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Witness Says Other Enron Execs, Investors Questioned Fastow's Transactions

Following seven days on the witness stand, the cross-examination of former Enron Corp. investor relations chief Mark Koenig in the trial of Enron founder Kenneth Lay and former CEO Jeffrey Skilling was finally completed on Monday. Koenig told the jury the special purpose entities (SPE) designed by former CFO Andrew Fastow were criticized internally at least two years before the company went bankrupt.

Following a redirect by the prosecution to clear up any inconsistencies, Kenneth Rice, Enron's former co-CEO of Enron Broadband Services, is expected to begin his testimony on Tuesday. Rice pleaded guilty in late July 2004 to one count of securities fraud, and he is cooperating with the government (see Daily GPI, Aug. 2, 2004).

On Monday, Lay's defense lawyer Mike Ramsey grilled Koenig extensively about Fastow, and asked Koenig if anyone at Enron questioned Fastow's financial dealings before the dismal third quarter earnings report was issued in 2001.

"Oh, yes," Koenig said. "A lot of people were complaining about the partnerships and the amount of money [Fastow] might have made."

Asked if anyone at Enron accused Fastow of theft, Koenig answered, "I don't think anyone ever mentioned the words, 'stealing from the house.'" Koenig testified that the SPEs were detailed in footnotes to Enron's regulatory filings in 1999.

Fastow pleaded guilty to conspiracy to commit wire fraud and conspiracy to commit securities fraud in January 2004, and he faces up to 10 years in prison (see Daily GPI, Jan. 15, 2004).

In 1999, Fastow created several SPEs, including the LJM partnerships, named after the first initials of his wife Lea and two sons. According to the government, the LJM SPEs enabled Enron, Fastow and "others" to, among other things, manipulate Enron's financial results by fraudulently moving poorly performing assets off the company's balance sheet, by manufacturing earnings for Enron through sham transactions with the LJM entities when Enron was having trouble meeting its goals for a quarter, and by improperly inflating the value of Enron's investments by backdating transaction documents to dates advantageous to Enron. Fastow is alleged to have earned at least $25 million in fees from the partnership's Enron-related deals while still serving as the company's CFO.

The prosecution claims Lay and Skilling were involved in deceiving investors and the public, but the defense claims it was Fastow and a handful of others. According to Koenig, who is a prosecution witness, former Enron executives who questioned Fastow's dealings included Richard B. Buy, the former chief risk officer, Jeffrey McMahon, the former treasurer, and Ray Bowen, a former CFO. Koenig also testified that investors were calling him with concerns about the partnerships and Fastow's possible conflicts of interest.

Ramsey, who is attempting to show jurors that Lay was upfront with investors in late 2001 -- the time period in which the government claims Lay deceived investors -- replayed a conference call led by the former chairman in October 2001, a day after Enron acknowledged that it was being questioned by the Securities and Exchange Commission concerning equity reductions and the SPEs (see Daily GPI, Oct. 24, 2001).

Sounding clearly concerned about the fall in the company's share price, which at the time was edging around $19/share, Lay said on the conference call that the company was cooperating with the SEC and promised to hold conference calls "on a regular basis for a while."

Lay then turned the call over to Fastow to discuss Enron's liquidity position, and in his introduction Lay said Enron continues "to have the highest faith in Andy, and I think he's doing an outstanding job as CFO." Lay said he took issue with reports concerning Fastow's character, which he said were unfounded. After Fastow had explained Enron's liquidity position, the call was turned over to phoned in questions from investors and analysts, who criticized the company's lack of clear communication regarding its operations.

"We are trying to be as transparent as we can," Lay told analysts. "We are not trying to hold anything back... My commitment is to get everything out there and make sure that the analysts and the shareholders know what's going on there."

The following day, Fastow was put on an "indefinite leave of absence" (see Daily GPI, Oct. 25, 2001), and a week later, the SEC launched a formal investigation into the company's business practices.

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