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Enron's Fastow says Lay lied about company problems

Posted on: Wednesday, 8 March 2006, 13:41 CST

By Jeff Franks

HOUSTON (Reuters) - Ken Lay, a former chief executive of Enron Corp., repeatedly lied to investors about the company, portraying it as financially sound even as it spiraled toward bankruptcy in 2001, the company's former finance chief, Andrew Fastow, testified on Wednesday.

Fastow, the government's key witness against Enron's two former CEOs, said Lay knew the Houston-based energy trading firm was drowning in debt and piling up undisclosed losses, but assured a financial world made nervous by the sudden resignation of Jeffrey Skilling as CEO in August 2001 that all was well.

"It was what Mr. Lay was saying, what the company was saying. I was trying to keep up the deception as well," said Fastow in his second day of testimony in the fraud and conspiracy trial of Lay and Skilling. "It was a lie."

Enron, once the nation's seventh-largest company, and a darling of Wall Street, filed for bankruptcy in December 2001 amid disclosures it had inflated profits and hidden losses in off-the-books partnerships directed by Fastow.

The scandal shocked the financial world, partly because Lay had been a prominent corporate leader for years and had close ties to U.S. President George W. Bush.

Lay and Skilling face a combined 35 criminal charges, but have denied any wrongdoing and blamed Enron's demise on Fastow, who has admitted he looted the partnerships for millions of dollars.

Skilling's attorney, Daniel Petrocelli, attempted to discredit Fastow in cross-examination by implying through questions that he was saying whatever prosecutors wanted him to say to fulfill the terms of a deal in which he pleaded guilty to two conspiracy counts in exchange for a 10-year sentence.

He also accused Fastow of holding a grudge against Skilling because he believed Skilling's resignation caused Enron's demise.

"The idea that you will sit in jail for 10 years while Mr. Skilling is a free man, that doesn't sit well with you, does it?" Petrocelli said.

But Fastow insisted he was only speaking the truth when he accused his two former bosses of massive deception.

He said Enron was a deeply troubled company by 2001, but had hidden its mounting debt and losses by stashing them in the partnerships.

Skilling, after just a few months as CEO, resigned supposedly to spend more time with his family. Lay, who was chairman, resumed the role of CEO, a position he had held from 1986 until Skilling was named CEO in February 2001.

A day after Skilling's resignation, Fastow said he met with Lay to discuss problems that ranged from a $1.2 billion accounting error to a host of problem-plagued business units that were bleeding cash.

The hole was so deep that Fastow said he recommended hiring an investment banker to help Enron find a way out such as a merger or selling off assets.

But after that meeting, Lay made numerous positive statements in interviews, presentations to analysts and to Enron employees.

"The company is probably in the strongest and best shape it has ever been. There are no surprises," prosecutor John Hueston quoted Lay as saying in an August 24, 2001, interview. "If there's anything material and we didn't report it we'd be breaking the law. We don't break the law."

"Most of those statements are false," Fastow told the jury. "I think there were quite a few unknown problem issues."

"There is no other shoe to fall," Hueston quoted Lay as saying.

"We had some shoes that fell in the third quarter," Fastow said, referring to the company's disclosure of big losses in October and a reduction in shareholder equity by $1.2 billion.

On Tuesday, Fastow said he had believed himself to be a hero because he helped Enron meet its earnings targets, but he also wept when he admitted that his wife, Lea, had gone to jail for a year on an income tax charge because of his lies.

"Did you feel like a hero when you let your wife to go to prison?" Petrocelli asked. "When you get right down to it, we're talking about greed, greed, greed. You must be consumed with insatiable greed."

"I believe I was extremely greedy and that I'd lost my moral compass, and that I'd done terrible things I very much regret," Fastow said.

Source: REUTERS

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