HOUSTON – A former Enron Corp. broadband unit executive faces cross-examination this week after damaging the defense with his testimony in the fraud and conspiracy trial of company founder Kenneth Lay and former CEO Jeffrey Skilling.
Kevin Hannon told jurors that Skilling said "they're on to us" in a May 2001 meeting of top executives regarding a boutique analyst firm's criticism. The analyst cited as shaky Enron's reliance on partnerships run by its finance chief to buy underperforming assets so that the energy company could boost earnings and get debt off its balance sheet.
In addition to Skilling, Hannon said the meeting attendees included Lay, former Chief Accounting Officer Richard Causey, Lawrence "Greg" Whalley, who ran the wholesale unit that included Enron's profitable trading arm, and former Chief Financial Officer Andrew Fastow, who ran the LJM partnerships.
Hannon, 45, is among 16 ex-Enron executives who have pleaded guilty to crimes -- a group that includes Fastow and Causey as well.
Fastow pleaded guilty in January 2004 to two counts of conspiracy for helping Enron manipulate earnings while skimming millions for himself. He is slated to testify after Hannon, as early as Tuesday.
Causey pleaded guilty to securities fraud in December, breaking ranks with Skilling and Lay on the eve of trial. He is not on the government's list of witnesses, but could be called to testify during the rebuttal phase after the defense teams present their cases.
So far, the defense teams have aggressively challenged cooperators, seeking to portray them as government mouthpieces who will say anything to obtain recommendations from prosecutors for lenient punishments.
Hannon, who pleaded guilty in August 2004 to conspiracy for scheming to tout Enron's broadband unit as successful when it was flailing and is slated to be sentenced in December. But Fastow agreed up front to serve the maximum 10-year term for his crimes.
Hannon had another damaging revelation in the final 10 minutes of testimony last week as well. He told jurors that Skilling told the meeting attendees that he had brought Fastow to talk about LJM. To that, Hannon said, Fastow said, "LJM is a good deal for me."
Hannon said Fastow's comment was met with "stunned silence," which appeared to suggest that the attendees had some idea of how much money Fastow pocketed from his LJM work.
Both Lay and Skilling have repeatedly insisted they did not know Fastow ultimately collected tens of millions of dollars from the partnerships.
The defense has a critical e-mail written in January 2001 by former in-house Enron lawyer Jordan Mintz, who questioned the propriety of Enron's LJM deals. The e-mail said, "I spoke again with Andy about this earlier today and he believes, perhaps rightly so, that Skilling would shut down LJM if he knows how much Andy earned."
Lead Skilling lawyer Daniel Petrocelli said in August 2004 that the e-mail showed Skilling "had no knowledge of Fastow's arrangements."
Enron's board approved the two partnerships -- created in 1999 and 2000 -- and waived a company conflict-of-interest policy to allow Fastow to run them. The partnerships also were vetted by outside lawyers and accountants.
Prosecutors contend Lay and Skilling repeatedly lied about Enron's financial health when they knew accounting tricks propped up an image of success.
The defendants say there was no fraud at Enron, they did nothing wrong, and the company spiraled into bankruptcy protection in December 2001 because of negative publicity coupled with loss of market confidence.
Skilling faces 31 counts of fraud, conspiracy, insider trading and lying to auditors. Lay faces seven counts of fraud and conspiracy. Both sold millions of dollars in stock before Enron failed, but only Skilling is charged with improper stock sales.