Enron's Skilling testifies that he, Ken Lay never broke law

HOUSTON -- Former Enron Corp. chief executive Jeffrey Skilling spoke up Wednesday for company founder Kenneth Lay in his third day on the witness stand in the pair's fraud and conspiracy trial, saying they were a "good team" that committed no crimes.

Even though most counts pending against him and Lay allege crimes that occurred at different times before Enron crashed in scandal in December 2001, an overarching conspiracy count alleges they participated in a sprawling effort to portray Enron as strong when they knew accounting tricks hid bad news and weak ventures.

Skilling appeared confident, alternating between earnestness and occasional annoyance, and told jurors that neither he nor Lay perpetuated such a ruse.

"Did you and Ken Lay ever discuss doing something you knew to be forbidden by law?" Skilling's lawyer, Daniel Petrocelli, asked Wednesday.

"No," Skilling said. Later, he added, "It is completely untrue," and "I was aware of no illegal activity occurring at Enron Corporation."

The ex-CEO countered dramatic prosecution testimony given in February from David Delainey, once a Skilling favorite. Delainey ran Enron's trading arm, Enron North America, until Skilling asked him to take over the company's retail energy unit, Enron Energy Services, in February 2001. Delainey pleaded guilty to insider trading in October 2003.

Delainey told jurors he reluctantly acquiesced in a Skilling-approved plan to move the retail unit's trading arm into the profitable Enron North America to hide $200 million in losses.

Delainey said he told Skilling in March 2001 that the move lacked integrity because losses could just be written off. Delainey told jurors that Skilling asked him, "What do you want to do?" which he took as code to go along with the move.

Skilling testified Wednesday that the move was intended to quell disputes between traders in the two divisions and gain efficiency -- not to hide losses.

"So I asked Mr. Delainey, 'Are you sure you want to do this?' and he said yes," Skilling said.

"Was this done to hide losses?" Petrocelli asked.

"Not in my mind," Skilling replied.

Delainey also testified that when he ran Enron North America, he felt pressure from Skilling and others to improperly raid its reserves to fill earnings gaps when other divisions failed to meet targets. He said he told Skilling in late 2000 that Enron was raking in such high trading profits that "we had a couple of quarters in our pockets" from $800 million in reserves. Delainey said Skilling was so pleased, the CEO gave him a hug.

Skilling acknowledged Wednesday, "I certainly hugged him, I may have kissed him," but only because he thought Delainey had reinstated reserves to protect Enron from losing money in a volatile market -- not to wrongly pad earnings.

"You kissed Mr. Delainey because you believed he did something good, not something illegal?" Petrocelli asked.

"Yes," Skilling replied, noting later, "There were no cookie-jar reserves at Enron Corporation."

Petrocelli showed jurors a document that showed Delainey's unit had set aside $363 million in reserves -- not $800 million, as Delainey said.

"This shows he's half a billion dollars off?" Petrocelli asked.

"Yeah, a little off," Skilling said with a hard voice and a sigh.

After court recessed for the day, Petrocelli told U.S. District Judge Sim Lake he expected to finish initial questioning of Skilling late Thursday, so cross-examination isn't expected to start until next week. Skilling's testimony is among the most anticipated in the trial, equal only to that of Lay, who reiterated Wednesday his intent to take the stand.

Skilling has mostly focused on addressing prosecution testimony damaging to himself, often saying it was outright wrong without documents to back him up. The document showing reserves was a rare corroboration tool.

Prosecutors also lacked obvious "gotcha" documents pointing directly to the defendants' guilt, so Skilling's recollections that differed from those of government witnesses injected a "he said, she said" quality to the proceedings that the jury will have to sort out.

The government contends both repeatedly lied to investors and employees by claiming Enron was healthy when they knew their outward optimism hid weak ventures and accounting tricks.

Skilling and Lay contend no fraud occurred at Enron other than former Chief Financial Officer Andrew Fastow and a few others skimming money from secret schemes, and negative publicity and diminished market confidence drove the company to seek bankruptcy protection in December 2001.

Petrocelli initiated questioning Wednesday about Enron's broadband unit, which prosecutors say never got on its feet despite big hype from Skilling, Lay and others. Unveiled to Wall Street in 2000, Skilling billed the unit as a potential multibillion-dollar business that would stream video to homes on Enron's fledgling broadband network and trade Internet bandwidth.

Several government witnesses said Skilling minimized the amount of revenue the unit earned from sales of inoperative fiber optic cable so analysts would believe more income stemmed from actual business operations.

Skilling acknowledged on Wednesday that he mistakenly told analysts such sales brought in $50 million in the second quarter of 2000 when the actual amount was about $150 million -- or most of the unit's revenue.

Earlier Wednesday, Skilling also told jurors he believed four fragile financial structures backed by Enron stock, dubbed Raptors, were proper vehicles to help Enron lock in gains from investments and assets. He countered prosecution testimony from former Enron Treasurer Ben Glisan Jr. and from Fastow that the company used the structures to hide losses.

Skilling insisted that Enron's inside and outside lawyers and accountants reviewed the Raptors.

"We weren't hiding losses. There were no losses to hide. We had gains to protect," Skilling said.

Glisan is serving a prison term for creating one of the Raptors. He pleaded guilty to conspiracy in September 2003. Fastow pleaded guilty to two counts of conspiracy in January 2004 in part for creating partnerships that he said helped Enron manipulate earnings and that were intertwined with the Raptors.

Skilling said former Enron Chief Accounting Officer Richard Causey assured him the Raptors would lock in gains "as long as Enron stock did not drop below some number."

He didn't specify that number. But he told jurors Causey told him shortly before he resigned from Enron in mid-August 2001 -- in part because he was frustrated at Enron's falling stock -- that some of the Raptors were troubled, others weren't, so together they broke even.

"My view was they were fine," Skilling testified.

Weeks later the Raptors crumbled because Enron stock had fallen throughout the year. The company shut them down in the third quarter, forcing the energy company to report hundreds of millions of dollars in losses.

Skilling is charged with 28 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay faces six counts of fraud and conspiracy.

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Associated Press Writer Michael Graczyk contributed to this report.