Enron inflated earnings, former employee testifies

HOUSTON — The numbers didn't match reality.

That was the message Wednesday in the first day of testimony in the trial against Kenneth Lay, Enron's former chairman and chief executive, and Jeffrey Skilling, its former president.

Mark Koenig, the company's former head of investor relations, detailed instances in which Skilling approved of manipulations of earnings reports so that Enron would meet or exceed investor expectations. Lay, he testified, was at least aware of the manipulations.

The government maintains Lay and Skilling altered financial reports and lied to shareholders and employees about the company's mounting debts and failing investments to inflate Enron's share price and personally reap millions of dollars in stock options.

Lay, 63, is charged with seven counts of conspiracy, wire fraud and securities fraud. Skilling, 52, is charged with 31 counts including conspiracy, fraud and insider trading. Both have pleaded not guilty.

Koenig, who pleaded guilty in August 2004 to one count of aiding and abetting securities fraud, is one of 16 former Enron employees who agreed to cooperate with the government in exchange for reduced sentences. He worked in Enron's investor-relations department for 10 years.

The defense plans to argue that Enron's finances were healthy, and that its abrupt downfall in late 2001 was the work of the company's former chief financial officer Andrew Fastow and two assistants.

Questioned by Assistant U.S. Attorney Kathryn Ruemmler, Koenig told how in January 2000 he called Richard Causey, the company's former chief accounting officer, shortly after getting word that the consensus analysts' estimate of the company's earnings for the 1999 fourth quarter had increased by one cent to 31 cents per share.

Enron, Koenig said, had planned to report earnings of 30 cents per share. But after a series of phone calls that Koenig, 50, said included Skilling, Enron's investor-relations department rewrote its press release to report 31 cents rather than 30 cents. Koenig said Skilling approved the change.

"We wanted to make sure that the consensus estimate that we would be compared to was at or below where we thought we would report earnings," he said.

Asked by Ruemmler, deputy director of the Justice Department's Enron Task Force, if he thought the action was improper, Koenig added, "Yes, it was wrong. I believe the operations for the company for the quarter were 30 cents, not 31 cents."

After the earnings report was issued Jan 18, Koenig testified he spoke to Lay and did not express displeasure or surprise at the change. "He understood the issue," Koenig said, adding that Lay's tone was "fairly matter of fact."

During 2000, Enron's stock price soared almost 300 percent.

A similar manipulation, Koenig said, occurred in July 2000. Skilling and other Enron executives were committed to beating second-quarter earnings estimates by two cents a share, Koenig testified. On July 18, Skilling approved increasing reported profits from 32 cents a share to 34 cents a share.

It was done partly to signal that the company's broadband-services unit was growing faster than forecasted.

Throughout the day, Michael Ramsey, Lay's lead attorney, objected to the playing of excerpts from various conference calls that Skilling and other Enron officials held with Wall Street analysts. Often sparring with Judge Simeon Lake III, Ramsey demanded that the government play entire conference calls — many of which ran for more than an hour. Lake rejected Ramsey's requests.

In one recording, Skilling was heard telling analysts that the broadband unit had generated $100 million in operating income when the true answer was closer to zero, Koenig testified. One quarterly earnings report said operating income from broadband services was $151 million, including $50 million from the sale of fiber-optic lines.

This was done, Koenig said, "to maintain the appearance of a growth story for broadband. Had investors had a clear way to see that most of the revenue was being covered by these noncore items, I think there would have been a much more negative view. It would have had a significant negative effect on the price."