See no evil, hear no evil: Enron hid losses, witness says
Former head of investor relations says company shifted losses from retail business to other unit without appropriate disclosure.
HOUSTON (CNNMoney.com) - Enron deliberately hid significant losses in the company's high-value retail energy unit in the first half of 2001, a witness for the prosecution said Thursday as testimony resumed in the trial of Enron Corp. founder Kenneth Lay and former chief executive Jeffrey Skilling.
Despite the losses, the company continued to tell investors the unit, which sold energy directly to consumers and businesses, was performing well within expectations, Mark Koenig, Enron's former executive vice president of investor relations, told jurors under questioning from prosecutor Kathy Ruemmler.
He said Enron transferred part of the business, and with it hundreds of millions of dollars in losses, from the retail unit to the company's wholesale trading unit. Koenig said Skilling told analysts the move was an effort to get more efficiency for the business and made no mention of the losses.
"The wholesale income level was large enough" to absorb the losses, Koenig said.
In the first quarter of 2001, the retail energy business lost $230 million, losses that jumped to $495 million in the second quarter, according to documents shown by the prosecution. The company didn't disclose those losses to the public.
"It would have been a negative surprise to investors...in my opinion it would have a significant impact on the stock price," Koenig said.
And even as those losses were piling up, Skilling said during the company's second-quarter conference call that the retail business had another "great, great quarter."
Koenig helped the company mislead the investment community but sold his own personal shares of Enron stock. He admitted he sold stock in May 2001, netting $700,000.
He said the decision to sell was based on information the company didn't disclose to the public, including the large losses in retail and the weakness in the Broadband unit.
"Did you know it was wrong?" prosecutor Ruemmler asked Koenig. "Yes it was," he replied.
Koenig said Skilling let analysts and investors believe the retail business was "hitting on all cylinders" as one analyst describes it on the second-quarter conference call.
When asked how it was misleading, Koenig said: "There was no mention of significant losses."
"I should've spoken up, but I didn't at the time," he said.
Koenig said the company also misled investors regarding the volatility of profits from its wholesale energy business.
In a video shown by the prosecution of a 2001 analyst conference, Skilling told analysts "We are not a trading business... we are a logistics business."
But Koenig said it became increasingly apparent that the unit was relying more and more heavily on volatile gas and power trading profits for earnings growth -- a fact that would have significantly reduced investors' valuations of the stock, he said.
"We didn't communicate that to investors," Koenig told jurors.
The prosecution played an audio tape of the company's second-quarter earnings call with analysts during which Skilling was grilled on the details regarding the make-up of the company's balance sheet.
Skilling said the information wasn't available and when pressed further by analyst Richard Grubman from hedge fund Highfields Capital, he referred to Grubman using an expletive.
"You're the only financial institution that can't produce a balance sheet or cash flow statement with their earnings," Grubman is heard to say on the tape, according to Reuters.
Skilling responds: "You ... you. ... Thank you very much, we appreciate it. Asshole."
There was some laughter in the courtroom after the tape was played, although some jurors appeared shocked by Skilling's brazen comment.
Koenig said Skilling didn't appear apologetic and the call progressed. "I was surprised, we were all surprised," Koenig said, adding that "it's not a comment we would normally use."
Koenig began testifying Wednesday, telling jurors that company execs had lied to analysts on a conference call about the health of the company's troubled Broadband unit.
He also accused Skilling of lying to the investor community about the company's finances and said Enron had massaged its earnings figures to meet targets set by Wall Street analysts.
Attorneys for the defendants arrived at the federal court house in high spirits Thursday, laughing and joking with reporters.
It was a far cry from late Wednesday, when tensions ran high. Defense attorneys Michael Ramsey and Daniel Petrocelli sparred with prosecutors over snippets of audio tapes presented to the jury in support of Koenig's testimony.
Ramsey and Petrocelli objected to the tapes and called for the judge to order the prosecution to play the hour-long tapes of Enron conference calls in their entirety.
After dismissing the jury early, Judge Sim Lake denied the defense's request.
Prosecutor Ruemmler expects to complete the questioning of Koenig later Thursday. The defense will then have the opportunity to cross-examine the witness.
Koenig pleaded guilty to securities fraud in 2004. Defense attorneys for Lay and Skilling, in opening arguments Tuesday, attempted to discount the quality of testimony from some witnesses that cut deals with the prosecution.
Thursday Ruemmler questioned Koenig on his plea agreement.
He admitted that he had lied to the SEC and government about any misconduct at Enron when first questioned because he was "trying to protect myself."
But after accepting a plea bargain in 2004, he said he now faces 10 years in prison, over $1 million in fines and 14 lawsuits over his role in the Enron collapse.
He said the government will provide a letter indicating his cooperation in the case against Skilling and Lay but said he's received no guarantees that the sentencing judge in his case will be lenient.
Skilling and Lay face more than three dozen fraud and conspiracy charges accusing them of lying to investors about the company's financial state while they enriched themselves by selling millions of dollars in stock.
Their lawyers say the two men didn't hide anything and deny that they were part of a criminal conspiracy.
The prosecution still hasn't finished questioning Koenig and is expected to finish early next week when court resumes. Court has been recessed for the weekend.
Enron filed for bankruptcy in December 2001 after investigators found it had used partnerships to conceal more than $1 billion in debt and inflate profits.
Click here for CNNMoney's special report 'Enron On Trial.'