A penny for Wall Street
Can the defense blunt the impact of an Enron exec's testimony about earnings manipulation?
 NEW YORK (FORTUNE) - Perhaps the most stunning bit of testimony from the first day of the trial of former Enron CEOs Jeff Skilling and Ken Lay, from the first witness -- former Enron investor relations chief Mark Koenig -- involved a rare occasion when his department had goofed on what seems to have been its chief duty: Managing Wall Street's earnings expectations. It remains to be seen whether the defense can blunt the impact of that testimony. Koenig and his lieutenants would pull out all the stops, especially toward the end of the quarter, to make sure that analysts' predictions for Enron's earnings were exactly what Enron wanted them to be. All this effort was due to the simple rule that prevails in today's market: If a company meets or beats earnings expectations, its stock goes up. Miss, and the stock plunges.
On the afternoon of Monday, January 17, 2000 -- less than 24 hours before Enron was scheduled to release its earnings for the fourth quarter of 1999 to Wall Street -- Koenig found out that the consensus expectation had increased by a penny. That quarter had been completed more than two weeks earlier, and Enron had already tallied up its profits. All the results were already included in a draft of the earnings press release, set to go out on Tuesday morning. Unfortunately, the number Enron was reporting was 30 cents a share. That would exactly match what Koenig had thought was the analysts' consensus estimate, allowing Enron to continue its remarkable record of meeting or beating expectations in every quarter since 1997. However, what Koenig had learned that Monday afternoon was that the real consensus estimate was actually 31 cents. This meant the company was about to miss hitting its number by a penny -- an event that would likely have a devastating effect on its stock. No matter. After Koenig ("I was sick about it," he testified) passed word of the impending disaster around the executive team (Koenig said he called chief accounting officer Rick Causey, who promised to talk to Skilling) the earnings number for the quarter that had already closed was mysteriously altered, and Enron announced on Tuesday morning that it had actually earned 31 cents a share, allowing the company to hit its number yet again. The happy news was then duly reported in the business press. After the news was out, Koenig testified, Lay joked that "he went to bed and we were 30 cents, and he awoke, and saw it was 31 cents." But according to Koenig, he offered not a single word of reproach. (Read more from Wednesday's testimony.) The defense gets its turn
Led by prosecutor Kathryn Ruemmler, Koenig, who paid $1.49 million in fines and faces a sentence of up to 10 years, is expected to continue his prosecution testimony for much of today, perhaps detailing alleged deceits surrounding Enron's retail energy business. But what will be especially intriguing will be the first round of cross-examination by the defense, likely to take place late today or Monday. It will offer the first glimpse of their effectiveness challenging both documents -- the government presented drafts of the press release for that December quarter showing how earnings per share were miraculously increased to 31 cents a share -- and a government witness who has offered damning allegations about their clients. This last part will be tricky, for both defense lawyers have argued that Koenig is in fact innocent, and was bludgeoned into a plea deal for a crime he didn't commit. Now Koenig -- who has been hit with a $1.49 million fine and faces a sentence of up to 10 years for aiding and abetting securities fraud -- is on the stand, insisting he really did commit crimes, and that Skilling and Lay, on repeated occasions, either tolerated or participated in the deception.
For the latest on the trial, click here. |
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