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Witness: Skilling put on pressure to meet or beat earnings targets

HOUSTON – A second Enron Corp. executive testified Tuesday that the company illegally dipped into reserves to meet and beat earnings targets under pressure from then-chief executive Jeffrey Skilling.”It was standard operating procedure,” said David Delainey, former chief executive of Enron’s profitable wholesale trading franchise, during the fraud and conspiracy trial of Skilling and Enron founder Kenneth Lay. “At Enron in Houston, we tended to be pretty fast and loose with our rules,” he said.Delainey, under questioning by prosecutor Kathryn Ruemmler, said he met with Skilling in the second half of 2000 to discuss how his business unit, Enron North America, had easily met and exceeded its earnings targets, primarily by cashing in on the volatility of energy markets and through deals with California utilities.”I said we had a couple of quarters in our pockets that would give us flexibility in the future,” he said. “I wanted to make sure he was aware we were doing really well.”Skilling was so pleased he gave Delainey a hug, he said.Delainey said top executives often called upon the trading unit to fill earnings gaps left open by other divisions that didn’t meet their targets.”Many times we would get that call, particularly from Mr. Causey,” he said, referring to Richard Causey, Enron’s former chief accounting officer.Delainey also said he felt “pressure” from Skilling and Causey to raid the reserves to boost earnings, but did not say either man directly told him to break the law.He said the practice of using reserves to pad earnings was wrong because reserves must be applied to specific risks and can’t be used to cover potential trading losses “or just kind of at management’s discretion.””Anything else is cheating and misrepresenting the company,” he said. “You can’t just pull money to create earnings from the reserves. It’s backwards.”In October 2003 Delainey pleaded guilty to insider trading and admitted he participated in schemes to manipulate earnings to please Wall Street. He forfeited $4.25 million in proceeds from illegal stock sales to the Justice Department and another $3.74 million to the Securities and Exchange Commission.In early March 2002, Delainey donated $10,000 to a fund established to help Enron workers who were laid off when the company crashed into bankruptcy proceedings in December 2001.Delainey’s testimony, to jurors who came into the courtroom Tuesday grinning and wearing green and purple Mardi Gras beads, mirrored comments the previous day from Wesley Colwell, who worked for Delainey. Colwell also said he helped to fraudulently manipulate earnings.Delainey, 40, of Calgary, Canada, said the trading unit was “making tons of money, knocking the cover off the ball” in 2000 as it took advantage of California’s power crisis in 2000 and 2001 and hauled in millions of dollars, even in a single day.His testimony contradicted Lay and Skilling’s oft-repeated public message that Enron was a stable company with predictable growth that acted as a middleman for energy buyers and sellers rather than a trading company that was vulnerable to market volatility.Prosecutors contend the two top executives pressed that message to maintain Wall Street’s bullish view of Enron’s stock, which could be diminished if analysts viewed the company as risky.Allegations against Skilling also include that he minimized Enron’s profits from California trading in statements to analysts.Delainey’s testimony about California trading profit piggybacked that of a former top Enron trader who said Tuesday that the company pocketed almost $1 billion in profits over nine months from wild energy trading during California’s power crisis.Timothy Belden, who ran Enron’s Western power trading desk in 2000 and 2001 and pleaded guilty in October 2002 to conspiracy for manipulating the state’s market, told jurors that California’s “dysfunctional” market in the aftermath of electricity deregulation left it ripe for high prices, which spelled mass profits for Enron.Specifically, the company booked $104.4 million in trading profits in the fourth quarter of 2000 and $778.8 million in the first two quarters of 2001.”The chaos drove high prices and the high prices drove our profits,” Belden said.Belden’s guilty plea was the first public acknowledgment of criminal activity related to California’s power crisis.Belden led traders who openly discussed manipulating California’s power market during profanity-laced telephone conversations in which they gloated about gaming California’s markets, according to audiotapes and transcripts of the calls released in 2004.However, U.S. District Judge Sim Lake ruled in early January that prosecutors cannot introduce the sometimes salacious tapes because neither Skilling nor Lay are charged with manipulating California’s power market.Prosecutors contend Lay and Skilling repeatedly lied about Enron’s financial health while knowing fraudulent accounting propped up the company before it failed.The defendants say there was no fraud at Enron, and negative publicity coupled with diminishing market confidence fueled the company’s swift collapse.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 could serve decades in prison. Only Skilling faces allegations of improper stock sales.Vail, Colorado


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