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Enron Employees Told to Ignore Negative Reports in Late 2001, Witness Testifies

A 22-year Enron Corp. veteran, who lost all of his retirement savings when the company collapsed, testified Thursday he and other employees were told in the fall of 2001 to ignore negative press reports about the company's failing condition and to listen instead to corporate leadership.

John Sides, testifying for the prosecution in the trial of Enron founder Kenneth Lay and ex-CEO Jeffrey Skilling, first worked in Midland, TX, for a subsidiary of Enron predecessor Houston Natural Gas. Sides now works for the Houston Independent School District.

Until October 2001, Sides testified he had about 75% of his 401(k) retirement account in Enron stock, and then rumors began circulating about the poor financial condition of the company. At that time, Sides recalled how he changed his investment mix.

"I moved all my mutual funds into Enron stock in October 2001," said Sides. Two months later, the company declared bankruptcy.

What happened to the 401(k)?

"Basically it had evaporated," Sides said. He was not allowed to discuss exact amounts he lost.

Sides was asked why he had not been worried about his retirement account when the rumors began circulating about Enron.

"At Enron, we'd basically been told by management that articles in newspapers were rumors and we should look to the company to get facts about the true condition of the company," Sides said.

Sides said his decision to keep and then increase his stake in Enron came from Lay's statements about the company's health in August 2001. Lay sent an e-mail to employees on Aug. 14, 2001 and then delivered an upbeat message in person on Aug. 16, 2001, following Skilling's resignation at CEO. Lay assured employees Enron was stable, and he offered a positive outlook on Enron Energy Services (EES), the company's retail energy arm, which Sides said was important to him.

"It was very important to me that [EES] be successful because here it becomes a core business; it wasn't a start-up company anymore, and we were using that same business model to go into things like broadband and possibly other items as well," Sides said.

Was he aware EES had been losing money in 2001, as previous witnesses have testified? Sides said no, he did not know the business had been losing money.

"To me that would have meant the value of the stock was going to drop..., so I would probably want to diversify my funds," Sides said.

Under cross examination by Lay lawyer Mac Secrest, Sides said Lay, in addition to promoting EES, talked about some of the negative issues facing the company, including losses related to an Indian plant investment and problems within the company's broadband business.

"He gave us both the good stories and the bad," Sides said.

Kevin Hannon, COO of Enron Broadband Services (EBS) between January 2000 and June 2001, also began his testimony for the prosecution Thursday. Hannon resigned from Enron in Sept. 2001, three months before the company declared bankruptcy (see Daily GPI, Sept. 4, 2001). Hannon pleaded guilty in 2004 to one count of conspiracy to commit wire and securities fraud, and he agreed to forfeit $2.2 million and pay $1 million in civil fines (see Daily GPI, Sept. 1, 2004).

Hannon's guilty plea was based on a meeting with financial analysts on Jan. 25, 2001 in which Enron heavily promoted EBS. Skilling also took part in that meeting (see Daily GPI, Jan. 26, 2001).

Hannon recalled a brainstorming session of Enron executives on March 7, 2001 in Houston that included Skilling. He said EBS was in poor financial shape at that point, and executives wanted to find ways to meet earnings targets.

"We talked about doing acquisitions of another company... We looked at the potential of buying WorldCom," Hannon said, referring to a company that ironically collapsed in financial ruin following misdeeds by top officials and ended up eclipsing Enron as the biggest U.S. bankruptcy.

However, Skilling thought buying the once-powerful telecommunications behemoth was a "nonstarter." Instead, Hannon said Skilling suggested folding EBS into the profitable wholesale trading unit, Enron North America. The tactic has been described in earlier testimony as a way Enron's top brass wanted to disguise losses within EES.

"It would hide the problem," Hannon said.

Asked by prosecutor Cliff Stricklin if folding EBS into Enron North America would have solved its financial problems, Hannon responded, "No, I think it would have made it worse."

Hannon said the meeting adjourned with officials still looking for ways to reduce expenses and increase revenues, with 1Q2001 set to close in less than a month.

The third and final day of testimony by David Delainey, former CEO of Enron North America and EES, concluded earlier Thursday. Delainey testified he was concerned whether it was appropriate to use special purpose entities (SPEs) backed by Enron stock as insurance against losses, but an endorsement by then-CFO Andrew Fastow convinced him to go along with the plan.

The SPEs, known as Raptors, were "a pot of money we used to manipulate our income statement," Delainey said. "I was definitely concerned about the Enron stock part of it...I certainly relied on what I heard from Mr. Fastow at the time."

Delainey testified he first learned of the Raptors in 2000. He said then-Enron treasurer Ben Glisan Jr. said the structures were a way for Enron North America to avoid booking losses from poor investments. However, he thought it was "odd" to use the structures because using Enron stock for capital meant the company was using its own shares in a way that could influence the income statement.

Delainey asked Skilling about the structures, and Delainey testified, "He said it had been approved... I relied completely on the presentation by Mr. Fastow in a board meeting and the affirmation by Mr. Skilling."

He said he wanted to talk with Skilling about the transactions to ensure they were approved. Defense lawyer Daniel Petrocelli, who represents Skilling, appeared incredulous at that statement, and questioned why Delainey needed to be assured about the SPEs if he too was involved in fraud.

"I just wanted to understand if the senior management team was aware of it, that's all," Delainey said.

Lay's lawyer Michael Ramsey questioned Delainey about statements he first made to the FBI. At first, Delainey said, he lied, but he eventually pleaded guilty in October 2003 to insider trading.

Asked about the turnabout in his statements, Delainey was at a loss for words. "I'm very, very... It was a terrible... I wish it... There were a lot of things I think I did well, and a lot of things I'm not proud of, and I wish I could take them back. And I wish they hadn't gone bankrupt, and people didn't get hurt. It's a big tragedy."

Fastow, the potential star witness, may take the stand early next week, according to the prosecution. Fastow has made no public statements since he pleaded guilty in January 2004 to one charge of conspiracy to commit wire fraud and one charge of conspiracy to commit wire and securities fraud and has agreed to be sentenced to up to 10 years in prison (see Daily GPI, Jan. 15, 2004). Fastow cooperated in a plea agreement for both himself and his wife Lea, who served one year in federal prison on an Enron-related tax charge (see Daily GPI, May 7, 2004).

The trial resumes in Houston on Monday.

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