The former top accountant for Enron Corp.’s profitable trading division testified Monday that he improperly raided reserves to increase earnings in mid-2000 when he learned former Chief Executive Jeffrey Skilling wanted to beat Wall Street expectations.
Wesley H. Colwell didn’t say Skilling ordered him to plunder reserves to boost earnings. He said, however, that he told his boss — then-Enron North America chief executive David Delainey — in an e-mail days before Enron released second-quarter 2000 earnings that he understood it was Skilling’s “preference” to surpass analyst expectations.
Twice within a five-day stretch between the close of the second quarter in 2000 and Enron’s announcement of earnings, Colwell reduced reserves by $7 million. The $14 million was added to reported income so Enron could announce earnings-per-share of 34 cents rather than the 32 cents Wall Street expected, making the company appear more successful than it was.
“Did you use reserve accounts at Enron North America to fraudulently manipulate Enron’s reported earnings?” prosecutor Sean Berkowitz asked.
“Yes,” replied Colwell, the fifth prosecution witness in the five-week-old fraud and conspiracy trial of Skilling and Enron founder Kenneth Lay.
Other witnesses have testified that Skilling either ordered or had authority to order the last-minute increase in reported earnings-per-share in the second quarter of 2000.
Prosecutors contend Lay and Skilling repeatedly lied about Enron’s financial health when they allegedly knew fraudulent accounting maneuvers propped up a wobbly company in the months before it crashed into bankruptcy protection in December 2001.
The defendants say there was no fraud at Enron, and negative publicity coupled with diminishing market confidence fueled the company’s swift failure.
Colwell, 46, testified as part of an immunity deal he obtained from prosecutors. In October 2003 he paid half a million dollars to settle Securities and Exchange Commission civil allegations of manipulating Enron’s earnings, but has not been charged with a crime.
“If I tell the truth and don’t withhold any information, I will not be prosecuted for my crimes while at Enron,” Colwell told jurors Monday when explaining his deal.
He has yet to be questioned by the defense teams.
The SEC complaint alleged Colwell and others improperly set aside higher-than-expected trading profits to report in future quarters so Enron would appear to be a stable, growing company rather than one vulnerable to market volatility.
The SEC said Colwell also participated in other schemes, including:
- Consolidation of the money-losing trading arm of Enron’s highly touted retail energy unit into the larger trading division to hide hundreds of millions of dollars in losses.
- Increasing the recorded book value of Mariner Energy Inc., an oil and gas company that was once Enron’s largest merchant asset, by $100 million to appear to have met quarterly earnings targets.
Sixteen ex-Enron executives have pleaded guilty to crimes ranging from conspiracy to insider trading, and are cooperating with prosecutors.
In addition to the $500,000 SEC fine, Colwell lost his CPA license and is barred from being an officer in a publicly traded company. He is not a felon.
Only one other such deal emerged from simultaneous investigations by the Justice Department and the SEC.
In February 2005, Raymond Bowen Jr., who became Enron’s chief financial officer after the company flamed out and remained in that role until October 2004, also paid $500,000 to settle SEC allegations that he knew or should have known some assets were grossly overvalued to pump up profits. Bowen also has not been charged with a crime.
Bowen, 46, is not on the government’s witness list, but he is on the defense teams’ combined witness list, which means lawyers for Lay or Skilling may call him to testify.
From September 1999 through February 2002, Colwell was chief accounting officer of Enron Wholesale Services. That division encompassed Enron North America, the company’s trading unit that Skilling nurtured as part of the company’s transformation from a staid pipeline company to a powerhouse trader that spawned copycats among competitors in the energy sector.
Colwell worked for the previous 17 years at Arthur Andersen LLP, the withered accounting firm whose 2002 conviction on a charge of trying to thwart an SEC investigation by destroying Enron-related documents was overturned last year by the U.S. Supreme Court.
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.