Enron Corp. founder Kenneth Lay worried in 2001 that the company’s mounting financial problems would jeopardize its credit rating and inquired about managing its accounting to avoid a downgrade, a former Enron treasurer testified Wednesday.
Former Treasurer Ben Glisan Jr. testified that Lay assigned him to feel out credit-rating agencies about how large some required accounting writedowns could be without jeopardizing Enron’s rating.
“That’s backwards,” Glisan told jurors in the fraud and conspiracy trial of Lay and former Enron CEO Jeffrey Skilling. “What should occur is we should take the charges that we needed to take and then deal with the consequences.”
Glisan said Lay and Skilling knew Enron, then a reputed powerhouse, was actually weak and faced multibillion-dollar losses and writedowns on poorly performing or overvalued assets.
Skilling abruptly resigned in mid-August 2001, Lay resumed as CEO, and those problems grew, Glisan said. The company tumbled into bankruptcy proceedings in December 2001.
Glisan also said Lay and Skilling misled Wall Street in 2001 about the nature of Enron’s business, describing it as a “logistics” company rather than as an energy trader.
Glisan said “logistics” indicated Enron made money by delivering commodities and could sustain its growth. A trader is vulnerable to market volatility and therefore a more risky investment, which Glisan said could translate into a lower credit rating and stock price.
“Mr. Skilling said the market does not like trading companies, and it was important to articulate our strategy as being a logistics company and stay away from the term ’trading company’ or ’traders,”’ Glisan said, describing Skilling’s instructions to top executives before Enron held an analyst conference in January 2001.
Glisan, a onetime protege of former Enron Chief Financial Officer Andrew Fastow, is the last major government witness in its case against Lay and Skilling. The defense teams are expected to begin next week presenting their evidence — which they say will include testimony from Lay and Skilling.
Testifying in the eighth week of the trial, Glisan corroborated testimony from earlier government witnesses — including Fastow — who also said Lay and Skilling repeatedly lied to investors about Enron’s financial strength. He often referred to notes he kept in 2001 of conversations and meetings.
The defendants claim there was no fraud at Enron and negative publicity coupled with diminished market confidence fueled the company’s failure.
But Glisan is halfway through a five-year prison sentence for creating fraudulent financial structures known as Raptors, which he said Enron used to house poor assets and investments and hide losses. He pleaded guilty to conspiracy in September 2003 and was immediately incarcerated because he hadn’t yet begun to cooperate with prosecutors.
Prosecutors contend Lay and Skilling knew about the Raptors and how they were used.
Glisan described his presentation of the first of the Raptors to the finance committee of Enron’s board in May 2000. Then-Chief Accounting Officer Richard Causey explained that the structure had some “accounting risk,” but outside auditors had approved it. Then he said Lay giggled.
“In what sense?” prosecutor Kathryn Ruemmler asked.
“In delight,” Glisan replied.
At that, Lay turned to his daughter, Elizabeth Vittor, one of the lawyers at the defense table, and said, “I giggled?”
“Did they accept the number one risk of the deal, which was accounting scrutiny?” the prosecutor asked, referring to directors at the meeting, including Lay and Skilling.
“Yes,” Glisan said.
Glisan was among Fastow subordinates who participated in one of the scams the ex-CFO ran to skim millions from Enron. The young treasurer invested $5,800 in a deal that brought him a $1 million return within weeks. He was fired in November 2001 when top executives learned of that take.
The ex-CFO pleaded guilty to two counts of conspiracy in January 2004 and agreed to serve the maximum 10-year term. He is to be sentenced in June.
Glisan also told jurors Wednesday that Lay wanted to prevent a credit downgrade, which would make it more expensive for Enron to borrow millions to support its trading operation and could force debt repayment when little cash was available. It also would alert Wall Street to looming financial problems.
Prosecutors contend Lay hid bad news from debt-rating agencies to maintain an investment-grade rating.
Glisan said his gentle inquiries with credit-rating agencies revealed that Enron could report a charge of up to $1 billion without prompting a downgrade.
In mid-October, the company announced that amount — not the multibillion dollars in actual charges that executives had discussed internally — when it released third-quarter 2001 earnings, with Lay telling analysts that all the financial cards were on the table and core businesses were strong.
Glisan, on furlough from prison, had yet to be cross-examined. He remained unsmiling and confident, speaking quickly and with no hesitation.
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.