Enron Witness Admits Partially Misleading Jury

By Greg Farrell

HOUSTON — A key witness in the government’s trial of former Enron CEOs Ken Lay and Jeff Skilling admitted on the stand Wednesday that part of his testimony to the jury the day before was misleading.

Ken Rice, the former head of Enron Broadband Services (EBS), testified Tuesday that an early 2001 budget forecast predicted that his unit would lose $489 million for the year. After some internal haggling, Rice agreed to present management with a more optimistic forecast of $110 million in losses for the start-up unit.

Rice then testified that his boss, Skilling, insisted that losses at EBS couldn’t exceed $65 million for the year. The two presented that figure to analysts and investors in March of 2001, allowing jurors to conclude that Skilling was presenting pie-in-the-sky goals as realistic business forecasts.

But under cross-examination by Skilling defense attorney Mark Holscher, Rice admitted that the early prediction of $489 million in losses at EBS was in itself unrealistic. Rice conceded that at budget time, he and others at Enron often engaged in a practice known as “sandbagging,” in which managers set artificially low goals when negotiating with their corporate bosses.

Speaking of the impression he left on the jury, Rice admitted to Holscher that, “It isn’t fair for them to think that that was a reliable budget.”

Holscher’s other attempts to undermine Rice’s testimony against his client met with less success. Rice had maintained that by 2001, business was drying up for EBS and that Skilling’s bullish statements to analysts about the unit were false and misleading. Again and again, Holscher tried to get Rice to admit that EBS had developed “groundbreaking” products that would lead to future success, but Rice stood his ground.

He said he thought the unit’s long-term business prospects were good, but that its near-term focus was only on survival. Holscher pointed to an agreement with Microsoft in March of 2001 as proof of broadband’s bright future, but Rice wouldn’t budge.

“I was excited about the transaction,” Rice said, adding later that it would produce “no near-term income. It was a starting point. It didn’t change the problems we had at EBS.”

Prosecutors contend that Skilling and Lay conspired to hide the true state of EBS finances from investors. But Holscher argued that EBS, like a dot-com start-up, shouldn’t be measured simply by profits and losses. He asked Rice to discuss some of the unit’s technical innovations, but U.S. District Judge Sim Lake shut him down. “If you’re going to cross-examine him about Shakespeare,” he declared, “you don’t have to start with the invention of the alphabet.”

The cross-examination of Rice continues today.

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