Prosecutor, Skilling Duel Over Trading
On his final day of cross-examination Wednesday, former Enron Corp. Chief Executive Jeffrey K. Skilling dueled with a federal prosecutor over Enron’s speculative trading during the California energy crisis of 2000 and 2001.
Skilling denied he had been lying when he repeatedly made public statements during the crisis that Enron had no stake in whether electricity prices rose or fell in California. The government claims Enron falsely tried to portray itself as a “logistics” company when its main profit came from speculative trading.
Prosecutor Sean M. Berkowitz confronted Skilling with the testimony of former Enron energy trader Tim Belden that the company’s Western Power Desk had reaped profit of $104 million in the fourth quarter of 2000, $445 million in the first quarter of 2001 and $333.5 million in the second quarter of 2001 -- the lion’s share of it from speculative bets on electricity prices in California.
Skilling said the large bets Belden testified about were offset by trading positions the company had in other parts of the country so that over the long term, Enron’s stance was neutral -- not a speculative effort to reap a huge profit.
Enron and other energy companies were accused of profiting from the pain of Californians -- criticisms that gained intensity after the energy crisis, when details came to light of Enron trading strategies with such nicknames as “Fat Boy,” “Ricochet” and “Death Star.” Enron traders were captured on tape chuckling about how they were fleecing “Grandma Millie” and other Californians.
Asked whether he was telling the public that Enron made no money on price volatility, Skilling repeated that Enron’s balanced trading posture was well known in the market because it had been having “a decade of conversation with our investors” and regularly published statistics on its trading positions.
Skilling, 52, and former Enron Chairman Kenneth L. Lay, 64, are accused of lying to the public about Enron’s financial condition and conspiring to cook the books to hide losses and inflate profit. The charges grew out of a federal investigation launched after Enron, once one of the country’s most admired companies, collapsed in December 2001.
Skilling, as was his habit over three days of cross-examination, fought Berkowitz on Wednesday on nearly every point. When Berkowitz, for example, asked him to concede that fund giant Alliance Capital was a major Enron stockholder, Skilling disagreed. “Are you fighting me on whether 3 million shares is a large position?” Berkowitz asked.
Skilling replied that for an institutional investor, 3 million shares -- less than half of 1% of all Enron shares at that point -- was not especially large.
Berkowitz played a recording of an August 2001 phone conversation between Skilling and Alliance officials, who were concerned about whether a large portion of Enron’s profit that year had come from speculation on the California energy crisis.
“The underlying commodity price has zero impact on profitability. Zero,” Skilling said in the phone call. That conflicted sharply with Belden’s assertion that Enron was making huge speculative profit in California.
Berkowitz also questioned Skilling about how, during the California crisis, executives went to the board at least three times for authorization to raise the daily limit on the size of Enron’s bet on energy prices. Between early October 2000 and early August 2001, the limit was hiked to $150 million from $75 million.
Skilling testified that the limit was raised not because Enron was speculating more but because its volume of business was increasing and, as a percentage of volume, the limits were shrinking and constricting the company’s flexibility.
The rising daily limits prompted Enron’s risk department in the spring of 2001 to run a statistical study showing that there was a small but measurable chance of an astronomical one-day trading loss. Berkowitz displayed on the courtroom screen a graphic produced by the risk department showing what might happen in the event of a $1-billion loss.
The chart, with boxes and arrows, mapped a progression from “profit warning” to “stock sell-off” to “credit downgrade” to “loss in investor confidence” to “liquidity dries up.”
Skilling said the probability was so remote that he paid little attention to the graphic.
Daniel M. Petrocelli, Skilling’s lead defense lawyer, said he would conclude his re-direct examination this morning.
