The ex-chief of Enron Corp.’s broadband unit said Tuesday former CEO Jeffrey Skilling approved related-party transactions put together by then-CFO Andrew Fastow to help the poorly performing unit boost its booked revenue.

Kenneth Rice, who worked at Enron for 21 years in various management positions, was named co-CEO of Enron Broadband Services (EBS) in mid-1999. He took the stand Tuesday as the second government witness in the trial of Skilling, 52, and Enron founder Kenneth Lay, 63, who are both charged with deceiving investors in the months before Enron imploded. Fastow has already pleaded guilty to two counts of fraud, and he is expected to be a cooperating witness in the trial.

Rice resigned from Enron about five months before the company declared bankruptcy in December 2001, and in 2004 he pleaded guilty to one count of securities fraud and agreed to pay a $13.7 million fine (see Daily GPI, Aug. 2, 2004). Rice, who faces up to 10 years in prison, is a cooperating witness for the prosecution, and he will be sentenced once the Enron Task Force completes its work.

Enron Task Force Director Sean Berkowitz handled Rice’s questioning, and he asked Rice if EBS, which was officially rolled out in early 2000, ever made a profit. “No,” Rice answered. EBS struggled to generate revenues, and in 1999, almost all of the unit’s earnings came from a speculative investment in a dot-com stock and from $55 million in sales of unused cable, or “dark fiber” to LJM, special purpose entity, run by Fastow, he said.

According to Rice, Skilling said the transactions with LJM were legitimate. “I didn’t agree with him,” Rice said. “I thought it looked goofy… Mr. Skilling explained that it was something that would facilitate getting transactions done. He said we needed it so that we weren’t being stuck by the banks at the last minute to get transactions done.”

However, even with the sales to LJM, a possible video deal with Blockbuster and stock investments, the future of EBS looked grim at the end of 2000, Rice testified.

“We were not generating any new transactions,” Rice testified. “Virtually all of our trades were break-even or losing money. We were trying to demonstrate that broadband was a commodity that could be traded. But I was increasingly concerned about our ability to hit our earnings numbers.”

Rice testified that Skilling wanted EBS and another new unit, Enron Energy Services (EES), to show growth so that Enron’s stock price would increase.

“Mr. Skilling said he wanted to substantially increase the value of Enron’s stock price and to do that we needed to grow the multiple of EES and EBS,” Rice testified.

In the budget projections for 2001, EBS internally forecast a $489 million loss. Rice said a revised budget was then done to reduce losses to $110 million. However, in a November 2000 budget meeting with Skilling, Rice testified Skilling wanted EBS to post a loss of $65 million in 2001.

“I thought that number was very unlikely,” Rice said. Still, he agreed to make the changes. Asked why he didn’t tell Skilling the figures weren’t achievable, Rice said, “I didn’t feel like I had any choice…because there really wasn’t an option because he said this is the number; this is what the number is going to be.”

He also said Skilling approved laying off some EBS employees to trim costs. Skilling later told analysts that EBS was not laying off workers but instead was shifting them to other areas of the company.

Rice also testified Skilling helped prepare presentations for a Jan. 25, 2001 analyst conference. He said Skilling wanted Enron’s presenters at the conference to appear confident in front of analysts and told them “body language” was important. Rice testified Skilling intended to mislead Wall Street about the health of EBS at the conference.

“I lied to them [analysts] about the status of our network and the things our network could do… I also withheld the true state of our business,” Rice testified.

Rice testified that in July 2001 he told Skilling during a breakfast meeting that he wanted to resign from Enron. He said EBS was going to merge into Enron’s wholesale trading business to hide problems within the division. Essentially, Rice would be working under people he considered his peers, and he told Skilling he wasn’t having any fun any more.

Rice said that Skilling agreed with him, that Enron was no longer “fun,” and “the traders have taken over,” Skilling said. “I can’t control the traders, and it’s not fun for me,” Rice said Skilling told him. Rice testified he thought Skilling was referring to executives within Enron’s wholesale trading business. A couple of weeks later, Rice met Skilling for lunch, and was surprised when Skilling told him he also planned to resign.

“I said, ‘I’m surprised. I didn’t see this coming,'” Rice testified. “I didn’t realize when I talked to him a few weeks before about leaving he was going to leave.” Rice said Skilling talked about buying a boat and sailing around the world. After lunch, Rice said he returned to his office and sold some of his Enron stock, a fact later included in the indictment against him.

The first prosecution witness, Mark Koenig, finished on the stand early Tuesday. Following his eight days of testimony, his Washington, DC-based lawyer, Philip Inglima, said in a statement “he will have nothing more to say until this case is concluded. However, I would like to offer an observation.

“When a person makes wrongful choices and violates the law, that person confronts another choice. Mark Koenig chose to confront and admit his wrongdoing, and to undertake the most meaningful effort available to him to begin making up for his offense,” Inglima said. “Over the past year and a half, and especially over the past two weeks, that’s exactly what he has done. He embraced responsibility for what he knew to be wrong, and spoke truth about what happened. And in doing that, he displayed a great deal of courage and strength of character.”

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