Witness Skewers Enron's Skilling

A former top trader who once enjoyed a place in former Enron Corp. chief Jeffrey Skilling's inner circle testified Tuesday that Skilling set earnings targets to please Wall Street and then expected division heads to meet them.

Skilling also led an effort in early 1999 to redefine Enron as a company with consistent growth rather than a trading company with less predictable growth because analysts who influence stock prices supported stability, said Kenneth Rice, the prosecution's second witness in the fraud and conspiracy trial of Skilling and Enron founder Kenneth Lay.

"Mr. Skilling told me on several occasions our stock would get whacked" if the market perceived Enron as a trading company, Rice said Tuesday, his first day on the witness stand.

He said Enron's obsession with maintaining a lofty stock price fueled efforts to maintain Wall Street support.

Prosecutors contend Lay and Skilling lied about Enron's financial health when they knew complicated finance structures hid debt and inflated profits. The defense teams say negative publicity and loss of market confidence, not fraud, fueled the company's collapse.

Rice ran Enron's highly touted broadband unit before it crashed into bankruptcy proceedings with the parent in December 2001. He pleaded guilty to securities fraud in July 2004.

He said the broadband unit never lived up to its hype, had paltry cash flow and millions in losses after he, Skilling and others unveiled it with much fanfare at a January 2000 analyst conference.

But when he told Skilling in late 2000 that 2001 losses would reach $110 million, almost double the $60 million in losses for 2000, Skilling told him to limit them to $65 million.

Rice said he felt he had no choice but to agree, even though the business was flailing.

"Mr. Skilling would simply say, in fact he did say, 'This is the number, this is what the number is going to be,"' Rice said.

Rice appeared comfortable, though he focused on jurors or prosecutor Sean Berkowitz rather than the defendants. Skilling watched him intently, while Lay took notes. Rice had yet to be questioned by the defense.

He described Skilling as a hands-on boss, who saw broadband as an important venture that could help increase Enron's stock price.

Rice said the broadband unit struggled in 2000 and 2001 to contain losses at the level Skilling told Wall Street to expect and show progress in gaining market share.

But the unit's two missions, creation of an Internet bandwidth trading market and streaming video into homes through a fledgling broadband network, never gained strength, Rice said. Few if any trading partners existed as the telecommunications industry bottomed out, and video streaming never surpassed the testing stage.

So the unit often met earnings targets by selling inoperative fiber-optic cable or "monetizing" a 20-year contract with Blockbuster Inc. to provide video-on-demand by selling an interest in its future revenue. The Blockbuster deal later flopped.

Rice said he called the monetizations "crack cocaine" because Enron was addicted to meeting quarterly earnings targets even if it meant selling future revenue potential.

Rice also said a partnership called LJM, set up by former Enron Chief Financial Officer Andrew Fastow, "looked goofy to me." The partnership, separate from Enron, was created to conduct transactions to help the energy company meet its earnings targets.

Rice said he asked Skilling whether it was proper for a partnership run by Enron's CFO to conduct deals with Enron. He said Skilling explained that LJM could do transactions fast and that he thought "it was an important thing for Enron to do."

Despite his concerns, Rice's unit turned to LJM to meet earnings targets. LJM bought $90 million in inoperative fiber in the second quarter of 2000.

In March 2001 Skilling told analysts in a conference call that the broadband unit had "strong growth as far as people, budgets, the whole thing."

"The reality was we were cutting people" in broadband and the unit was spending $100 million per quarter without bringing in any significant cash, Rice said. He stopped short of saying Skilling lied.

Rice was more explicit last year when he testified in the 2005 fraud and conspiracy trial of five former broadband executives. Rice said that he, Skilling and most of the defendants in that case lied when they told analysts in January 2000 that the network was up and running when it wasn't, to generate Wall Street buzz and inflate the company's stock price.

Within two days of the conference, Enron's stock price leaped from $54 a share to $72.

A videotape of Skilling's presentation played during the broadband trial showed he alternated between saying what the network could do at the time and what it would do in the future.

That trial ended with acquittals on some counts, and jurors hung on others. Those defendants are to be retried in three separate cases this year.

Rice said he decided in July 2001 to leave Enron when the broadband unit was to be folded into the larger trading division. Skilling asked him to stay, and they both would leave in "a couple of years," Rice said.

About two weeks later, Skilling told Rice that he was going to resign in mid-August.

He said Skilling also told him about plans to get a boat and travel the world.

"All I remember is, it was more like a ship," Rice said. "It was a big boat you could put cars on and maybe a helicopter."