Lay: ‘They’re on to us,’ witness recounts

HOUSTON — Former Enron Corp. Chief Executive Jeffrey Skilling told other top executives “they’re on to us,” when a small analyst firm produced a research note critical of the company’s sales to partnerships run by then-Chief Financial Officer Andrew Fastow, a former top executive testified in a bombshell revelation Thursday.

Minutes before that, Skilling said at the May 2001 meeting — attended by company founder Kenneth Lay — that he had “brought Andy here” to talk about those partnerships, called LJM1 and LJM2.

“Fastow said, ‘LJM is a good deal for me,”’ Kevin Hannon, then chief operating officer of the company’s flailing broadband unit, told jurors in the fraud and conspiracy trial of Lay and Skilling.

“As I remember, (Fastow’s comment) was met by stunned silence,” Hannon said.

“Did Mr. Skilling say anything?” prosecutor Cliff Stricklin asked.

“Yes. He said, ‘They’re on to us,”’ Hannon said. “It seemed to indicate the investment community was beginning to understand how Enron made money.”

Hannon’s statements — in the last 10 minutes of testimony Thursday — were a potentially devastating blow to the defendants. Their lawyers have maintained that Lay and Skilling did nothing wrong and there was no fraud at Enron besides the theft of money by Fastow and two other former executives.

But Hannon’s inside view of the company’s executive policy meeting appeared to directly challenge the defendants’ insistence that the LJM partnerships were proper and received appropriate approvals from lawyers and accountants as well as Enron’s board.

Prosecutors contend the partnerships were one of a slew of accounting tricks used to prop up a wobbly company that Lay and Skilling touted publicly as healthy before it spiraled into bankruptcy proceedings in December 2001.

Hannon’s prosecution testimony was to continue Monday, followed by cross examination. Trial is not in session on Fridays.

His revelation set the stage for testimony next week from Fastow. Lay has labeled him as a crook who skimmed millions of dollars from the company until his ouster in October 2001, one day after the founder publicly defended his honesty and ethics.

Fastow is slated to succeed Hannon in the witness chair in a much-anticipated confrontation with his former bosses. He pleaded guilty in January 2004 to two counts of conspiracy for orchestrating schemes to manipulate Enron’s reported earnings. He has already agreed to serve the maximum 10-year sentence for the crimes, with potentially a year and a half off for good behavior.

Fastow pocketed about $60 million in management fees and other income from running the partnerships, which he created exclusively to buy Enron assets and conduct other deals with his main employer.

Lay and Skilling aren’t alleged to have known how much Fastow pocketed. But prosecutors contend they knew the LJM partnerships were among tools used to manipulate earnings so the two men could present a falsely rosy picture of Enron’s health to investors.