updated 3/21/2006 8:32:21 PM ET 2006-03-22T01:32:21

The only former Enron executive to go straight to prison after pleading guilty to a crime testified Tuesday that former company chiefs Kenneth Lay and Jeffrey Skilling lied about Enron’s strength in 2001 when it was failing.

“It was weak,” Ben Glisan Jr., on furlough from prison, said of Enron’s financial state by the time Skilling resigned as chief executive in August 2001 and Lay hurriedly resumed the role he had ceded to his No. 2 just six months earlier.

The former corporate titans sought to calm any Wall Street jitters at Skilling’s sudden resignation in an Aug. 14, 2001, conference call with analysts — but Glisan directly challenged their truthfulness in his testimony during the eighth week of their federal fraud and conspiracy trial.

“Mr. Skilling said, ‘There’s nothing to disclose, the company’s in great shape.’ Was it?” prosecutor Kathryn Ruemmler asked.

“No,” Glisan quickly replied.

“Mr. Lay said, ‘The company is probably in the strongest and best shape that it’s ever been in.’ Was it?” she asked.

“No,” Glisan said.

Ruemmler also corrected herself during another question in which she referred to Lay as “Mr. Lie.”

The ex-treasurer said that by the summer of 2001, Enron was burdened with crushing debt, company operations generated paltry cash flow and several business units were flailing — and Lay and Skilling knew it.

“We were manufacturing both cash flow and earnings for subsidiaries to achieve those targets,” he said, referring to earnings estimates set by Wall Street investment analysts.

Glisan also said Enron’s books showed its international asset portfolio was worth more than $10 billion — which was about $5 billion too high, according to Skilling’s own estimate in a document shown to jurors earlier in the trial. He said the portfolio should have been written down by more than half to reflect the true market value, but “that was a larger loss than we could have stomached.”

Glisan said he joined efforts to downplay any concerns about inflated values the market might have.

“Were investors ever told management believed international assets were overvalued by $5 billion?” Ruemmler asked.

“No. Again, we wanted to alleviate that concern,” Glisan replied.

Glisan’s cross-examination is not expected to begin until Wednesday afternoon. Lead Skilling lawyer Daniel Petrocelli declined comment on his testimony Tuesday, but lead Lay lawyer Michael Ramsey claimed the exchange between Glisan and Ruemmler was scripted.

“I am amazed at what can be produced by 100 hours of preparation,” the attorney said. “What you’re seeing up here is a scripted ventriloquist act.”

Glisan, 40, looked like the CPA he used to be when he took the witness stand Tuesday. He strolled into the courtroom in the latter part of the day, wearing a business suit and tie like any other witness.

But unlike most of the 16 ex-Enron executives who have pleaded guilty to crimes, Glisan is already federal inmate No. 20293-179. He was granted a furlough for his testimony, allowing him to sleep at home, wear a suit and sip on a venti-sized Starbucks cup while awaiting his turn on the stand.

U.S. District Judge Sim Lake compelled Glisan to testify after granting him immunity from prosecution for other crimes he may have committed at Enron.

“It’s just a dance,” Glisan told Ruemmler about the immunity grant before jurors filed in the courtroom. Outside the jury’s presence, he declined to answer a question about other crimes as allowed by the Fifth Amendment, and then honored Lake’s order upon being granted immunity.

Glisan is a key witness against Lay and Skilling, who claim there was no fraud at Enron and negative publicity coupled with diminished market confidence fueled the company’s December 2001 descent into bankruptcy protection.

He has been in prison since September 2003, when he admitted to creating four fragile financial structures known as Raptors that he said Enron used to house assets and investments and to hide losses, making the company appear more successful than it was. Prosecutors contend Lay and Skilling knew about the Raptors and how they were used.

Also unlike others who have admitted to crimes, Glisan has nothing to gain from the government by testifying. The government had a one-year window to file court papers asking that Glisan’s five-year term be reduced, but time for that ran out a year after he went to prison. Glisan can shave a few months from his sentence for good behavior, and is slated to be released in January 2008, according to the Federal Bureau of Prisons.

Earlier, two former outside accountants who oversaw portions of Enron’s books put some dents into defense claims that that no fraud occurred at Enron — but like some other prosecution witnesses, they didn’t provide hard evidence the defendants knew of accounting chicanery.

Former Arthur Andersen LLP accountants John Sult and Thomas Bauer resisted defense attempts to cast doubt on their assertions that Lay may have misled them on plans for a troubled division to avoid a massive writedown of an asset’s value and that the company likely misused reserves to pad earnings.

Their testimony, involving often arcane accounting discussions, appeared to add to the government’s brick-by-brick effort to back up criminal charges that Lay and Skilling repeatedly lied about Enron’s true financial state when they knew accounting tricks propped up a wobbly company.

Another witness, Ronald Barone, corporate director of finance at debt rating agency Standard & Poor’s, said Lay likely headed off a possible reduction in Enron’s credit rating with an unusual call to him in October 2001 in which he acknowledged the company’s deteriorating financial position.

“He was committed to credit quality and he would take the necessary steps available to him and shore up the balance sheet and right the ship, so to speak — his terms, not mine. He said he would look to sell assets, the pipeline assets even, as well as selling equity if it ever was deemed necessary.”

Barone, however, said Lay “still wanted his financial staff to be creative.”

An investment-grade credit rating was critical to Enron’s ability to borrow millions to support its profitable trading operation. Prosecutors contend Lay hid bad news from debt rating agencies to maintain that rating.

Lay is facing seven charges, including improperly avoiding writedowns and lying to outside auditors. Skilling’s 31 counts include misusing reserves and signing misleading letters to auditors vouching for Enron’s financial statements.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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