HOUSTON – A former Enron Corp. broadband unit executive acknowledged Monday that jurors must conclude that he lied to regulators in early 2002 about the division's prospects of success to believe his current testimony in the fraud and conspiracy trial of company founder Kenneth Lay and former Chief Executive Jeffrey Skilling.
Kevin Hannon fidgeted in his chair, repeatedly pursed his lips and often hesitated before answering when he faced cross-examination Monday by Skilling lawyer Mark Holscher.
In what may be the most damaging testimony to the defense so far, Hannon last week told jurors that Skilling misled Wall Street analysts about the failing broadband unit's future during a late March 2001 conference call. He said the division was bleeding cash and facing layoffs without gaining any substantial revenue from its missions of trading Internet bandwidth or delivering video to homes through fiber-optic network.
Skilling told analysts on that call that it was a "great quarter" for bandwidth trading, a claim Hannon disputed under initial questioning from a prosecutor.
But on Monday Hannon acknowledged that he told the Securities and Exchange Commission in early 2002 that he was optimistic about Enron's ability to take advantage of the telecom industry's meltdown and the glut of broadband capacity in 2001 to create a bandwidth trading market — which was Skilling's message to analysts in March 2001.
Attempting to skewer Hannon's credibility, Holscher asked whether his SEC testimony "directly contradicts every statement you've made to this jury that you thought there was bad news in the broadband market?"
"I don't know if every statement contradicts that, Mr. Holscher," Hannon replied as he fidgeted. "When I went to the SEC, I did so essentially to get them to focus not on me."
Hannon then said, "Yes, that's correct," when Holscher asked whether jurors must conclude that he lied to the SEC to believe his current testimony.
Holscher said he expected to cross-examine Hannon for several hours. The attorney had yet to address the statement Hannon made last week during initial testimony — that Skilling said, "They're on to us," in a May 2001 meeting of top executives regarding an analyst firm's criticism.
The analyst believed it was shaky business practice for Enron to rely 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 was attended by 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. Fastow, who was slated to succeed Hannon in the witness chair, arrived at the federal courthouse in Houston mid-morning. Whether his much-anticipated testimony would begin Monday depended on how long Hannon's cross-examination lasted.
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. Holscher's questioning Monday followed that pattern.
Hannon, who pleaded guilty in August 2004 to conspiracy for scheming to tout Enron's broadband unit as successful when it was failing and is slated to be sentenced in December. But Fastow agreed up front to serve the maximum 10-year term for his crimes.
In the final 10 minutes of testimony Thursday, Hannon also told jurors that Fastow told attendees at the May 2001 meeting that "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.
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.