In some of the most explosive testimony against Enron Corp. founder Kenneth Lay, ex-treasurer Ben Glisan Jr. on Wednesday told jurors Lay was in charge of a financial scheme in late 2001 in which he asked Glisan to determine Enron’s total 3Q2001 losses by first determining what amount would lower the company’s credit rating.
Glisan’s second day of testimony in the trial of Lay and ex-CEO Jeffrey Skilling was some of the most damaging to date, and it supported earlier testimony by other prosecution witnesses, including ex-CFO Andrew Fastow. And, as they had Tuesday, jurors took copious notes as Glisan testified, appearing interested in everything he had to say.
A lot of the direct testimony by Glisan is taken from his handwritten notes, which he made during meetings with Enron executives in 2001. While Fastow also made notes of meetings and telephone conversations, Glisan’s documentation is thorough. He made daily entries in notebooks, which are being shown to jurors on overhead projection screens.
Glisan, now serving a five-year prison sentence, clearly recounted how Enron’s financial fortunes began to quickly fall after Skilling resigned in mid-August 2001. He recalled a meeting with Lay to discuss the third quarter of 2001. According to Glisan, Lay asked him to determine Enron’s quarterly losses for the period by finding how high the losses could be before a credit rating downgrade was triggered. Maintaining a high credit rating was important to Enron because it was borrowing millions to run its energy trading operations.
Lay’s request was “backwards,” Glisan, 40, testified. “What should occur is we should take the charges that we needed to take and then deal with the consequences.”
However, following the meeting, Glisan went back to his office and discussed the problem with a co-worker. He then called some credit analysts in New York and “carefully” asked about how much of a writedown Enron could take in the quarter and still maintain its “BBB+” credit rating. Glisan said he was “delicately probing” analysts about the trigger numbers because he wanted to avoid letting any of them know more losses existed than Enron planned to report.
Obtaining the trigger figures from the analysts was difficult. “You can’t ask, ‘How much can we charge without losing our credit rating?'” Glisan said of the discussions.
After his conversations, Glisan determined Enron could report up to $1 billion in losses — an amount he did not think would “shock” the company’s financial integrity. The losses were grouped to Enron’s poorly performing Enron Broadband Services unit, the Azurix water unit and the Raptor special purpose entity (SPE) run by Fastow and Glisan. However, Enron had more losses in the quarter, and Glisan told jurors Lay wanted him to find a way to report even higher losses but still maintain the credit rating.
“They asked me to go get more,” Glisan recalled, “to allow the room to take a loss that was larger than a billion dollars.” But, “there was no way to do that…anything more than a billion dollars…we would lose our credit rating.”
Glisan also affirmed earlier testimony by two former accountants for Arthur Andersen LLP, Enron’s outside auditors. In public statements, Lay said in 2001 Enron was planning to invest up to $1 billion to grow its Azurix water unit, but the former accountants testified earlier this week there was no proof of the planned investment. Glisan said Lay had no intention of increasing funds to the money-losing business because in late 2001, Enron had no money to invest in it.
“In October 2001 the balance sheet was full,” Glisan said.
Glisan, who appeared competent and relaxed on the stand, recalled a meeting after Skilling resigned of top Enron executives in The Woodlands, a suburb outside of Houston. The discussion, referred to in earlier testimony by several witnesses including Fastow, concerned Enron’s dour financial picture. John Lavorato, one of Enron North America’s top executives, “made the comment that he was glad he didn’t have a gun or he would shoot himself,” Glisan told jurors.
At the meeting, Glisan said Lay encouraged Enron’s financial team to continue to use complex financial structures to hide Enron’s debt because “they were imperative for us to hit our numbers.” Glisan also said when Lay reviewed Enron’s growing financial problems in August 2001, his former boss said, “We’re staring at a bankruptcy.”
Just weeks later, however, in September 2001, Lay said at an all-employee meeting Enron’s stock price was “incredibly cheap,” and he encouraged employees to “talk up the stock and talk positively about Enron to your family and friends.” Lay said, “There have been all kinds of reckless and unfounded rumors about Enron and the financial condition of Enron.”
The comments were lies, Glisan told jurors. “As outlined in a number of ways, the balance sheet wasn’t strong.”
In afternoon testimony, Glisan explained the complicated Raptor SPE, which allowed Enron to hedge against some of its investments — and circumvent required accounting rules. With the Raptor transaction, there was a put in place, in which Enron had to pay the Talon partnership $41 million to buy Enron stock at a future date. The put was in place so that it could pay Fastow’s LJM SPE for its $30 million investment plus profit. Without LJM’s involvement, the hedging couldn’t take place in Raptor.
Glisan explained the deal to Skilling, and “Mr. Skilling clearly indicated that he understood it and that he liked it,” Glisan told the jury. “Mr. Skilling noted that this was not a deal that he would recommend except that it allowed him to circumvent the accounting rules.” Glisan said there was no business reason to conduct this type of transaction, and it did not involve any transfer of risk, which is required under U.S. accounting rules.
“I did not believe this deal would withstand accounting scrutiny from the [Securities and Exchange Commission] SEC,” Glisan said.
With Skilling’s blessing, Glisan presented it to the Enron board’s finance committee, which included Lay.
“Mr. Lay giggled” when Glisan explained the deal. “He giggled?” prosecutor Kathryn Ruemmler asked. “He giggled,” Glisan said. “In what way?” “In delight,” Glisan responded.
Lay and the finance committee approved the transaction.
In a sign the defense team could be concerned about Glisan’s testimony, Lay lawyer Mike Ramsey held an impromptu news conference at the end of the day Tuesday outside the courtroom. Ramsey called Glisan a “performing monkey.” Of Glisan’s testimony, he said, “What you’re seeing up here is a scripted ventriloquist act.”
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