HOUSTON - Enron Corp. founder Kenneth Lay disclosed hundreds of millions of dollars in quarterly losses and a surprise $1.2 billion writedown in shareholder equity six weeks before the company fell into bankruptcy proceedings in December 2001, jurors in his fraud and conspiracy trial heard Monday on a tape of a quarterly earnings conference call.
But prosecutors contend he still held back some bad news from investors or wrongly described the losses as one-time events to give Wall Street false hope that business would improve, while he allegedly knew the company was in serious trouble. Lay is on trial alongside former CEO Jeffrey Skilling.
The defense teams contend there was no fraud at Enron and negative publicity coupled with loss of Wall Street confidence fueled its collapse.
Lay lawyer Michael Ramsey kicked off the third week of the trial Monday by trying to show that his client hid nothing when he disclosed a list of problems that included a $638 million third-quarter 2001 loss and the reduction in shareholder equity.
"Was this a surprise, the writedowns?'' Ramsey asked former Enron investor-relations chief Mark Koenig, in his seventh day on the witness stand Monday.
"They were a surprise,'' Koenig said.
The losses stemmed from bad investments in broadband and water ventures and the unwinding of so-called Raptors, four fragile financial structures backed by Enron stock used to hedge inflated asset values and keep hundreds of millions of dollars in debt off the energy company's books. When the company's stock price fell throughout 2001, the hedges crumbled.
Lay assured analysts on the mid-October 2001 conference call heard Monday that Enron "cleaned up some items here'' and expected no credit-rating downgrades - which would alert investors that more problems were brewing.
Six weeks later Enron filed for bankruptcy protection amid revelations of off-the-books debt and inflated profits. The collapse of what was once the country's seventh-largest company left thousands jobless and wiped out billions in investors' wealth.
Koenig pleaded guilty in August 2004 to aiding and abetting securities fraud for lying to analysts about Enron's finances. Next up is Kenneth Rice, a former Skilling ally who ran the company's money-losing broadband unit that never lived up to its hype.
Rice was a top trader and dealmaker for Enron and a member of Skilling's inner circle. Skilling tapped him in the late 1990s to help run the new broadband business that emerged from a small telecom operation at an Oregon utility the energy giant bought in 1997.
Rice testified in the broadband case that he, Skilling, and four of the five executives on trial lied to analysts about capabilities of Enron's then-fledgling broadband network when the new business was unveiled at a January 2000 analyst conference.
He said they told analysts the network was up and running when it wasn't to generate Wall Street buzz and inflate Enron stock. Within two days of the conference, Enron's stock price leaped from $54 a share to $72.
Skilling, 52, faces 31 counts of fraud, conspiracy, insider trading and lying to auditors. Lay, 63, faces seven counts of fraud and conspiracy. Both face decades in prison if convicted. Both also sold millions in stock before Enron filed for bankruptcy protection, though only Skilling faces charges of improper stock sales.