Lay Blames Fastow for Enron Problems

By Frank Ahrens
Washington Post Staff Writer
Tuesday, April 25, 2006; 3:48 PM

HOUSTON, April 25 -- Enron Corp. founder Kenneth L. Lay, in his second day on the witness stand in his fraud trial, Tuesday zeroed in on former company finance chief Andrew Fastow, largely blaming him for the company's collapse while painting a detailed portrait of Enron's last days.

A series of stories that appeared in the Wall Street Journal Oct. 17 through 19, 2001, raised questions about the accounting of the off-balance-sheet partnerships known as the LJMs that Enron used as hedges against loss and that were run by Fastow.

Fastow has pleaded guilty to fraud charges for siphoning money from the LJMs for personal use and is cooperating with the government prosecution.

Lay and co-defendant Jeffrey K. Skilling maintain their innocence in the 2001 collapse of the energy giant. They say that Enron's demise was caused by a failure of investor confidence, spurred partly by the Journal's accounts of Fastow's partnerships, and the company was done in by a classic "run on the bank."

Bad publicity over questionable accounting in the LJM partnerships resulted in "driving the nail in the coffin of Enron's demise," Lay said.

Lay and Skilling have expressed overt admiration for the other from the stand, but Lay's description of Enron's health following Skilling's departure does not square with Skilling's. In his earlier testimony, Skilling said the company had some outstanding issues but overall was in good health. Lay has spent most of the day describing a clean-up operation at Enron in the weeks following Skilling's exit in August 2001.

Lay faces six counts of fraud; Skilling faces 28 counts of fraud, conspiracy and insider trading. If convicted of all charges, Lay and Skilling face prison terms and substantial fines. Both also are named in shareholder civil suits.

Lay spent a great deal of time on Tuesday describing his activities after he took over the chief executive job following Skilling's abrupt resignation.

Lay testified that he called a meeting shortly after taking over and ordered the liquidation of another off-the-balance-sheet partnership called the Raptor funds, despite the objections of chief Enron accountant Richard Causey, who also has pleaded guilty to fraud and is cooperating with the government.

"At the end of the day I wanted to shut it down, clean them up and move forward," Lay said. "We wanted to use the third quarter to clean up anything and everything and get it behind us and look forward to a cleaner balance sheet."

Shortly after, Enron reported its third-quarter earnings in 2001, which included a $1 billion write-down and a $1.2 billion reduction in shareholder equity.

Lay testified that the earnings were greeted favorably by Wall Street, and the stock, which had been in steady decline for months, ticked up.

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