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.

But the first Journal story hit the next day, causing investors increasing discomfort, Lay testified. Two more stories about the LJM partnerships appeared in successive days.

"We thought the Wall Street Journal was on a witch hunt against Andy Fastow and maybe Enron, but certainly Andy Fastow," Lay testified. After the Journal stories, other news outlets began to follow, Lay said, and Enron stock plunged.

Much like Skilling, Lay has given the impression that critics of Enron simply did not understand the company.

An Enron board member drafted a letter to the Journal complaining about the articles, but Lay testified it was never sent.

By October 2001, the LJMs were old news to Lay, he testified, and he couldn't understand why they were of interest to the Journal.

But they were of interest to Enron employees who had read the Journal stories and New York bankers who had lent Enron money.

At an all-employees meeting on Oct. 23, Lay testified that he and the board still had full confidence in Fastow but if they found out he had not acted appropriately, they would fire him.

Fastow was sitting in the front row, Lay said, "and when I made that last point, I was looking directly at him."

Things were happening fast during that period, Lay testified: The following day, Enron treasurer Benjamin Glisan told Lay that New York bankers had told Glisan that they would not make a $1 billion loan to the company that it desperately needed if Fastow remained as the finance chief.

Lay said he told Fastow Glisan's news and said a special board meeting would have to be convened to discuss the situation. Within two hours, Lay testified, he had Enron board members on a conference call. Two board members told Lay that Fastow had earlier said he was owed $45 million compensation for his management of the LJMs, which Lay said was the last straw.

"All the directors felt their trust had been violated" by Fastow, Lay said.

After the call, Lay said he went to Fastow's office and told him the board had placed him on a leave of absence. He was to clear out his personal belongings and leave the building at once.

Lay said Fastow responded by trying to negotiate a severance package of about $5 million.

"I think at that point in time, I said, 'Hell no, Andy!' and walked out," Lay thundered.

By then, Lay testified, "the market was reeling" and Enron stock was in freefall. By November, he felt the only two ways to save Enron were through a recapitalization of the company by its banks or a merger with cross-town rival Dynegy Inc.

Lay testified that he believed he worked out the details of the merger with the head of Dynegy, had signed the documents and was heading back to Houston from the meetings in New York when he got the call from Dynegy that the board disliked the merger.

"The next Sunday," Lay said, "we filed for bankruptcy."

Earlier Tuesday, Lay said he never told Skilling about an employee's memo that warned that the company "could implode in a wave of accounting scandals."

The memo, by Enron insider Sherron Watkins and delivered to Lay in August 2001, just after Skilling left the company, has proven to be a linchpin of the government's case against Lay and Skilling.

Watkins detailed what she saw as accounting problems at the LJM partnerships.

In his testimony last week, Skilling said Lay had never mentioned the Watkins memo to him, even though Skilling was prominently mentioned in it. Lay's testimony Tuesday corroborates Skilling's.

During Skilling's testimony, government prosecutors seemed incredulous that Lay never mentioned the memo to Skilling, especially in that Lay and Skilling met hours before Lay met with Watkins to discuss the memo.

Lay is being questioned by defense lawyer George "Mac" Secrest, which will be followed by government cross-examination, probably later in the week. Lay's lead lawyer, Michael Ramsey, is recuperating from coronary surgery and Lay has at times appeared uncomfortable in Secrest's hands.