Enron Corp. founder Kenneth Lay blamed the media Tuesday for undercutting his company’s strengths in the weeks before it crashed by highlighting problems at Enron that he said were already cleaned up.
Yet he said more problems, including restatement of previously announced earnings that wiped out nearly $600 million in profit for the previous four years, further pushed Enron toward bankruptcy protection as investor confidence eroded in October and November of 2001.
The restatement is unrelated to criminal counts against Lay, but he noted that it added to the firestorm he said was ignited by the media.
“Obviously, that was a devastating blow to the financial markets and us,” an agitated and sometimes bristling Lay told jurors in his fraud and conspiracy trial.
The former chairman and chief executive appeared to be trying to control the examination by defense lawyer George Secrest in his second day on the stand, saying, “I’m not sure where you’re going with that,” when Secrest asked him to differentiate strategic from non-strategic assets. Lay then affably explained that a strategic asset is considered to be strategic to a certain business.
“He and (former Enron Chief Executive Jeffrey) Skilling could not be more different in their demeanor,” said Philip Hilder, a former federal prosecutor who represents several ex-Enron executives, outside of court. Skilling, Lay’s co-defendant in the federal criminal trial, finished nearly eight days on the witness stand last week.
Hilder’s ex-Enron clients include Sherron Watkins, a former executive who won fame for trying to warn Lay of the financial peril facing the company days after he stepped back into the CEO role after Skilling’s abrupt resignation in August 2001.
Hilder said Lay appeared to be “taking control of the questioning and charting his own course” to “reinforce his version of reality,” while Skilling let his lead attorney, Daniel Petrocelli, guide his testimony.
Testimony in the three-month trial could last another three weeks, lawyers on both sides told U.S. District Judge Sim Lake Tuesday after jurors were dismissed for the day. The judge told the panel last month that the case could wrap up before the end of April. He said Tuesday he may lengthen the court day or cut the daily 90-minute lunch break to pick up the pace, which seemed to drag as Lay and Secrest often switched subjects without apparent organization.
“I respect the court, but I have a constitutional obligation to my client. I don’t take it personally,” Secrest said outside of court. He said Lay has “waited a long time to testify. He’s only been on (the witness stand) for two days.”
The government says Lay and Skilling conspired with each other and their staff to hide accounting tricks and flailing business ventures until the company collapsed into bankruptcy proceedings in December 2001.
Both defendants say there was no fraud at Enron other than that committed by former Chief Financial Officer Andrew Fastow and a few others, who skimmed millions from secret scams. Lay, who began testifying Monday, continued to insist Tuesday that Enron cratered in a storm of bad press, a skittish post-Sept. 11 market and Fastow’s greed.
Fastow told jurors during his testimony as a prosecution witness earlier in the trial that he met with Lay the day after Skilling resigned and warned of billions of dollars in looming writedowns of overvalued assets. Lay, who has pegged Fastow as a traitor, a liar and a crook, flatly denied Fastow told him any such thing.
“I don’t recall him ever telling me the company was in dire straits,” Lay said, noting he would remember such a warning.
A few days later, Watkins met with Lay to alert him to four off-the-books financial structures ostensibly created in 2000 to lock in gains from assets and investments. Fastow and other prosecution witnesses said the structures, called Raptors, actually hid losses by warehousing poor assets and investments.
When Watkins testified, she read part of her infamous memo leaked by Congress in early 2002 that warned, “I am incredibly nervous that we will implode in a wave of accounting scandals.”
Lay minimized her complaints, telling jurors that she had been concerned about the appearance of the Raptor deals and that she told him “no,” when he asked if the structures were illegal.
The Raptors, backed by Enron stock, crumbled as the company’s shares fell throughout 2001, accounting for more than half of a $1 billion charge the company reported in the third quarter on Oct. 26, 2001.
Lay testified Tuesday that the Raptors “provided a worthwhile service or business service to the company,” but he opted to shut them down, take the third-quarter loss and move on rather than shore them up with more Enron stock.
When Secrest asked who gave transactions such names as Raptor, Lay laughed and said, “Beats the hell out of me.” But few jurors laughed with him. The panel appeared attentive except for a female alternate who unabashedly dozed throughout the day. She has seemed disengaged from the case for weeks.
The day after Enron reported the third-quarter losses, The Wall Street Journal began publishing articles questioning the propriety of partnerships created and run by Fastow in 1999 to conduct deals with Enron. Fastow had sold his personal interest in those LJM partnerships in 2001, and Lay told jurors Tuesday he considered them “an old, dead issue.”
But the Journal didn’t — and Lay insisted that in September he had reluctantly followed advice of Enron public relations staff to refuse to answer the newspaper’s questions about them.
“My policy had always been it’s better to talk to the press than not talk to the press,” Lay told jurors.
Lay said both the LJM partnerships and the Raptors were proper and had received all necessary approvals from inside and outside accountants and lawyers.
The Journal’s questions continued, though, and days later another article identified a separate off-the-books financial structure, Chewco, that had been created by Fastow in 1997 to be Enron’s partner in a joint venture.
Lay said Chewco “jumped out as something I was unaware of.” He said accountants looked into it, and discovered it never should have been kept off Enron’s books and used to report profit because of the ex-CFO’s admitted self-dealing.
The Chewco discovery forced Enron to restate its financial results, wiping out $586 million in profit dating back to 1997 — and alerted Lay to the possibility that there may well be problems with Enron’s accounting, he said.
“I was convinced that despite the noise about LJM that, in fact, all the accounting within the company was correct,” Lay said. But the Chewco discovery and subsequent restatement would “obviously be a very, very negative event in the middle of all the other uncertainty that was already swirling around us.”
Lay faces six counts of fraud and conspiracy related to his tenure as CEO following Skilling’s resignation. Former CEO Jeffrey Skilling faces 28 counts of fraud, conspiracy, insider trading and lying to auditors related to his activities from 1999 to 2001.
In a separate case, Lay is accused of obtaining $75 million in loans from three banks and reneging on an agreement with lenders that he would not use the money to buy Enron stock on margin.
Those criminal charges, covering 1999 to 2001, will be tried without a jury before U.S. District Judge Sim Lake while jurors in the Lay-Skilling trial are deliberating. Lake is also presiding over the Lay-Skilling trial.