executive Jeffrey Skilling, Paula Rieker told jurors the wholesale division’s $3.8 billion in profit in the first three quarters of 2001 after $1.4 billion for the entire prior year would have alarmed investors. It wasn’t discussed when or how investors may have learned of such a spike.Lay and Skilling repeatedly portrayed that business as a steady source of predictable growth, which helped maintain Wall Street’s enthusiasm for Enron’s stock.”You don’t like profits?” Lay lawyer Bruce Collins asked, then quickly withdrew his question.”I’d like to answer the question,” Rieker said.”The reason I say $3.8 billion is an alarming level is because the wholesale business portrayed by Mr. Lay, Mr. Skilling and others was steady predictable growth,” she continued. “And tripling of numbers from one year to next would have alarmed investors, in my view, of the types of risks they were taking.”Neither Lay nor any other directors raised any concerns about wholesale’s massive increase in earnings.”I wish a lot of people had spoken up,” Rieker said. Collins didn’t ask her to explain the spike.Rieker, the government’s fourth witness in as many weeks, deflected Collins’ efforts to rattle her. She calmly ruffled through documents in thick notebooks that included copies of her notes and minutes of board meetings as Collins quizzed her about liquidity factors and forecasts, contingencies, scenarios, outflows and inflows.Rieker has directly challenged Lay’s claim that he believed Enron was strong in the months before the company crashed into bankruptcy proceedings in December 2001. She said Tuesday he knew bad news was brewing when he painted a rosy picture for Wall Street after he resumed the role of CEO upon Skilling’s resignation in August of that year.She acknowledged under cross-examination that she never told Lay she had done something improper. Rieker pleaded guilty in 2004 to insider trading charges for selling stock after learning that Enron’s broadband unit had lost more money than anticipated. She is cooperating with prosecutors.She testified Tuesday that Skilling ordered last-minute additions to earnings-per-share figures Enron reported for two quarters in 1999 and 2000 to meet or beat Wall Street expectations, though she didn’t address what accounting may have been behind the changes. Skilling’s legal team had yet to question her.During Skilling’s six-month tenure as CEO, Rieker was Enron’s No. 2 investor-relations executive. When she became corporate secretary in September 2001, she maintained minutes of board meetings and answered to Lay.Rieker also highlighted Enron’s penchant for obfuscated disclosures. She said she once tried to rewrite a 2001 regulatory filing’s footnote that contained unclear descriptions of financial entities backed by Enron stock that were used to push debt off the company’s books.”I did not know enough to answer questions on the subject,” Rieker said. In-house accountants rejected any change, she said.The entities were called Raptors, which crumbled as Enron stock fell throughout 2001 and accounted for more than $500 million in third-quarter losses. Shutting them down also forced Enron to write down shareholder equity by $1.2 billion.At early October board meetings, Lay told a committee, according to Rieker’s notes, “Raptor was the second most contentious vehicle next to LJM,” referring to partnerships that had been run by former Chief Financial Officer Andrew Fastow and that conducted deals with Enron.But a week later, when an analyst sought more information about what transaction led to the equity writedown, Lay said, “I’m not sure it even had a name, it was an internal vehicle set up for financing assets.”While the Raptors created serious financial headaches for Enron, Fastow’s partnerships fostered other problems when word spread throughout the company that the CFO had run them. The board had waived Enron’s conflict-of-interest policy to allow Fastow to run the partnerships.Lay convened a meeting of Enron managers, where Vince Kaminski, who headed Enron’s risk research arm, skewered the Raptors and Fastow’s partnerships.”He thought it was absurd, and that management should have been able to see this coming,” Rieker said, referring to the fallout upon the Raptors’ collapse.Collins sought to show why Lay remained optimistic about Enron’s future, noting in his questions that the Fastow-run partnerships had been approved by outside accountants and lawyers, and many top executives gave Lay good news about Enron’s businesses.In an hourlong video of an employee meeting played for jurors Wednesday, Lay defended Fastow and proclaimed he would remain at the Enron helm until directors tossed him out. He was pushed out three months later.”I’m absolutely heartbroken at what’s happened,” he said in the video. “It’s OK to be mad and be frustrated and feel the world is not fair.”Lay answered questions handed in on index cards at the meeting. The recounting of one drew jurors’ laughter.”I would like to know if you are on crack,” Lay read. “If so, that would explain a lot. If not, you may want to start because it’ll be a long time before we trust you again.”He replied: “No, I’m not on crack. It might be a lot easier to take the last few days if I was.”Fastow pleaded guilty to two counts of conspiracy in January 2004 for orchestrating schemes to hide Enron debt, inflate profits and skim millions for himself on the side. He is expected to be a key witness against Lay and Skilling.Lay and Skilling are accused of repeatedly lying to investors about Enron’s financial health when they allegedly were hiding bad news and weak performance. The two men contend there was no fraud at Enron other than a few executives who stole money, and negative publicity that siphoned market confidence fueled the company’s flameout.Skilling faces 31 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay faces seven counts of fraud and conspiracy. If convicted, both face decades in prison. Only Skilling faces allegations of improper stock sales.—AP Business Writer Kristen Hays contributed to this story.Vail, Colorado


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