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Ex-Enron Exec Implicates Skilling, Lay in Deals to Hide Company Losses

Paula Rieker, Enron Corp.'s former corporate secretary, testified last week that ex-CEO Jeffrey Skilling ordered changes to at least two of the company's quarterly earnings reports to ensure the company would meet or beat Wall Street's expectations. Rieker also implicated founder Kenneth Lay in some of the fraudulent schemes, testifying he told the board of directors in early October 2001 about accounting issues within Enron Energy Services (EES), but praised the retail unit's performance to analysts a week later, failing to disclose any problems.

Poised and relaxed, Rieker, 51, began her first day of testimony for the prosecution Tuesday in the trial of Lay and Skilling. Lay is being tried on seven criminal fraud counts, and Skilling is being tried on 31 criminal counts in U.S. District Court in Houston. The trial is expected to resume Monday.

Rieker was appointed corporate secretary in late 2001 after Skilling had resigned and Lay had resumed the post of CEO. Previously she was managing director of investor relations, reporting directly to former investor relations chief Mark Koenig, the first prosecution witness. Rieker pleaded guilty in 2004 to one felony count of insider trading and agreed to cooperate with the U.S. Justice Department's investigation (see NGI, May 24, 2004). The single felony charge carries a maximum penalty of 10 years in prison and a $1 million fine, but both the prison time and the penalty may be reduced or even eliminated following her testimony.

Rieker, a compelling witness who smiled and made frequent eye contact with the jury, meticulously answered questions posed by prosecutor John Hueston about how Enron hid financial data from Wall Street and revised earnings numbers to improve Enron's stock price. Before becoming corporate secretary, one of Rieker's jobs was to stay in contact with financial analysts and monitor their earnings forecasts on the company.

When she learned in January 2000 Enron was going to miss the analysts' 4Q1999 consensus earnings estimates, Rieker testified, "I was shocked and horrified and a bit panicked."

She then told her boss, Koenig. "He was disgusted...he said, 'I guess I'm the one that gets to tell Skilling.'"

After he learned of the results, Rieker testified, Skilling wanted to change some of Enron's 4Q1999 earnings figures. Asked what she thought about making the changes, Rieker said, "I felt it was wrong to change the earnings release."

Asked why she did not inform the analysts about the changes in the earnings estimates, Rieker testified, "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."

Mirroring testimony earlier this month by both Koenig and Kenneth Rice, former CEO of Enron Broadband Services (EBS), Rieker said most of the revenues for EBS were derived from the sale of dark fiber, used in broadband infrastructure. To ensure losses within EBS and EES were hidden in earnings releases in 2000 and 2001, Rieker testified some of the losses were transferred into Enron's wholesale trading division. She was "very bothered" by the secret shift, and went to Koenig to complain.

"He said, 'Look, you may not agree with it, but your job is to deliver the company message,'" Rieker testified.

Recalling a conference call with Wall Street analysts on Oct. 16, 2001, Rieker testified that Lay mentioned a $1.2 billion shareholder equity reduction, but said details of the reduction were purposely omitted from a coinciding press release. Lay said one sentence about it during a conference call (see NGI, Oct. 22, 2001).

The equity reduction was actually "an accounting error," Rieker testified. However, on the conference call, Lay refers to it as an "early termination of a structured finance agreement with a previously disclosed entity." The entity was Raptor, one of former CFO Andrew Fastow's special purpose entities (SPE), or off-balance-sheet transactions. Then-outside accounting firm Arthur Anderson had ordered Enron to consolidate Raptor on its balance sheet, which led to the write-down.

On the conference call, Lay could not remember Raptor's name.

"I'm not sure it had a name," Lay is heard saying on a audiotape of the conference call. "It was an internal vehicle that was set up for financing assets. I'm not even sure if it had a name."

A week before the conference call, Rieker testified Lay had told Enron's board of directors that Raptor was "the second most contentious vehicle next to LJM," another SPE run by Fastow.

Because Lay did not use Raptor's name, analysts did not know what Enron's financial obligations were to Raptor, Rieker testified. Following the conference call, she said analysts began calling and asking about the write-down because they had not heard a number on the call.

When learning the Raptor partnership included share-price triggers, Rieker said she asked Lay about it. Lay, she said, confirmed the Raptor structure included triggers requiring Enron to inject capital into the partnership if Enron's share price fell to a certain level. Rieker testified she urged Lay to disclose the information to investors because it was material. Lay's answer, she said, was "acknowledgement, but no reaction."

After what she said was an uncomfortable silence, she left. "I felt really awkward," she said.

At a two-day board meeting Oct. 8-9, 2001, one week before Enron issued its 3Q2001 earnings report, Rieker said Lay explained some problems within EES, which included a lack of cash flow and about $1 billion in uncollected bills. Rieker testified Lay told the board, "there had been lots of retooling" with "good progress" in solving problems.

"Do you ever recall Mr. Lay discussing those problems with investors in August or October 2001?" Hueston asked.

"No," Rieker said.

She also said Lay allowed a flawed analyst report to be distributed to the board at the meeting. The report, issued Oct. 3, 2001, indicated Enron had a strong future because of cost controls in place after Skilling left. Rieker said the report was distributed when Enron was having liquidity problems and reducing its work force.

"Did Lay ever correct the analysts' views?" Hueston asked. "No," Rieker said.

As Enron began its major meltdown toward bankruptcy in October 2001, Rieker described the climate at the company. She and other director-level managers were told of an inquiry by the Securities and Exchange Commission (SEC) into the off-balance-sheet transactions during an Oct. 22, 2001 meeting. Rieker said the meeting was "unusual" because the company was normally an enjoyable place to work.

"It was a remarkable meeting because of how angry people were," Rieker testified.

Following the meeting, she and Koenig shared concerns that Enron's board was not aware of how employees were reacting nor how much money Fastow was making in the LJM partnerships. They also considered going to Lay or directly to the board to voice their concerns about how "hostile" the investors were becoming as they learned about the SPEs.

Under cross examination, Rieker acknowledged Wednesday that less than a month before the company declared bankruptcy, she told Lay in a note that his leadership was "invaluable." She sent a note to Lay after Dynegy Inc. announced plans in November to acquire Enron (see NGI, Nov. 12, 2001). As part of the deal, Lay agreed to step down as chairman and CEO. Dynegy later backed out, and Enron declared bankruptcy.

Lay lawyer Bruce Collins produced a note Rieker sent to Lay in November 2001, just two weeks before the company imploded. In the note, Rieker praised Lay's leadership. However, she told Collins the note was personal, not necessarily about his business skills.

"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 Collins. At the time she was corporate secretary, and she frequently traveled with Lay and Skilling to meet with board members and analysts. She previously served as managing director of investor relations for Enron.

Rieker also was asked about an e-mail she sent in October 2001 to then-CFO Andrew Fastow. The defense teams have framed a lot of their cross-examination around the theme that Enron's troubles were all caused by Fastow, who controlled Raptor and the LJM entities.

On Oct. 22, 2001, after the Securities and Exchange Commission launched an investigation into LJM and the Raptor entities, the former CFO sent Rieker an e-mail about a board meeting set to discuss the inquiry.

"You may want to double check to see if Ken Lay wants me to attend," Fastow wrote.

She responded, closing to Fastow with, "Hang in there."

Asked whether she supported Fastow at that time, Rieker paused for a few seconds before she answered.

"You know, I don't know that I had much feelings [sic]," Rieker said. "I did not take this on as a personal banner like many of my peers did in management. I just have a life-long training of being nice to people and I didn't feel it was my role to punch Andy in the stomach."

Collins also quizzed Rieker about the dry, financial details of Enron's quarterly reports. However, under questioning, Rieker remained poised, frequently smiling at the jury when she answered questions. Some of the financial details were not her responsibility, and she frequently said simply, "I don't know" to Collins' questions. Collins quizzed Rieker about how she could know exactly what was done if she was not involved in the accounting details.

"How much time did you spend reviewing the accounting?" Collins asked.

"I did not review the accounting," Rieker said.

"How much time did you review the exposure?" Collins asked.

"I did not review the exposure."

During a meeting of the board of directors and other management staff to discuss 3Q2001, Collins asked Rieker if anyone of the more than 30 people present had expressed any concerns about EES.

"No," said Rieker.

Did her boss, Mark Koenig, chief of investor relations, say anything at the board meeting?

"He probably wished he had," Rieker said.

"You could have spoken up too but chose not to," Collins said.

"I wish a lot of people had spoken up...that wholesale was not recording its true level of profits, and retail was not recording its true level of profits," Rieker said.

Asked if former EES chief David Delaney would have had a better idea of what should be included in the financial reports, Rieker said, "Mr. Delaney had much more expertise on the retail business. I feel that I had more expertise on what the investor community expected and relied upon." Rieker once held the No. 2 position in investor relations at Enron.

Collins also quizzed Rieker about EES contracts, indicating that the flow and value of the contracts were not as important because the business was beyond the start-up phase.

However, Rieker stopped him. "This was not a mature business," she said. Financial analysts still considered the EES contract values and volumes important, she noted.

Skilling's lead lawyer Daniel Petrocelli had the toughest questions for Rieker, questioning her extensively about conference call scripts for quarterly earnings reports, which she wrote with Koenig.

"You wrote those words," Petrocelli said.

Yes, Rieker replied, acknowledging that she had a role in preparing the scripts. But, "I knew that there were misrepresentations in those conference call scripts."

"So you wrote words that you knew weren't true and had Mr. Skilling read them?" Petrocelli asked. "Are you saying you had conversations with Mr. Skilling where he told you to write lies for him to read?"

Petrocelli earlier asked Rieker how often she worked with Skilling and whether she had known that he lied. Rieker responded she only worked with Skilling "a couple of hours" every three months, at the end of the quarterly reporting periods. She also testified that she never witnessed him lying, nor did she confront him about any lies.

"You spent almost no time with Mr. Skilling preparing for analyst conference calls, correct?" asked Petrocelli.

"That's correct," Rieker said.

Petrocelli also asked Rieker about a "brag sheet" she had written for an annual review. The "brag sheets" were used by employees to note what they had done in the previous year. On one page, Rieker called herself a "key architect" in delivering Enron's message to investors (Before becoming corporate secretary, she had been managing director of investor relations). Rieker answered that she overstated her accomplishments.

"I over-stretched on my own accomplishments for purposes of my annual review," Rieker said.

Was she "brainwashed" by Enron? Petrocelli asked.

"I was saturated at the time...I sat in many, many meetings. I packaged it, and I repeated myself," she said.

Petrocelli revealed to the jury that Rieker made $2.9 million in 2000 and $3.1 million in 2001. He also detailed a $300,000 bonus she had once received. "Now you want us to believe, contrary to what you wrote at the time..., now you want us to believe you were just repeating what you were hearing? You want us to believe that?"

At one point, Rieker asked Petrocelli, who hovered near the witness stand, to move away from her.

"May I ask you to step to the podium?" she asked. "Thank you."

Petrocelli, smiling, stepped back and said, "Got too close."

Petrocelli also alluded to how much more prepared Rieker was for the trial, compared with her 2004 deposition with the Enron Task Force, when she pleaded guilty to securities fraud.

"I think you are drawing a conclusion that I think is not right," Rieker said.

"Just answer my question," Petrocelli said. "Don't worry about my conclusion."

He questioned Rieker about her testimony indicating Skilling requested she not tell analysts about misstatements he had made in the 2Q2001 quarterly earnings conference call, concerning sales of excess dark fiber by EBS. He suggested Rieker was unqualified to determine what information should be released to investors.

Asked about how the sales were mentioned in the earnings press release, Rieker said, "Mr. Skilling asked me if we had to put that language in the press release." Nearly all of the sales from EBS were dark fiber sales, but she said she thought that fact should be clear in the press release.

"Mr. Skilling did not tell you to take out the dark fiber [wording]?" asked Petrocelli.

"The improper part of that conversation is that I felt under pressure to take out that disclosure and that I needed to stand my ground that it was in the earnings release," Rieker said.

She said she was "stunned" when Skilling misrepresented the dark fiber sales on a conference call with analysts -- not once but twice. When Petrocelli asked Rieker why she had not corrected Skilling, she explained that her boss, Mark Koenig, usually met with Skilling.

Asked about Enron's investment in Avici investment, a start-up telecommunications company, Rieker said Enron had acquired stock, but she did not know the details. Petrocelli stated Avici was a "great" investment that generated "a pile of money." But Rieker corrected him, and said Avici never generated any cash for Enron.

"I didn't say cash," Petrocelli said.

"When you said 'pile of money,' I'm thinking 'cash,'" Rieker said.

Hueston, on redirect, asked Rieker why she never challenged Skilling about some of his misstatements.

"Because I was afraid of his reaction," Rieker said.

"Why?" Hueston asked.

"Because my prior interactions with him had conditioned me that he didn't want to be corrected," she said.

A rumor has been floating around Houston's downtown courthouse for a couple of weeks that Skilling is trying to intimidate witnesses, but no one has confirmed it. In an article in Fortune magazine, writers Bethany McLean and Peter Elkind focused on possible intimidation on Feb. 6, a day when Koenig was testifying. On that day, Koenig, questioned by Skilling lawyer Daniel Petrocelli, began to cry as he recalled having to tell his children he was guilty of committing crimes at Enron (see NGI, Feb. 13). Judge Sim Lake called for a 10-minute recess, and as everyone left the courtroom, Skilling's wife started crying. After walking her out, Skilling, who entered the courtroom behind Koenig, muttered an expletive, according to the article.

"This, at least, is the story as reported to prosecutor Kathy Ruemmler by someone near the two men," according to Fortune. Koenig apparently did not hear the remark, the story said. "At the end of the same day a court officer also approached Ruemmler to tell her about what he viewed as a possible attempt at witness intimidation -- he said he had seen Skilling gesturing and mouthing things at Koenig during his testimony. By then a third courtroom source had told Ruemmler that Skilling had been seen mouthing 'son of a bitch' at Koenig during his testimony for the prosecution."

According to the magazine, Ruemmler "raised a concern" about Skilling's behavior to Petrocelli. However, Petrocelli said the comments were untrue. He said his client "made no comment, and I didn't know what they were talking about. Not only did it not happen, but it could not have happened, because he was never in the same space with him." Petrocelli called the gestures and mouthed remarks "absurd," and said it was "irresponsible for anybody to report, in my view, other than to attempt to prejudice Jeff."

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