A former high-ranking Enron Corp. trading and retail energy executive delivered the most bruising punches so far to company founder Kenneth Lay and former Chief Executive Jeffrey Skilling on Tuesday in the fifth week of their fraud and conspiracy trial, saying it was standard to "play fast and loose with our rules" when it came to earnings manipulation.
David Delainey, who impressed his superiors enough to be chosen to run the profitable wholesale trading franchise until early 2001 when he took the helm of a highly touted retail energy unit, Enron Energy Services, told jurors he reluctantly acquiesced to a Skilling-approved plan to move the retail unit's trading arm into the larger trading franchise to hide $200 million in losses.
He also said Enron wrongly dipped into reserves to meet and beat earnings targets under pressure from Skilling.
"It was standard operating procedure," Delainey said. "At Enron in Houston, we tended to be pretty fast and loose with our rules."
Delainey said he discussed folding the retail unit into the wholesale division's larger trading operation with Skilling, former Enron Chief Accounting Officer Richard Causey and others at a late March 2001 meeting in Skilling's office. He said he told his superiors the move "lacked integrity" because it was intended to hide first-quarter losses that Enron could write off.
An angry Causey asked, "Isn't this a bona fide operational change?" Delainey recalled. Then Skilling looked at Delainey and said, "What do you want to do?"
"What did you take that to mean?" prosecutor Kathryn Ruemmler said of Skilling's question.
"Get in line," Delainey replied. "It was, 'Hey, we've come up with a solution, let's move forward."' He did not say explicitly he took Skilling's question as an order to break the law.
When Enron released first-quarter earnings in April 2001, Skilling told Wall Street analysts who influence stock prices the decision to move retail trading into the wholesale division was driven by the smaller unit's "explosive growth," and the combination of like functions would be more efficient.
Delainey told jurors Tuesday the real motive for the move was "to find a solution to the $200 million problem."
After Skilling abruptly resigned from Enron in mid-August 2001, Lay, who resumed the CEO role, also told analysts and Enron employees the retail unit was strong and would keep growing. By then it had lost up to $400 million, Delainey said.
Enron, which crumbled into bankruptcy proceedings in December 2001, had four core business units: Enron Wholesale Services, which included trading unit Enron North America as well as global assets; Enron Energy Services, a retail energy unit that packaged energy services for mostly industrial companies; Enron Broadband Services; and Transportation and Distribution, which included natural gas pipelines and Portland General Electric, an Oregon utility.
Before Delainey, 40, ran EES, he was chief executive of Enron North America. He said top executives often called upon the profitable trading operation to fill earnings gaps left by other divisions that didn't meet their targets.
He said he felt pressure from Skilling and Causey to raid reserves derived from ENA's extra profit to boost earnings at other units, but did not say either man directly told him to break the law.
Delainey, of Calgary, Canada, said the trading unit was "making tons of money, knocking the cover off the ball" in 2000 as it took advantage of California's power crisis in 2000 and 2001 and hauled in millions of dollars, even in a single day.
His testimony contradicted Lay and Skilling's oft-repeated public message that Enron was a stable company with predictable growth that acted as a middleman for energy buyers and sellers rather than a trading company that was vulnerable to market volatility.
Prosecutors contend the two top executives pressed that message to maintain Wall Street's bullish view of Enron's stock, which could be diminished if analysts viewed the company as risky.
Delainey also explained his introduction in the spring of 2000 to so-called Raptors, four fragile financial structures backed by Enron stock that were used to lock in the energy company's gains from asset values or investments and keep hundreds of millions of dollars in debt off the energy company's books.
Delainey said the architect of the Raptors, then-Enron Treasurer Ben Glisan, offered the structure as a way to avoid booking losses from Enron North America's poor investments in money-losing assets or securities. But Delainey said he found it "odd" because the structures' use of Enron stock for capital meant the company was using its own shares in a way that could influence its income statement.
He said he asked Skilling if he knew of the structures and that they were backed by Enron stock.
"He said that it was approved," Delainey said, meaning outside auditors had signed off. "He was kind of, 'What are you worried about.' I took that as affirmation that it was OK."
Allegations against Skilling include that he knew the Raptors were wrongly treated as independent of Enron and that they were used to avoid public disclosure of decreases in asset values.
The Raptors' ability to provide a cushion against losses depended on Enron shares remaining high. When shares fell throughout 2001, the structures crumbled, and contributed to some of the company's hundreds of millions in third-quarter 2001 losses as well as its $1.2 billion writedown in shareholder equity.
Glisan pleaded guilty in September 2003 to conspiracy in part for developing the Raptors to help manipulate Enron's books. He is serving a five-year prison sentence and is slated to testify against Lay and Skilling.
In October 2003 Delainey pleaded guilty to insider trading and admitted he participated in schemes to manipulate earnings to please Wall Street. He forfeited $4.25 million in proceeds from illegal stock sales to the Justice Department and another $3.74 million to the Securities and Exchange Commission.
Delainey's testimony, to jurors who came into the courtroom Tuesday grinning and wearing colorful Mardi Gras beads, mirrored comments the previous day from Wesley Colwell, who worked for Delainey. Colwell also said he helped to fraudulently manipulate earnings.
Delainey's testimony about California trading profit piggybacked that of a former top Enron trader who said Tuesday the company pocketed almost $1 billion in profits in the fourth quarter of 2000 and first half of 2001 from wild energy trading during California's power crisis.
Timothy Belden, who ran Enron's Western power trading desk in 2000 and 2001 and pleaded guilty in October 2002 to conspiracy for manipulating the state's market, told jurors California's "dysfunctional" market in the aftermath of electricity deregulation left it ripe for high prices, which spelled mass profits for Enron.
Prosecutors contend Lay and Skilling repeatedly lied about Enron's financial health while knowing fraudulent accounting propped up the company before it failed.
The defendants say there was no fraud at Enron, and negative publicity coupled with diminishing market confidence fueled the company's swift collapse.
Skilling faces 31 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay faces seven counts of fraud and conspiracy. If convicted, both could serve decades in prison. Only Skilling faces allegations of improper stock sales.