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Enron Witness: Company 'Wrong' to Revise Earnings Estimates

Enron Corp.'s former investor relations chief, Mark Koenig, stood his ground under tough cross examination Tuesday, contending it was wrong for the company to revise its earnings upward to meet Wall Street expectations.

Koenig spent his fourth day on the witness stand in Houston, grilled for a second straight day by defense attorney Daniel Petrocelli. The defense is attempting to poke holes in Koenig's testimony that Enron's founder Kenneth Lay and former CEO Jeffrey Skilling were intimately involved in schemes to defraud shareholders and financial analysts.

Petrocelli, who is Skilling's attorney, questioned Koenig extensively about Enron's quarterly earnings, which Koenig claims were changed upward in some quarters to meet or beat analysts' expectations. Koenig is cooperating with the prosecution under an agreement; he pleaded guilty in 2004 to one count of aiding and abetting securities fraud.

Some of the supposedly false information issued by Enron was reviewed and approved by Enron's outside auditors, Arthur Andersen, Petrocelli noted. He asked Koenig whether he could be sure Skilling was lying when the former CEO and president made inaccurate statements during a 2000 conference call with financial analysts.

"I don't know if it was a mistake or a lie," Koenig said. However, Koenig noted the correct information was available to Skilling and everyone else at Enron.

At times, the exchange between Koenig and Petrocelli has been emotional. Late Monday, the trial was recessed for a few minutes when Koenig broke down in tears after Petrocelli accused him of lying to try to protect himself.

Petrocelli asked Koenig, "At the time you pled guilty, how old were your three children?" Koenig started to answer, but he put his hand to his mouth and started to cry. U.S. District Judge Sim Lake then called a 10-minute break. When questioning resumed, Petrocelli asked Koenig if he was afraid his answers would not result in a reduced sentence from the government. Koenig faces up to 10 years in prison, depending on the leniency of the government's recommendation.

"To answer your earlier question, I have two children in college and one in high school," Koenig said. "Entering into the guilty plea and telling them was the hardest thing to do. I'm over the biggest fear."

For the most part, however, the witness has remained calm, if not somewhat tense. As the cross examination has continued, Koenig has not been afraid to interrupt Petrocelli or attempt to correct his statements to the jury.

Koenig, who was responsible for writing the company's earnings press releases and scripting conference calls, recalled Tuesday telling Skilling and former Chief Accounting Officer Richard Causey that financial analysts were forecasting Enron would earn 31 cents/share for 4Q1999, a penny lower than the draft earnings press release, which indicated Enron would earn 30 cents/share for the period.

Koenig said Causey told him he would "work" on the numbers, and Koenig added, "a decision was made to increase the earnings." Koenig, however, said he did not know who ordered the change.

Petrocelli explained to the jury that earnings estimates are only "estimates," and companies sometimes "sharpen the pencil" to make adjustments. However, Koenig disagreed.

"I know they figured out a way to come up with the extra penny. I didn't inquire into the exact transaction or adjustment, no," Koenig said. "To go back and sharpen a pencil to find another penny, I don't think that's fairly presenting the quarter." He added, "That's wrong."

Petrocelli asked Koenig if he knew how the accounting department made up for the one penny difference, which, if not adjusted, would have caused a drop in the company's stock price.

"I was not in accounting when they were adjusting the number, no," Koenig said.

Petrocelli then had Koenig read the following phrase out of Enron's annual report: "Some amounts are based on the best estimates and judgments of management."

In earlier testimony, Koenig claimed Enron management had never missed an earnings estimate for fear of plunging stock prices (see Daily GPI, Feb. 2). However, on Tuesday, Petrocelli asked Koenig to read part of Enron's earnings release for 4Q1997, which indicated the company had missed an earnings' estimate consensus by one cent. Petrocelli then showed articles indicating Enron's share price rose about $2/share following the earnings release.

"So, Enron missed it's earnings by a penny and it's stock went up $2?" Petrocelli asked. After Koenig said "yes," and said he had misspoken earlier about the earnings releases, Petrocelli asked, "When you make those mistakes it doesn't mean you're a criminal does it?"

"Not always, no," Koenig said.

After Petrocelli has completed his cross examination, Koenig then will face questioning by Lay's attorney, Mike Ramsey.

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