HOUSTON – Former Enron Corp. Chief Executive Jeffrey Skilling sparred with a prosecutor Tuesday when challenged about whether the company used fraudulent financial structures and other means to fudge its numbers in the years before it collapsed into bankruptcy proceedings in 2001.
The 52-year-old former CEO held his temper during his sixth day on the witness stand in his fraud and conspiracy trial. But he appeared to seethe when federal prosecutor Sean Berkowitz sternly pressed him about poor investments housed in the off-the-books structures that prosecution witnesses said were used to hide losses.
Skilling occasionally answered at length or with sarcasm, only to have Berkowitz demand a "yes," or "no," to which the ex-CEO would say, "OK."
The financial structures, known as Raptors, were largely backed by Enron stock and could protect against losses on investments and assets as long as the energy company's shares remained above a certain level.
The four structures crumbled as Enron stock fell throughout 2001, and accounted for more than half of a $1 billion charge the company reported in the third quarter that year when they were shut down. Six weeks later Enron sought bankruptcy protection.
Skilling's co-defendant, Enron founder Kenneth Lay, is expected to begin testifying next week, after Skilling wraps up his testimony and other defense witnesses take the stand.
The government contends Enron was so bent on meeting or beating Wall Street expectations that the company turned to fraud, including the use of the Raptors, to sweep potential losses from its books and wrongly dipped into reserves to pad earnings.
Skilling acknowledged pressure at Enron to meet earnings targets, but said that was normal for any company.
"Mr. Berkowitz, every company tries to hit their earnings targets. The question is would you do something incorrect ... In my view, there was no issue of hitting our numbers," he said.
Skilling and Lay say the Raptors were proper hedging structures. Skilling reiterated Tuesday that the Raptors were used to lock in gains, and denied that they primarily warehoused bad investments and money-losing assets.
"At least many of the assets going into Raptor were poorly performing?" Berkowitz asked.
"No, that's not true at all," Skilling replied. He advised the prosecutor to "go through a number of these assets" to see if their values were written down before they were placed in one of the Raptors. If so, "there's no reason to think there's more likelihood of going down than of going up. Public securities are public securities."
"They went down as anticipated?" Berkowitz asked later.
"Hindsight is a wonderful thing," Skilling replied.
Former Enron treasurer Ben Glisan Jr. is serving a prison sentence for creating one of the Raptors, which he testified were used to manipulate Enron's earnings.
Skilling also minimized warnings by Enron's risk assessment and control group throughout 2000 about poor investments and assets, many of which ended up in Raptors.
When Berkowitz presented documents from that group that informed top executives of problem assets and investments, the ex-CEO said the items listed were not a significant percentage of Enron's asset portfolio.
"Out of hundreds of investments Enron made, these are the ones being watched," Skilling said. He compared Berkowitz's evidence to baseball rankings where only the "mess-ups" of the worst two teams are highlighted, ignoring others with better performance.
"Let's talk not about baseball, Mr. Skilling, let's talk about Enron," Berkowitz admonished.
"This is a misrepresentation," Skilling shot back, adding that the watch list shows Enron carefully monitored risky investments.
Prosecutors allege Skilling and Lay repeatedly lied to investors and employees about Enron's health, using false optimism to hide weak business ventures and accounting tricks to obscure debt and inflated profits.
The two defendants say no fraud occurred at Enron, and the company collapsed because of bad publicity and lost market confidence.
Skilling insisted that Enron did not dip into reserves to pad earnings when business units failed to meet income targets. Several prosecution witnesses testified that they felt pressure from Skilling to use reserves that way when such funds are supposed to be used for specific expenses, like litigation costs.
When Berkowitz displayed for jurors a chart that showed more than $1 billion in reserves were "available for earnings," Skilling said the prosecutor misinterpreted the document.
"You misunderstand how reserves are calculated, approved and set," Skilling said.
Berkowitz suggested they move on to another line of questioning, but Skilling snapped, "No, let's not move on. Let's talk about the financial reports."
The ex-CEO continued saying the document had nothing to do with reserves set aside for supposed improper purposes, but Berkowitz cut him off again.
"I know it is difficult for you to sit here and answer questions, Mr. Skilling, and I know you at times overreact to people who are critical. But if you could just let me ask the questions, and we'll move along, Mr. Skilling."
Skilling raised his eyebrows, cocked his head and nodded as Berkowitz admonished him, apparently more in acknowledgment than agreement.
Later, Berkowitz pointed out a script for an April 2001 conference call Skilling would conduct to discuss that year's first-quarter earnings. Enron's investor relations department produced such scripts for Skilling to read.
But a transcript of what Skilling actually said in the analysts' call showed that he skipped a portion which said Enron's broadband unit — which he had highly promoted to Wall Street — expected a 2001 loss of up to $100 million rather than the $65 million he had forecast in January that year. Prosecutors say he knew the broadband unit was flailing when he touted it, which Skilling denies.
Berkowitz asked if Skilling could choose to leave something out of a script.
"Something tells me that's a trick question, but go ahead," Skilling said.
Berkowitz asked if Skilling would answer every question. "Even the trick ones, yes?" he asked.
"Yes," the ex-CEO said. Regarding the script, he then said, "Sometimes I would add and subtract words form the script."
Skilling is charged with 28 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay faces six counts of fraud and conspiracy.