Skilling Implicated by Witness in Hype

Former Enron Corp. Chief Executive Jeffrey K. Skilling was closely involved in efforts to mislead investors about the financial health of the company’s vaunted Internet unit at a time when the operation was bringing in almost no revenue from its core operations, the former head of the unit testified Tuesday.

Kenneth D. Rice, the second prosecution witness in the fraud and conspiracy trial of Skilling and former Enron Chairman Kenneth L. Lay, said that Skilling pressured him in 2000 and early 2001 to accept unrealistic performance targets for Enron Broadband Services. Skilling, Enron’s chief operating officer at the time, wanted to convince Wall Street analysts that the broadband unit was a big success in the making, Rice testified.

In reality, Rice said, the unit was struggling in a climate of sharply rising expenses and a depressed telecommunications market in which hardly any customers would agree to sign the long-term bandwidth contracts that were supposed to be the Internet unit’s bread-and-butter business.

Bandwidth refers to capacity for sending data over the Internet. Enron, which had pioneered gas and electricity trading, thought that it could trade bandwidth -- and eventually other commodities -- on the same model. The broadband unit was important to Enron’s image as an increasingly high-tech company that should command a far higher stock-market valuation than its competitors in the energy business.

Rice testified that while preparing for in-house budget meetings, his subordinates at Enron Broadband Services initially estimated that the unit would lose $489 million in 2001. Under pressure from Enron executives, he said, they lowered the loss estimate to $110 million.

Rice testified that even that was too high for Skilling, who ordered him to accept a loss target of $65 million.

Co-lead prosecutor Sean M. Berkowitz asked Rice why he agreed to a target he thought he had no chance of meeting.

“I didn’t feel like I had any choice,” he said.

Rice told the federal jury of eight women and four men that during a major business-outlook conference in January 2001, he lied to an audience of analysts and investors to make them think that Enron Broadband Services was on target for achieving the more modest loss number.

It was those actions that led to the single securities-fraud charge to which Rice pleaded guilty in 2004, agreeing to cooperate with the federal investigation.

To make the world think that Enron Broadband Services was successfully developing a bandwidth trading market, Rice said, the unit would do unprofitable trades just to generate volume.

“Nearly all our deals were either break-even or at a loss,” he testified.

Rice, 47, also testified Tuesday about a telephone conversation in mid-1999 in which he complained to Skilling about a new partnership, known as LJM, that had been created to do certain deals with Enron and would be run by Andrew Fastow, Enron’s chief financial officer.

The deal was criticized within Enron because it seemed to pose a conflict of interest for Fastow to simultaneously run the outside partnership and hold a high executive position at Enron.

Rice said Skilling told him that he favored the arrangement because it would give Enron a source of financing apart from banks.

Rice said he wasn’t convinced by his boss’ rationale.

“I thought it looked goofy,” he testified.

LJM later proved to be a godsend to Enron Broadband Services when it was used in several deals that helped the unit achieve its public business goals.

For example, in 2000, LJM bought $90 million to $100 million of “dark fiber,” or unused telecommunications lines, to generate a $55-million gain for the broadband unit, Rice said. At that time, in the midst of the telecom industry meltdown, no other buyer would have been willing to make such a deal, Rice said.

Skilling and Lay face multiple felony counts of fraud and conspiracy. If convicted, they could spend decades in prison. They have denied any wrongdoing.