Lay, Skilling Linked With Effort to Hit Expectations

By Carrie Johnson and Ben White
Washington Post Staff Writers
Thursday, February 2, 2006

HOUSTON, Feb. 1 -- Federal prosecutors on Wednesday sought to portray former top Enron Corp. executives Kenneth L. Lay and Jeffrey K. Skilling as deeply involved in day-to-day company operations and obsessed with hitting Wall Street earnings expectations, no matter the cost.

To make their points, prosecutors called as their first witness Mark Koenig, head of investor relations at Enron under Lay and Skilling. Koenig described fevered efforts by Skilling, Lay and other Enron executives to meet or beat Wall Street earnings forecasts. And he tried to undermine defense claims that Lay, the public face of Enron, was not involved in accounting issues at the center of the case.

"Mr. Lay was less involved in the period Mr. Skilling still served as chief executive," Koenig told a federal jury. "But Mr. Lay was still highly involved, and after Mr. Skilling departed, he became even more involved."

Skilling stepped down as chief executive of Enron in August 2001 after six months in the job. Lay, who held the top job at Enron for 15 years before Skilling's ascension, stepped back into the post after Skilling resigned. Skilling, 52, faces 31 criminal charges, including securities fraud and insider trading. Lay, 63, is charged with seven counts of fraud and conspiracy. If convicted, both men could spend the rest of their lives in prison.

Koenig testified that days after Enron closed its books for the fourth quarter of 1999, he learned that analysts had increased estimates of Enron's results, meaning the company would fail to meet earnings expectations for the first time since 1997.

"I was kind of sick about it," Koenig said. "We had great success in keeping that estimate in line in the past." He said he was concerned "that there would be a significant decline in the stock price."

Koenig said he sounded alarms and called Enron's accounting chief, who Koenig said also conferred with Skilling. Within hours, Koenig said, Enron had met the increased target -- 31 cents per share -- even though books for the quarter had been closed for days. Defense lawyers claim Enron's books were never cooked, and they repeatedly criticized the government Wednesday for playing snippets of Skilling in conference calls without what they said was the full context.

According to Koenig's account, the next morning he ran into Lay, who said "he went to bed and we were 30 cents, and when he awoke he was watching one of the business news stations and he saw it was 31 cents."

Koenig's deputy, Paula Rieker, who also is expected to testify for the prosecution, sent him an e-mail shortly after the incident, stressing the need to reach out to Wall Street analysts to urge them to lower future estimates to avoid a similar event. "I think we should aggressively get folks there, including outliers, early in the quarter to avoid last quarter's events. Do you agree?" she wrote, according to the Jan. 25, 2000, e-mail introduced as evidence.

Later that year, in July, as Enron prepared to release second-quarter earnings, draft news releases and other documents introduced by the prosecution appeared to indicate a change over a few days in the earnings the company planned to state, to 34 cents per share from 32 cents. Koenig testified that the change occurred because of "a desire that quarter to beat the consensus estimate by two cents."

Under questioning by Assistant U.S. Attorney Kathryn H. Ruemmler, Koenig told the eight-woman, four-man jury that Enron never missed an earnings target from 1997 to 2001. The company filed for Chapter 11 bankruptcy protection in December 2001.

Koenig, 50, told jurors that he regularly attended weekly meetings with the company's top executives, including Lay and Skilling. He spoke with Skilling several times a week before Skilling resigned. Koenig pleaded guilty to aiding and abetting securities fraud, which carries penalties of up to 10 years. He could receive a shorter prison sentence in exchange for helping prosecutors.

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