Special report: Enron on trial Full coverage
Enron trial: four down, oh so many to go
Former Enron investor-relations deputy Paula Rieker stays poised during most testimony, but shows some strain under defense grilling.
By Bethany McLean, FORTUNE senior writer

HOUSTON (FORTUNE) - Former Enron investor-relations deputy Paula Rieker, the fourth witness to testify in the criminal trial of Ken Lay and Jeff Skilling, finished up on Thursday afternoon. (Well, for now: The defense has said it may still recall her.)

Rieker was perfectly poised through her examination by prosecutor John Hueston, and her cross-examination by Lay lawyer Bruce Collins, but she showed some signs of strain under a withering cross by Dan Petrocelli, who is Skilling's lawyer.

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Rieker addressed both Hueston and Collins as "sir," a term she noticeably did not use with the aggressive Petrocelli. At one point, she asked Petrocelli, who was standing right next to the witness box -- too close for comfort -- to please step back. He quickly retreated, saying, "Sorry I got too close," and later in the day, when he had to approach her, he asked for permission with elaborate politeness.

It would not have been fun to be in Rieker's shoes on Thursday. Petrocelli began his cross by pointing out that she had made over $5 million in her last two years at Enron, took over $200,000 in deferred compensation out of Enron in its final year, and had received a "confidential" $300,000 bonus in the dark days before the company declared bankruptcy. (This, by the way, illustrates just how over-the-top the compensation was at Enron.)

Petrocelli contrasted Rieker's high pay with her testimony that she had not felt empowered to correct Lay and Skilling's misrepresentations of the business ("Is it fair to say that you weren't paid $3 million to repeat what management said?" he asked) -- and he certainly succeeded in making her seem less sympathetic.

Petrocelli also used her self-evaluations of her work at Enron and her testimony to others (such as the bankruptcy examiner), to show that at some points in the past, Rieker shaded things slightly differently than she did on the stand this week.

In one tense exchange, Rieker denied Petrocelli's assertion that she was an "architect" of Enron's message to Wall Street, and instead described herself as a "packager." Petrocelli then presented her with a self-evaluation in which she described herself asóhold your breath! -- an "architect." Rieker responded that she had "overstretched" on her in-house brag sheet.

Which prompted Petrocelli to counter: "Just as no diligent employee is going to talk down himself, no diligent executive is going to talk down his company."

"I would expect them to tell the truth," Rieker said.

"Just as you did here," replied Petrocelli. When Rieker said that she had gone along with the Enron message because of "years of saturation," Petrocelli suggested: "I think you might be a victim of saturation of their [the government'] message now."

At one point, Petrocelli seemed to flail. This happened when he was quizzing Rieker about Skilling's assertion on a conference call that $50 million of broadband's revenues had come from dark fiber sales, whereas the real number was $150 million. Petrocelli pointed out that $54 million of that had been sold to LJM, and said, "Perhaps that's what Jeff Skilling had in mind when he said $50 million." Are you kidding?

Rieker stuck to her central assertion that something was wrong at Enron. Asked if she had observed any crimes, she said that she had seen things that "caused her significant concern," but that she didn't reach a legal conclusion at the time. When Petrocelli asked why she didn't walk out the door, she said that although she had thought about it, "I was well compensated... and I didn't have the nerve to quit."

Later, on redirect, prosecutor Hueston asked her why she didn't ever tell Skilling he had done something wrong (a point Petrocelli had hammered away at.) "Because I was afraid of his reaction," Rieker replied. "My prior interaction with him had just conditioned me that he didn't want to be corrected." How will the jury see all this? We'll know someday!

Just as you can only speculate on what the jury is thinking, you can also only speculate on the internal politics of the defense camp, where lawyers for Lay and Skilling have thus far maintained a conspicuously united front. But Thursday's testimony could have caused some tension.

Here's why. Before Collins turned Rieker over to Petrocelli, he spent some time on EES, Enron's retail energy business, and the (by now) much-discussed fact that much of EES' "earnings" came not from its core business, but from the sale of warrants Enron owned on the New Power Company.

Collins pointed out that Enron did indeed disclose -- albeit in a way that almost no one understood -- in its 10-K for 2000, filed with the SEC in March 2001, that $63 million of EES' $103 million in earnings during 2000 had come from the sale of such warrants. (The $63 million was described as "other, net"; elsewhere in the 10-K, this was explained as "gains associated with the securitization of non-merchant equity instruments." Gee, thanks! There's no mention of New Power.)

Rieker had testified that she told Lay that, because of the one-time gains, it wasn't right to describe EES' earnings as "strong." Yet Lay, she said, continued to do so anyway, in meetings with analysts and investors during 2001.

Collins later tried to argue that because there was no documentation of Lay saying that EES' earnings were "strong" until his return as CEO in August 2001 -- after the 10-K "disclosing" the one-time gains had been publicly filed -- he hadn't really misrepresented anything. Lay's statement aside, he suggested, analysts and investors could have found out the information elsewhere.

But it seems Collins could have created issues here. He had underlined the prosecution point that EES' profit numbers depended heavily on these one-time gains. And in offering an excuse for what Rieker claimed was Lay's misleading statement, Collins implicitly hung someone else out to dry -- namely, Skilling, who has no such excuse. Lay's co-defendant had publicly pronounced EES' earnings as more than "strong" many times during 2001 -- long before the SEC filing.

Indeed, after stepping back in as CEO following Skilling's abrupt resignation, Lay had raised a few issues about the legacy Skilling had left him. On one videotape, he could be seen telling employees that "Jeff did have some very aggressive numbers out there," and that he would "try to clear it up" and restore investor confidence in Enron's "enigmatic" balance sheet.


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