Skilling Scoffs at Fastow’s Deals
Many of the financial transactions at the heart of the fraud case against former Enron Corp. Chief Executive Jeffrey K. Skilling were almost too piddling to attract his notice, let alone to cause him to resort to crime, Skilling testified Tuesday.
In his second day on the witness stand in his federal fraud and conspiracy trial, Skilling dismissed Enron’s deals with off-the-books partnerships headed by former Chief Financial Officer Andrew S. Fastow as minuscule in the context of a company that was doing tens of billions of dollars’ worth of deals annually.
Fastow, the star prosecution witness, testified last month that he considered himself “a hero for Enron” in 1999 and 2000 because his LJM partnerships pulled off flurries of transactions that helped Enron business units hide losses and inflate profit -- often just in time for crucial quarterly earnings releases.
Fastow, in a 2000 memo shown to the jury of eight women and four men Tuesday, bragged that LJM had executed six deals in eight days in December 1999, generating earnings of $125 million for Enron.
But Skilling scoffed that $125 million amounted to a “rounding error” for Enron, which did $5 billion in deals that month and more than $21 billion that year.
The government contends that many of the LJM deals were mere accounting shams because of secret agreements -- which Fastow referred to as “bear hugs” -- under which Skilling guaranteed Fastow that LJM would not lose money.
“I don’t even know what a ‘bear hug’ is,” Skilling told his lead defense lawyer, Daniel M. Petrocelli of Los Angeles. “I had no agreement with Andy Fastow that would guarantee him a rate of return. Period. Full stop.”
Skilling, 52, and Enron founder and former Chairman Kenneth L. Lay, 63, could spend more than 20 years in prison if convicted of the multiple fraud and conspiracy charges they face. The government contends that they lied to the public about Enron’s true financial condition and plotted with underlings to pump up the company’s profit through accounting tricks such as the LJM deals.
Enron collapsed in late 2001, filing what was then the biggest-ever U.S. bankruptcy. The government contends that the unraveling of the accounting dodges brought Enron down, but Skilling and Lay say it was a crisis of confidence, like a run on the bank. They say Enron’s energy-trading business -- its lifeblood -- dried up when negative publicity surrounding the Fastow deals caused trading partners to panic and refuse to extend credit.
Prosecutors say Lay and Skilling’s motive for the fraud was greed: the desire to meet Wall Street analysts’ quarterly earnings targets and protect their personal fortunes, which were tied up mainly in Enron stock.
Skilling tried to undercut that argument Tuesday by testifying that when he was promoted to president of Enron in 1997, he passed up $48.5 million in cash. His employment contract entitled him to a $70-million payout when he changed jobs, he said, but instead he took $21.5 million. He had earned the money by launching Enron’s wildly successful natural gas and electricity-trading businesses.
Skilling said that forgoing the additional pay, which would have more than doubled his net worth, would “put me in a stronger moral position” to ask other executives to put the company’s interest ahead of their own. He said he hoped it also would convince Enron’s board of directors that his strategic business proposals weren’t motivated by hope of personal gain.
“I made more money than I ever expected, and it was plenty,” Skilling said.
Skilling also denied any awareness or encouragement of efforts to fraudulently add one or two pennies per share of earnings to Enron’s results in the fourth quarter of 2000 or the second quarter of 2001.
Government witnesses earlier said Skilling was involved in a frantic scramble during those periods to boost profit to beat analysts’ forecasts.
Monday’s high drama, when Skilling began his long-awaited testimony, gave way to near tedium Tuesday as Petrocelli methodically led Skilling through his lengthy indictment and tried to rebut its charges one by one. One count concerned three power barges -- floating power plants that could be docked and connected to a local power grid -- that Enron owned in Nigeria and sold to LJM, allegedly under a Skilling “bear hug” that promised that Fastow’s partnership would not lose money.
“I don’t know if I even knew of that transaction,” Skilling said, adding that the $12-million pretax gain from the sale would typically be beneath his notice as company president.
Petrocelli said his direct examination probably would finish Thursday.
It was unclear whether cross-examination by co-chief prosecutor Sean M. Berkowitz would begin immediately afterward, because Lay’s lawyers had not yet decided whether they would question Skilling.
