Lay disclosed massive losses to shareholders

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 chief executive 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. He was to return for an eighth day today.

“They were a surprise,” Koenig said. He backtracked a bit when Ramsey later had him read reports from analysts produced after the call that said the losses and writedown were smaller than expected.

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 help keep hundreds of millions of dollars in debt off the energy company’s books. When the company’s stock price fell throughout 2001, Enron was on the hook to issue more stock or repay the debt.

Lay assured analysts on the Oct. 16, 2001, conference call heard Monday that Enron “cleaned up some items here” and expected no credit-rating downgrades — which would alert investors to other problems.

There were more problems. The Wall Street Journal published several articles in the days after the earnings release about partnerships called LJM1 and LJM2 run by then-Enron finance chief Andrew Fastow that had done millions of dollars in deals with Enron.

Fastow had sold his interest in those two partnerships to one of his former top aides in July 2001. But the publicity prompted the Securities and Exchange Commission to investigate the entities.