In some of the most damaging testimony so far in the trial of Enron Corp. founder Kenneth Lay and ex-CEO Jeffrey Skilling, David Delainey, who once headed the wholesale gas trading unit, testified Tuesday the company played “fast and loose” with accounting rules, and financial tricks were “standard operating procedure.
Delainey told the jury he met almost daily with Skilling during his tenure as CEO of Enron North America. Delainey, who also served as CEO of the retail energy unit, Enron Energy Services (EES), struck a deal in 2003 to plead guilty to insider trading and manipulating earnings in connection with criminal charges brought by the U.S. Department of Justice. Along with cooperating with the prosecution, Delainey forfeited nearly $4.26 million from money he made at Enron, and he also paid a $3.74 million fine to the Securities and Exchange Commission (see Daily GPI, Oct. 31, 2003).
On Monday, Wesley Colwell, former top accountant for Enron North America, testified he tapped into the wholesale trading unit’s reserves during 2000 to boost the corporation’s earnings numbers. Prosecutor Kathryn Ruemmler asked Delainey whether it was a surprise when cash reserves were tapped into in 2000.
“No, it was standard operating procedure at Enron,” said Delainey, 40. “My history with Enron in Houston was that we tended to be pretty fast and loose with the rules, generally.”
Delainey, a Canadian citizen, worked first for Enron in Calgary, then moved to Houston. At 34, he was awarded Enron’s plum position of CEO of Enron North America. He described meeting almost daily with Skilling.
“He was very detail-oriented, very complete, very thoughtful, very smart,” said Delainey. “He was always encouraging us to go one step further, to find transactions in the market that made sense and to build the business we were all working toward.”
Delainey recounted of the time in the fall of 2000 when he told Skilling that Enron North America would be so incredibly profitable that year.
“I said we had a couple of quarters in our pockets that would give us flexibility in the future,” Delainey testified. “I wanted to make sure he was aware we were doing really well.” Skilling, said Delainey, was ecstatic.
“He gave me a hug,” Delainey said of his former boss. “We were making so much money, it was a good thing.”
However, Delainey also testified there was a darker side to the company. He said he often felt “pressure” from Skilling and Richard Causey, Enron’s former chief accounting officer to raid Enron North America’s reserves to boost corporate earnings. Causey originally was going to trial with Lay and Skilling; but he pleaded guilty in December and is cooperating with the prosecution (see Daily GPI, Dec. 29, 2005).
Using reserves to boost earnings was wrong, he said, because the reserves had to be applied to specific risks and were not supposed to cover potential trading losses “or just kind of at management’s discretion…Anything else is cheating and misrepresenting the company. You can’t just pull money to create earnings from the reserves. It’s backwards.”
Delainey testified Skilling lied during a financial analyst meeting in January 2001 to attempt to show Enron had more stable businesses than only the highly profitable — but highly risky — wholesale gas trading unit. Enron North America’s trading risks were so volatile when the power and gas markets were shaken up in late 2000 that the company routinely recorded losses and gains on hundreds of millions of dollars on a daily basis, he said.
On one single day in 2000 for instance, Enron’s traders lost between $500-600 million — equivalent to the company’s entire profit in 1999, he said. However, Enron North America’s usual huge gains more than offset losses, and the trading unit managed to post strong earnings in 1999, Delainey testified.
Recalling a meeting with financial analysts in January 2001, Delainey said Skilling told him before the meeting he wanted him to frame Enron North America in a certain way and to avoid calling it a “trading” unit.
“If we represented ourselves completely as a market maker, intermediary, originator and a services company — and also a speculative trader, there would be a lot of questions from the analyst community,” Delainey told the jury. “If [we were] asked those questions, we would have to admit we were a very large trader and a very good trader.”
Delainey added, “the investment community does not pay significant multiples for significant trading revenues, especially speculative trading revenues.”
To change the culture at the company, Delainey testified executives wanted employees on the trading desk to be referred to as “risk managers” instead of traders. However, he said, “employees like to be proud of what they do, and if they’re good at it, they get insulted if they’re told they’re not that. The next step, they thought, was that, ‘if you’re not going to call me a trader, you’re not going to pay me for trading.”
Being an Enron energy trader was especially prestigious because many of them made seven-figure bonuses in 2000. One trader, or “risk manager” made an $8 million bonus on top of salary, he said.
“They were encouraged to take large and well-thought out trades based on their view of where supply and demand was and where they could profit the most based on those bets,” Delainey told the jury.
Delainey also offered an explanation of Raptor, the complicated special purpose entity put together by ex-CFO Andrew Fastow. He said Raptor was presented by Fastow and former Enron treasurer Ben Glisan Jr. as a way to hedge trading losses. Glisan pleaded guilty to one count of criminal conspiracy and is serving a maximum five-year prison sentence (see Daily GPI, Sept. 11, 2003).
“The analogy made by Ben Glisan and my team was that it was analogous to an insurance policy,” Delainey said. “This vehicle had a certain amount of value that could cushion losses for Enron during which time those assets could be sold and cash be brought into the company. It was never represented to me as a true hedge or a third-party sale or anything like that.”
In April 2001, Delainey, still CEO of Enron North America, assumed the CEO position at EES. He said the retail energy unit’s bookkeeping was a mess.
“It was one of the two or three growth areas that had been touted by the management team,” he said, and the company was boasting that the “nature of the customers we were dealing with in that segment would create consistent, repeatable and growing earnings in the future…and thus deserved a higher multiple [in stock price] than even our Enron North America business,” Delainey testified.
But in early 2001, as the company was touting EES, “it was a basket case, is the only way I can put it,” he said.
In mid-January 2001, as the California energy crisis continued, Delainey said EES had an exposure of nearly $1 billion because of poorly written contracts. During a meeting of top executives on Jan. 22, 2001, Delainey suggested the “uncollectible” $500 million in receivables for EES could be moved to Enron North America. He said the transaction basically was moving the problem from a “little bucket” to the “big bucket.”
“‘Dave, that sounds like a good idea,” Delainey said Skilling told him. “Why don’t you follow up with Mr. Causey.”
At the same meeting, Delainey said management decided it wanted to get out of several of the “screwed up” electricity service contracts by dumping them back on California utilities.
Presiding U.S. District Judge Sim Lake asked why the California utilities would take on the additional contracts, Delainey said Enron threatened to sue the utilities if they didn’t take them back
A few weeks later, Delainey said Skilling rewarded him with a $3 million cash bonus.
Because of requests, the Enron Task Force is now posting copies of documents put into evidence on the Department of Justice website. The documents include e-mail postings, Enron board of director meetings, earnings releases and press releases. It is available at www.usdoj.gov/enron/index.html.
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