Government Witnesses May Hurt Lay, Skilling

HOUSTON – The next three government witnesses in the fraud and conspiracy trial of former Enron Corp. chiefs Kenneth Lay and Jeffrey Skilling are hardly household names but may still deliver testimony that is devastating to the defendants.

They include two government cooperators — one who pleaded guilty to insider trading — and a former in-house accountant who found financial chaos at a retail energy unit that Enron founder Lay and former Chief Executive Skilling touted publicly as a robust business that would bring in billions.

Lay and Skilling are accused of repeatedly lying to investors and employees about Enron's health when they allegedly knew their optimism hid weak business ventures and accounting tricks.

The defendants contend there was no fraud, and negative publicity that siphoned market confidence fueled the company's spiral into bankruptcy proceedings in December 2001. The implosion of what was once the nation's seventh-largest company left thousands jobless and wiped out billions in investors' wealth.

Jurors will return for the fourth week of the trial on Tuesday. Court is closed Monday because of the Presidents Day holiday.

Flanked by his attorney Daniel Petrocelli, Skilling said Thursday he was ready to testify when the defense teams begin presenting their cases in a trial expected to last four months or more.

"Absolutely, ready to go," he said.

The government has presented just three witnesses in an as many weeks since the trial began. Jurors spent much of that time listening to several hour-long audiotapes of quarterly conference calls or videotapes of employee meetings at the behest of the defense team, which requested that any snippets presented by the prosecution be put in context of the entire presentation.

U.S. District Judge Sim Lake allowed the defense to play the tapes in full just once. Now, jurors will see or hear clips.

"The pace is picking up," Petrocelli said in response to reporters' questions about the speed of testimony following a full week on the stand for former investor-relations chief Mark Koenig. "I think the story's being told."

Prosecutors' next witnesses will be Paula Rieker, who in May 2004 pleaded guilty to charges of insider trading; Wes Colwell, the former top trading-division accountant who paid the Securities and Exchange Commission $500,000 to settle allegations of manipulating earnings; and Wanda Curry, a former accountant who found contracts overvalued by hundreds of millions of dollars.

Rieker was the top lieutenant to Koenig before becoming the company's corporate secretary. During more than seven days of testimony, Koenig said he, Skilling and Lay — at different times throughout 2001_ misled Wall Street and employees about the company's finances. He pleaded guilty to aiding and abetting securities fraud for lying to investors four months after Rieker entered her plea.

Rieker admitted that in July 2001 she cashed out stock options upon learning that the company's broadband unit lost tens of millions of dollars more in the second quarter than Skilling had earlier told Wall Street the division would lose for the entire year.

She forfeited nearly $500,000 in profits from the stock sales to the government.

"I knew it was wrong at the time," Rieker told U.S. District Judge Melinda Harmon when she entered her plea.

She also returned $130,000 in retention bonuses to Enron that she had received after the company failed. All employees who received such bonuses had to sign papers saying they hadn't illegally traded stock.

Rieker's knowledge of how top Enron managers allegedly misled investors may extend beyond the broadband unit.

When she entered her plea, Rieker settled SEC allegations that said she provided "substantial assistance to Enron executives and senior managers in the dissemination of false and misleading information to the public about Enron business units in analyst calls and earnings releases."

Rieker became Enron's corporate secretary in September 2001, maintaining minutes of board meetings and answering to Lay. She kept that position until 14 days before she pleaded guilty, when her name surfaced as a target in the Justice Department's investigation of Enron.

"We want her on the stand," said Lay lawyer Michael Ramsey. "We will put in all the notes from those meetings. They'll show that (Enron) was a well-run organization and a lot of people were asking righteous questions. They demonstrate an intelligent corporation in action."

Colwell was chief accounting officer for Enron's profitable energy-trading unit. He settled the SEC allegations in October 2003 — without admitting or denying guilt — and has not been charged with a crime.

The SEC alleged Colwell and others used trading profit to offset losses in a retail-energy unit and squirreled away higher-than-expected income to smooth earnings in later quarters.

Skilling is alleged to have known that reserve accounts were used to mask losses from Enron's retail-energy division and that trading profit was held in reserve to be reported later.

Prosecutors contend Skilling misled Wall Street by insisting Enron was a stable company with predictable earnings rather than a trader prone to gaining or losing hundreds of millions of dollars daily in volatile markets. The government says that if the trading profit had been reported accurately, Wall Street could have viewed Enron as unable to forecast consistent income and been less bullish on its stock.

Skilling's defense team say the reserves helped protect Enron from California utilities unable to pay their bills during that state's power crunch of 2000-2001.

Curry found problems in the retail unit when she analyzed its trading contracts and billing procedures.

Until 2001, the division had its own trading operation separate from the larger wholesale unit that encompassed all other trading. Curry found overvalued trading contracts — meaning Enron likely wouldn't bring in the cash from those contracts it booked as earnings up front — and customers frustrated by chaotic billing.

Skilling faces 31 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay faces seven counts of fraud and conspiracy. Both face decades in prison if convicted. Both sold millions of dollars in stock before Enron went bankrupt, but only Skilling faces allegations of improper stock sales.