Enron Corp. founder Kenneth Lay and ex-CEO Jeffrey Skilling were actively involved in the day-to-day financial dealings at their company and either knew about or took part in some of the alleged wrongdoing, the former chief of investor relations testified Monday.

In his third day on the witness stand, Mark Koenig testified for the prosecution that Lay wanted to keep details of the company’s 3Q2001 $1.2 billion shareholder equity losses out of the earnings press release to minimize the details. Koenig said there was an internal debate about whether to include in the text of an Oct. 16, 2001 earnings release information about the $1.2 billion write-off.

In order to unwind itself from third-party balance sheet transactions put together by then-CFO Andrew Fastow, including the infamous LJM transactions, Enron repurchased about 55 million of its own shares, which led to the 3Q equity write-down — a fact later uncovered by The Wall Street Journal and other news organizations (see Daily GPI, Oct. 23, 2001).

Koenig, who was in charge of the releases, said he wanted to include the equity write-off information in the press release, but he said Lay and former Chief Accounting Officer Richard Causey did not. (Causey, who was to go to trial with Lay and Skilling, pleaded guilty in December and has agreed to cooperate with the prosecution.) Koenig said Lay and Causey thought the information should not be included because it was not an income statement item. As a compromise, two brief lines concerning the equity write-down were mentioned in the script of a conference call that occurred that day, but the equity write-down was not mentioned in the press release (see Daily GPI, Oct. 17, 2001).

“By not putting it in the earnings release, that was an attempt to minimize it,” Koenig testified.

“Do you feel you were being encouraged by Mr. Lay to conduct business in honesty and candor and fairness?” prosecutor Kathryn Ruemmler asked Koenig.

“At times no,” Koenig said.

After the 3Q2001 earnings report was released, Koenig testified that a planned trip to meet with analysts in Philadelphia was canceled after several news reports cited the equity write-down and LJM partnership run by Fastow. Koenig testified there was a meeting at Enron the following Sunday to discuss the LJM partnerships.

“We had people working on ways to say LJM was okay, that it was approved by the board…, it was approved by auditors,” Koenig said. “I was upset that with this investigation that we were trying to talk our way out of it. It was not going to cut it.”

Koenig also testified that during 2Q2001, Enron sold several natural gas-fired power plants, earning $418 million on the sales (see Daily GPI, July 13, 2001). However, Enron did not include the power plant sales’ financial figures in its public documents because, he said, the asset sales within its wholesale business unit were not “consistent with the story that earnings were based on steady volumes and earnings margins.” During a conference call to discuss 2Q2001 earnings, an analyst from Goldman Sachs asked for a break out of the plant sales’ revenues. However, according to Koenig, Skilling answered, “We don’t even track that.”

Koenig said investors and analysts questioned him about the lack of financial disclosures, particularly in quarterly conference calls, throughout 2001. “To Mr. Lay and Mr. Skilling, I communicated that,” he said. Koenig also cited examples of Skilling failing to disclose losses or releasing misleading information about Enron’s retail energy and broadband units during conference calls. However, Koenig never said Skilling or Lay knowingly hid bad news or ordered unlawful accounting.

The defense wasted no time in trying to dismantle the character of Koenig, as Daniel Petrocelli, Skilling’s attorney, took over the cross examination at mid-morning Monday. Petrocelli pointed out to the jury that Koenig admitted he lied to the Securities and Exchange Commission and the U.S. Department of Justice before pleading guilty to aiding and abetting securities fraud in 2004. Petrocelli referred to earlier statements by Koenig, and noted that as part of a plea deal with the government, he remains out of prison and still has about $5 million in the bank, statements Koenig said were true.

“You’re still in a mode of protecting yourself,” Petrocelli said. The defense lawyer asked Koenig, “what does zero mean?…Isn’t that the amount of time you want to spend in jail?”

Koenig, who will be sentenced after the Enron Task Force has completed its investigation, said he would “love” for the amount of time he spends in jail to be “zero.” And he also affirmed Petrocelli’s assertion that he would have to “produce a performance for the government” under the plea agreement.

“Is it fair to say your life is on the line testifying in this trial?” Petrocelli asked.

“My life has been on the line since August 2004,” Koenig said, referring to the date he entered his plea agreement with the government.

Petrocelli asked Koenig if he had ever told anyone at Enron about the alleged lies by himself or his bosses or if he ever confronted anyone about the alleged lies during analyst meetings and conference calls.

“You never said ‘Mr. Skilling, why are you spearheading a criminal conspiracy,’ did you?” Petrocelli asked.

“No,” Koenig replied.

“And you never saw a single e-mail or memo that said Mr. Skilling broke the law? Or Mr. Lay?” Koenig said he had not.

Cross examination of Koenig is expected to continue into Tuesday. The next person scheduled to testify is Kenneth Rice, formerly co-CEO of Enron Broadband Services. Rice pleaded guilty in 2004 to one count of securities fraud and is cooperating with the investigation.

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