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Witness: Lay hid bad news from Wall Street

As a vice president of investor relations and corporate secretary for Enron Corp.’s board, Paula Rieker viewed the energy trading giant’s inner workings as it rose to be a Wall Street darling and then imploded in scandal.
/ Source: The Associated Press

As a vice president of investor relations and corporate secretary for Enron Corp.’s board, Paula Rieker viewed the energy trading giant’s inner workings as it rose to be a Wall Street darling and then imploded in scandal.

But even as she described how Enron founder Kenneth Lay downplayed or hid bad news from Wall Street in the last few months before Enron spiraled into bankruptcy protection in December 2001, she acknowledged Wednesday that in early November that year she sent him an encouraging note that called his leadership “invaluable.”

She sent the note on the day one-time Enron rival Dynegy Inc. announced plans to acquire what was once the nation’s seventh-largest company. Dynegy later aborted that plan, leaving Enron with no options except bankruptcy.

“I sent him the note because the merger between Enron and Dynegy was a dramatic fall for Enron and I was not sure that Mr. Lay could make that step down for himself,” Rieker told Lay lawyer Bruce Collins on cross examination.

Rieker, 51, is the government’s fourth witness in the fraud and conspiracy trial of Lay and former Enron Chief Executive Jeffrey Skilling and returned for a second day of testimony Wednesday.

On Tuesday, Rieker told jurors how Skilling ordered abrupt last-minute changes to two quarterly earnings reports in 2000 to please analysts and investors.

She also told how Lay misled analysts by withholding from investors pessimistic financial details he described to directors as “lots of retooling.” She said Lay infuriated the board months later when directors learned, after he quit as CEO in January 2002, that he’d repaid more than $70 million in company loans with Enron stock in 2001, even as the company was spiraling.

“They were outraged,” she said of the board and quoted one member, John Duncan, saying: “He was using Enron like a damn ATM machine.”

At the mention of the $70 million figure, Lay fidgeted with his red tie, frowned and turned to whisper to his attorney-daughter, Elizabeth Vittor, seated next to him.

Lay isn’t charged with improper stock sales, and has said he sold stock back to the company because he needed cash to repay bank loans collateralized by his Enron shares.

Rieker is testifying against her former bosses as part of an agreement with the government after pleading guilty in 2004 to insider trading charges for selling stock after learning internally Enron’s broadband unit had lost more money than anticipated.

Rieker is among 16 ex-Enron executives who have pleaded guilty to charges and are cooperating with prosecutors.

Her cross-examination began late Tuesday, with Collins trying to show Lay didn’t have to disclose sales of stock back to the company until later in 2002 and hid nothing from the board.

“I can’t comment on the legal duty,” Rieker said. “I can only comment on what the board thought was right or wrong when they heard about it.”

Rieker, poised and articulate and often speaking directly to jurors, earlier Tuesday said she learned in January 2000 from her then-boss, former Enron investor-relations chief Mark Koenig, that Skilling ordered a penny increase in company earnings-per-share figures for the fourth quarter of 1999 to match analysts’ expectations of 31 cents.

She also said Koenig told her Skilling ordered a two-cent increase to reported earnings per share in the second quarter of 2000 — hours before they were officially released — so Enron could top expectations and generate Wall Street enthusiasm for its stock.

Rieker’s testimony was stronger than that of Koenig, the government’s first witness. While she said Koenig told her Skilling ordered the changes, Koenig stopped short of saying his boss explicitly issued such an order, testifying only that Skilling was authorized to do so.

Neither Rieker nor Koenig addressed how the accounting changes were made.

But Rieker said Enron’s stock price would have suffered if analysts believed the company fudged numbers just to meet or beat their expectations.

“Again, it would have really hurt the credibility of Enron and would have hurt the stock price because for analysts, strong underlying performance was a good thing, and management changing the earnings just to beat expectations by 2 cents would have been a bad thing,” she said.

She said Lay told analysts in October 2001 that retail energy contracts valued at $30 billion would be “growing at very rapid rates for at least three, four or five years” when he knew the values had been shrinking, Rieker said.

“It was very misleading,” Rieker said.

The same month, on Oct. 16, she said he ordered word of a $1.2 billion reduction in shareholder equity, which she later learned was an accounting error, pulled from the third-quarter earnings report “because it really didn’t have anything to do with the earnings,” she said Lay said.

Lay mentioned the writedown during a conference call with analysts.

“Analysts were confused,” she said. “There was this buzz. They were irritated they missed it.”

Lay and Skilling are accused of repeatedly lying to investors about Enron’s financial health when they allegedly were hiding chaos 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. Both sold millions of dollars in stock before Enron went bankrupt, but only Skilling faces allegations of improper stock sales.