Image: Jeffrey Skilling
Pat Sullivan  /  AP file
Former Enron executive Jeffrey Skilling, above, said "They're on to us" regarding an analyst's criticism , testified former Enron official Kevin Hannon.
updated 3/3/2006 4:04:37 PM ET 2006-03-03T21:04:37

“They’re on to us.”

With those four words in the last 10 minutes of this week’s testimony, the fraud and conspiracy trial of Enron Corp. founder Kenneth Lay and former Chief Executive Jeffrey Skilling moved into higher gear after crawling at a snail’s pace for the first month.

Kevin Hannon, Enron’s former broadband unit chief operating officer who pleaded guilty to conspiracy in August 2004, heard the comment first hand at a May 2001 meeting with Lay, former Chief Accounting Officer Richard Causey and Lawrence “Greg” Whalley, then CEO of Enron’s wholesale trading unit.

Hannon said Skilling’s remark came in response to a small analyst firm’s criticism of Enron’s reliance on partnerships run by its own finance chief to buy underperforming assets so that the energy company could boost earnings and get debt off its balance sheet.

Also there, according to Hannon, was then-Chief Financial Officer Andrew Fastow, who ran the LJM partnerships he created almost exclusively to conduct deals with Enron and pocketed tens of millions of dollars for his trouble.

“LJM is a good deal for me,” Hannon recalled Fastow telling the group.

Hannon’s revelation appeared to be devastating evidence of the government’s charge that Skilling and Lay knew their company’s purported success was a sham, propped up by accounting tricks that hid debt and inflated profit. The two defendants insist there was no fraud at Enron. The testimony also seemed to suggest the defendants knew more than they have claimed about how profitable the partnerships were for Fastow.

“The government’s case is, I think, much stronger than anyone anticipated,” said David Berg, a Houston civil litigator and author of “The Trial Lawyer: What It Takes to Win.”

“Moments like that are frozen in jurors’ minds, and it’s going to be very difficult for the defense to overcome the impression that Hannon made,” Berg said.

Hannon’s testimony capped an entire week that was damaging for the defendants. Another witness gave jurors an inside view of Skilling’s alleged approval of a fraudulent accounting move to hide a flailing business unit’s losses, though it wasn’t as straightforward as what Hannon said he heard his boss say.

David Delainey, who in 2001 ran Enron’s retail energy unit and was among Skilling’s protégés, said Skilling looked at him and said “What do you want to do?” when Delainey balked at moving retail losses into another division to hide them from investors.

Delainey said he took Skilling’s question as meaning he should go along with the move, and added, “I wish on my kids’ lives I had stepped away from that table.” Delainey pleaded guilty to insider trading in October 2003. Like Hannon, he is testifying in hopes of getting a lenient punishment.

Prosecutors contend Lay and Skilling repeatedly lied about Enron’s financial health to try to maintain a lofty stock price when they knew the company faced serious problems. The two men counter they did nothing wrong and blame Enron’s December 2001 collapse into bankruptcy proceedings on negative publicity coupled with diminished market confidence in the company.

The defense teams aggressively challenged Delainey’s truthfulness as part of an ongoing strategy to portray ex-Enron executives who have pleaded guilty to crimes as government puppets who will say anything to please prosecutors in hopes of getting lenient punishments. They are expected to do the same on Monday with Hannon, a prickly type who appeared stiff in the witness chair.

Hannon and Delainey also cleared a path for Fastow, who is slated to succeed Hannon in the government’s lineup.

While both Hannon and Delainey ran in the same company circles as Lay and Skilling, Fastow had closer proximity. A 1990 Skilling hire, Fastow could provide more revelations, particularly given his own admitted crimes.

Fastow came out fighting when he was initially indicted in October 2002 on what grew to 98 criminal counts including fraud, conspiracy, insider trading, money laundering and cheating on taxes.

“Enron hired Andy to arrange off-balance sheet financing. Enron’s board of directors, its CEO, and its chairman, directed and praised his work. Accountants and lawyers reviewed and approved his work. He never believed he was committing any crime,” Fastow’s attorney, John Keker, said at the time.

By CEO and chairman, Keker meant Skilling and Lay.

In January 2004, Fastow gave up and cut a deal with prosecutors. He pleaded guilty to two counts of conspiracy, admitting that he used the LJM partnerships to help Enron manipulate earnings while skimming millions for himself.

Fastow’s testimony will mark the first time he has spoken about his role in the alleged conspiracy his former bosses are accused of spearheading.

Skilling faces 31 counts of fraud, conspiracy, insider trading and lying to auditors. Lay faces seven counts of fraud and conspiracy. Both sold millions of dollars in stock before Enron failed, but only Skilling is charged with improper stock sales.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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