Enron Corp.’s former corporate secretary acknowledged Wednesday that less than a month before the company declared bankruptcy, she told founder Kenneth Lay in a note that his leadership was “invaluable.” However, under cross-examination, Paula Rieker remained polite and seemingly unflappable, as the defense team for Lay and ex-CEO Jeffrey Skilling attempted to undo her previous testimony.
Rieker, the fourth prosecution witness called in the four-week-old trial, said in her second day on the stand that she sent a note to Lay after Dynegy Inc. announced plans in November to acquire Enron (see Daily GPI, Nov. 12, 2001). As part of the deal, Lay agreed to step down as chairman and CEO. Dynegy later backed out of the deal, and Enron declared bankruptcy.
The defense, led by Lay lawyer Bruce Collins, tried to undermine Rieker’s strong testimony on Tuesday, in which she implicated both Skilling and Lay in various fraudulent schemes. Rieker is testifying under a plea agreement with the government (see Daily GPI, May 20, 2004). Collins produced a note Rieker sent to Lay in November 2001, just two weeks before the company imploded. In the note, Rieker praised Lay’s leadership. However, she told Collins the note was personal, not necessarily about his business skills.
“I sent him the note because the merger between Enron and Dynegy was a dramatic fall for Enron and I was not sure that Mr. Lay could make that step down for himself,” Rieker told Collins. At the time she was corporate secretary, and she frequently traveled with Lay and Skilling to meet with board members and analysts. She previously served as managing director of investor relations for Enron.
Rieker also was asked about an e-mail she sent in October 2001 to then-CFO Andrew Fastow. He pleaded guilty in early 2004 to conspiracy to commit wire fraud and conspiracy to commit securities fraud (see Daily GPI, Jan. 15, 2004). The defense teams have framed a lot of their cross-examination around the theme that Enron’s troubles were all caused by Fastow, who ran the dubious special purpose entities (SPE), including the LJM partnerships.
On Oct. 22, 2001, after the Securities and Exchange Commission launched an investigation into the SPEs, the former CFO sent Rieker an e-mail about a board meeting set to discuss the inquiry.
“You may want to double check to see if Ken Lay wants me to attend,” Fastow wrote.
She responded, closing to Fastow with, “Hang in there.”
Asked whether she supported Fastow at that time, Rieker paused for a few seconds before she answered.
“You know, I don’t know that I had much feelings [sic],” Rieker said. “I did not take this on as a personal banner like many of my peers did in management. I just have a life-long training of being nice to people and I didn’t feel it was my role to punch Andy in the stomach.”
Collins spent most of Wednesday quizzing Rieker about the dry, financial details of Enron’s quarterly reports. However, under questioning, Rieker remained poised, frequently smiling at the jury when she answered questions. Some of the financial details were not her responsibility, and she frequently said simply, “I don’t know” to Collins’ questions.
Regarding her testimony on Tuesday that management had shifted some of the losses in Enron Energy Services (EES) to the wholesale trading unit in 3Q2001, Collins quizzed Rieker about how she could know exactly what was done if she was not involved in the accounting details.
“How much time did you spend reviewing the accounting?” Collins asked.
“I did not review the accounting,” Rieker said.
“How much time did you review the exposure?” Collins asked.
“I did not review the exposure.”
During a meeting of the board of directors and other management staff to discuss 3Q2001, Collins asked Rieker if anyone of the more than 30 people present had expressed any concerns about EES.
“No,” said Rieker.
Did her boss, Mark Koenig, chief of investor relations, say anything at the board meeting?
“He probably wished he had,” Rieker said.
“You could have spoken up too but chose not to,” Collins said.
“I wish a lot of people had spoken up…that wholesale was not recording its true level of profits, and retail was not recording its true level of profits,” Rieker said.
Asked if former EES chief David Delaney would have had a better idea of what should be included in the financial reports, Rieker said, “Mr. Delaney had much more expertise on the retail business. I feel that I had more expertise on what the investor community expected and relied upon.” Rieker, who once held the No. 2 position in investor relations at Enron.
Collins also quizzed Rieker about EES contracts, indicating that the flow and value of the contracts were not as important because the business was beyond the start-up phase.
However, Rieker stopped him. “This was not a mature business,” she said. Financial analysts still considered the EES contract values and volumes important, she noted.
In related news, U.S. District Judge Melinda Harmon in Houston Wednesday gave preliminary approval for three banks to pay $5.8 billion to settle civil claims they helped Enron Corp. manipulate earnings. So far, financial institutions involved in deals with Enron have agreed to pay $7.2 billion.
Harmon is expected to give final approval to the settlements with the Canadian Imperial Bank of Commerce (CIBC), JP Morgan Chase & Co. and Citigroup Inc., according to William Lerach, who represents the University of California, the lead shareholder of about 50,000 Enron stockholders who filed claims in the actions against the banks.
Last year, CIBC agreed to pay $2.4 billion, Chase agreed to pay $2.2 billion, and Citigroup agreed to pay $2 billion. The combined total of $5.8 billion has risen to $6.7 billion with interest, according to Lerach. Another $500 million in settlements already had been completed with Lehman Brothers Holdings Inc., Bank of America Corp., Andersen Worldwide, and 18 former outside Enron directors, including 10 who paid $13 million from their personal accounts after selling stock.
Financial institutions that have not settled include Merrill Lynch & Co., Barclays PLC, Toronto-Dominion Bank, Royal Bank of Canada, Deutsche Bank AG and the Royal Bank of Scotland Group plc.
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