Skilling Knew Better, Witness Says

Jeffrey K. Skilling, right, returns to court yesterday with Daniel M. Petrocelli, one of his lawyers. The former head of Enron's broadband unit testified.
Jeffrey K. Skilling, right, returns to court yesterday with Daniel M. Petrocelli, one of his lawyers. The former head of Enron's broadband unit testified. (By Richard Carson -- Reuters)
By Carrie Johnson
Washington Post Staff Writer
Wednesday, February 15, 2006

HOUSTON, Feb. 14 -- A top deputy to Jeffrey K. Skilling testified Tuesday that the former Enron Corp. chief executive misled analysts and investors about the company's financial health.

Kenneth D. Rice, who led the energy trader's broadband unit, said he warned Skilling in November 2000 that it had little chance of hitting earnings targets and had collected minimal revenue aside from investments in a risky technology stock and deals with a secretive business partnership run by former Enron finance chief Andrew S. Fastow.

Skilling, described as "really hands-on," responded, in reference to the earnings target, that "this is the number. This is what the number is going to be," Rice testified. Later, he said, Skilling told him that another major Enron division, the international unit, was making "nada," increasing the pressure on the company to report good news in its highly touted Internet division.

Events at the Internet unit are particularly important in understanding whether Enron misled investors because during the boom year of 2000, it helped boost Enron's stock price by more than $15 a share, Rice testified. Enron executives relied on the broadband division to help convince investors that it was a high-growth company that merited a high stock price.

Rice, 47, is the second government witness in the trial of Skilling and former Enron chairman Kenneth L. Lay. Rice had been a friend and travel partner of Skilling's before the company filed for bankruptcy protection. Skilling watched Rice solemnly during his testimony, occasionally jotting notes to his lawyers.

Rice pleaded guilty in 2004 to a count of securities fraud that was based on false and over-optimistic statements to Wall Street analysts at a conference in January 2001. Rice, who spent more than two decades at Enron, faces a maximum of 10 years in prison. He has forfeited nearly $14 million in cash and assets.

Sean M. Berkowitz, director of the Justice Department's Enron Task Force, swiftly moved Rice through a two-year period as the high-speed Internet unit struggled with upward of $350 million in expenses and waning revenue. One of its most promising ventures and one that Rice said gave Enron "instant credibility" was an agreement with Blockbuster Inc. to provide movies on demand to millions of U.S. homes. But that deal fell apart in February 2001, as did a contemplated merger with now-defunct Internet service provider PSINet Inc.

Berkowitz guided Rice through financial reports that the former executive said Skilling had seen in 2000 and 2001. Rice described a March 15, 2001, meeting with employees in Portland, Ore., at which Skilling reported that they would have to redeploy 250 workers and said: "The market is in absolute meltdown. . . . We have to get the cost structure down so we can survive this."

Eight days later, prosecutors said, Skilling told analysts that Enron was having a "great quarter" on the trading side of its Internet business and that the redeployment of workers was "very good news" because Enron would not have to invest as much in building its communications networks.

"This was not good news for us," Rice testified. "We were laying off people because our cost structure was too high. We had no revenues to speak of."

Rice did not tell jurors how accounting maneuvers were carried out, nor did he indicate that he ever discussed the alleged fraud in explicit terms with Skilling or Lay, who maintain their innocence.

Mark Holscher, a lawyer for Skilling, signaled Tuesday that the witness will face extended cross-examination, based in part on "substantive" accounting issues underlying the broadband business. He also called some of the government's references "misleading" in objections he raised with the judge.

Defense lawyers kept Mark E. Koenig, former investor relations chief at Enron, on the stand for six days while they played more than seven hours of audio tapes and webcasts of statements their clients made to analysts and employees.

U.S. District Judge Simeon T. Lake III, who has tried to impose a measure of efficiency in the three-week-old trial, told the lawyers after the jury departed that he would not tolerate repetitive questions.

Defense lawyers also are likely to home in on misstatements Rice made at a trial of former broadband-unit colleagues last year. That case ended in a mistrial after jurors could not reach unanimous verdicts on most charges. Rice also admitted under questioning by Berkowitz on Tuesday that he had engaged in insider trading when he sold stock in August 2001 just hours after Skilling told him at a lunch meeting that Skilling would leave within weeks. Prosecutors often introduce unfavorable information about their witnesses to make it look less damning than it might if it is brought out for the first time by the defense.

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