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Enron Transferred Wholesale Energy Reserves to Meet Targets, Ex-Accountant Testifies

The former chief accounting officer of Enron Corp.'s wholesale energy trading operations testified Monday he transferred millions of dollars of reserves from the unit in 2000 to help the company top Wall Street's earnings forecasts.

Wesley H. Colwell, 46, was the fifth person to testify for the prosecution in the joint trial of former Enron CEO Jeffrey Skilling and founder Kenneth Lay. Skilling faces 31 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay is being tried on seven counts of fraud and conspiracy.

Colwell became chief accounting officer of Enron Wholesale Services, which encompassed Enron North America, in September 1999, and he held the post until February 2002. In 2003, Colwell agreed to pay $500,000 in penalties to the Securities and Exchange Commission and to cooperate with civil and criminal investigations (see Daily GPI, Oct. 13, 2003). He testified Monday as part of an immunity agreement obtained from prosecutors.

"If I tell the truth and don't withhold any information, I will not be prosecuted for my crimes while at Enron," Colwell told jurors as he explained the reason for his testimony. Colwell, who had worked at Arthur Andersen for 17 years before joining Enron, lost his certified public accountant license, and he is barred from serving an officer in a publicly traded company. However, he is not considered a felon.

With its wholesale energy trading unit going strong, Colwell testified Enron set aside $70 million in the unit's profits in a reserve fund in 2000. Within a five-day period in July 2000, between the close of 2Q2000 and Enron's official earnings announcement, Colwell testified he raided the reserves, moving $7 million twice into the corporation. Each $7 million increase created about $5.25 million in net earnings after taxes, which in turn pushed Enron's quarterly earnings to $289 million after taxes, when they should have been about $278.5 million, he said. Earnings per share increased to 34 cents from 32 cents (see Daily GPI, July 25, 2000).

"Did you use reserve accounts at Enron North America to fraudulently manipulate Enron's reported earnings?" prosecutor Sean Berkowitz asked Colwell.

"Yes," Colwell said.

Did Enron's reported 2Q2000 earnings accurately reflect the company's performance?, the prosecutor asked.

"No," Colwell said. "The releases had no economic substance to them." He said the monetary releases were based on a "desire to increase earnings."

"Who gave the orders to release the $14 million?," Berkowitz asked.

"I understood that to be Jeff Skilling," Colwell said quickly.

Colwell testified he told his boss, former Enron North America CEO David Delainey, in an e-mail days before Enron released its 2Q2000 earnings that he understood Skilling's "preference" was to beat financial analyst expectations for the quarter.

When Enron collapsed, it also pulled Arthur Andersen into bankruptcy, and the auditor was the first Enron defendant to go to trial, convicted in 2002 of obstructing a government investigation (see Daily GPI, June 18, 2002; Oct. 17, 2002). (The U.S. Supreme Court has since overturned the verdict.) In its trial, Andersen was fingered as being instrumental in helping Enron in its cover up, but Colwell offered another perspective.

Enron hid its actual 4Q2000 earnings from Andersen, "backward engineering" its earnings for that period to meet targets set by Skilling, Colwell said. And, as it had done in 2Q2000, Enron drained the reserves fund set aside by Enron North America to boost corporate earnings, Colwell said.

"What do you believe Arthur Andersen would have done if they'd known the actual way earnings were derived for the fourth quarter?" Berkowitz asked.

"They would have had to report that to the [Enron board of director's] audit committee, the fact that this was backward engineered," Colwell said. Andersen's required annual financial opinion of Enron's financial statements likely would not have stated a "clean opinion, without qualifications" if Andersen had known Enron purposely shaped its results to meet internal earnings estimates.

On cross examination, Skilling lawyer Randy Oppenheimer tried to get Colwell to admit that transferring reserves from one ledger to another ledger was legal because of Enron's use of mark-to-market accounting for energy trading. Oppenheimer showed the jury a document indicating Enron North America had $42.3 million in reserves overages in 2000.

What was wrong with taking out $14 million from reserves to add to Enron's quarterly ledger?, Oppenheimer asked.

"If I flipped the switch and used these reserves, there is a set of policies and a set of practices associated with credit reserves," Colwell said. "If I had somebody come to me and ask me, because they wanted another penny or two pennies of earnings and to take this $42.3 million in reserves and make it $14 million lower, that would be illegal. The fact that this reserve exists is part of the normal practice of the company."

Colwell also testified the amount of money held in reserve after 4Q2000 by Enron North America was shaped from the beginning by what was needed for the company to hit an internal earnings target. Unlike 2Q2000's earnings, which would have been $278.5 million before the $14 million change, Colwell said there was no baseline number for 4Q2000.

"We were engineering from the earnings-per-share number," Colwell said of 4Q2000 earnings figures. "We were not walking this through the quarter. My reserve [for Enron North America] ended up at $369 million at the end of that quarter [4Q2000]. I didn't make an independent determination of what the reserves should actually be." The reserves earnings "demand" was 41 cents/share, which he said was achieved through back engineering. Colwell testified he did not know whether the earnings actually should have been higher or lower than 41 cents because the proper calculations were never made (see Daily GPI, Jan. 23, 2001).

In redirect questioning Berkowitz asked, "What relationship should the earnings process have on the reserves process?"

"None," Colwell said.

"Why is that?"

"Because your reserves should be independently determined," said Colwell.

Wanda Curry, a 20-year Enron employee, was Monday's second prosecution witness. She served as chief accounting officer of Enron North America for four months prior to Colwell's appointment. Prosecutor Kathryn Ruemmler took over the questioning, asking Curry why she was the chief accountant for only four months before being transferred in February 2000.

"I was told I was being replaced as chief accounting officer of Enron North America because I was not capable of making aggressive accounting decisions," Curry answered. She said she was told of the move by J. Clifford Baxter, then CEO of Enron North America. Baxter committed suicide less than two months after Enron declared bankruptcy (see Daily GPI, Jan. 28, 2002). Curry said Baxter's decision to replace her stemmed from her scrutiny of a 1999 transaction with Merrill Lynch, which helped Enron disguise a $7 million loan as a sale of three Nigerian energy barges (see Daily GPI, April 22, 2005).

Curry was transferred to Enron Energy Services, the company's retail division, where she began reviewing those operations. She said she found "internal controls were nonexistent," and said the accounting books had to be rebuilt.

"It was a complete do-over because we couldn't trust what was in the risk books," Curry testified.

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