- The Washington Times - Tuesday, April 25, 2006

HOUSTON (AP) — Enron Corp. founder Kenneth L. Lay blamed the press yesterday for undercutting his company’s strengths in the weeks before it crashed by highlighting problems that he said were already resolved.

Yet he said more problems, including the 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 2001.

The restatement is unrelated to criminal counts against Mr. Lay, but he noted that it added to the firestorm that he said the press ignited.

“Obviously, that was a devastating blow to the financial markets and us,” an agitated and sometimes bristling Mr. 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 attorney George Secrest in his second day on the stand, saying, “I’m not sure where you’re going with that,” when Mr. Secrest asked him to differentiate strategic from non-strategic assets. Mr. Lay then affably explained that a strategic asset is considered to be strategic to a certain business.

Philip Hilder, a former federal prosecutor who represents several former Enron executives, said outside court that Mr. Lay and former Enron Chief Executive Officer Jeffrey Skilling “could not be more different in their demeanor” in court. Mr. Skilling, Mr. Lay’s co-defendant in the federal criminal trial, finished nearly eight days on the witness stand last week.

Mr. Hilder’s clients include Sherron Watkins, a former Enron executive who won fame for trying to warn Mr. Lay of the financial peril facing the company days after he stepped back into the CEO role, following Mr. Skilling’s abrupt resignation in August 2001.

Mr. Hilder said Mr. Lay appeared to be “taking control of the questioning and charting his own course” to “reinforce his version of reality,” while Mr. Skilling let his lead attorney, Daniel Petrocelli, guide his testimony.

The government says Mr. Lay and Mr. Skilling conspired with each other and their staff to hide accounting tricks and failing 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 of dollars from secret scams. Mr. Lay, who began testifying Monday, continued to insist yesterday that Enron cratered in a storm of bad press, a skittish post-September 11 market and Fastow’s greed.

Fastow told jurors during his testimony as a prosecution witness earlier in the three-month trial that he met with Mr. Lay the day after Mr. Skilling resigned and warned of billions of dollars in looming write-downs of overvalued assets. Mr. 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,” Mr. Lay said, noting that he would remember such a warning.

A few days later, Mrs. Watkins met with Mr. 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 Mrs. 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.”

Mr. 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 whether 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 that the company reported in the third quarter on Oct. 26, 2001.

Mr. Lay testified yesterday 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.

The day after Enron reported the 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 Mr. Lay told jurors yesterday he considered them “an old, dead issue.”

But the Wall Street Journal didn’t — and Mr. 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,” Mr. Lay told jurors.

Mr. Lay said both the LJM partnerships and the Raptors were proper and had received all necessary approvals from inside and outside accountants and attorneys.

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.

Mr. 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 Mr. Lay to potential 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,” Mr. 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.”

Mr. Lay faces six counts of fraud and conspiracy related to his tenure as CEO after Mr. 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, Mr. 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. Judge Lake is also presiding over the Lay-Skilling trial.

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