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The Honolulu Advertiser
Posted on: Thursday, March 9, 2006

Ex-Enron executive says Lay was lying

By Erin McClam
Associated Press

HOUSTON Enron Corp. chief executive Kenneth Lay was aware of the company's withering finances in late 2001 even as he gave glowing reports to employees and the media, the admitted architect of schemes that helped sink the company testified yesterday.

Andrew Fastow, the former Enron chief financial officer, provided the most direct link yet between Lay and fraud at Enron just before facing a blistering attack from a lawyer for ex-chief executive Jeffrey Skilling, who is on trial with Lay.

Fastow said he gave Lay a rundown of huge looming write-offs, a massive accounting error that would force a $1.2 billion writedown in shareholder equity and deterioration of fragile financial structures that Enron used to mask losses. Still, Lay insisted publicly in late 2001 that the company was fundamentally sound. Months later, it collapsed into bankruptcy proceedings.

In an interview with BusinessWeek on Aug. 24, 2001, days after taking the CEO reins from Skilling, Lay said Enron had no accounting problems and declared, "The company is probably in the strongest and best shape that it has ever been in."

Fastow testified that four days earlier, Lay and other executives heard projections that Enron would fall far short of Wall Street expectations for the quarter.

Asked by a federal prosecutor about the Lay interview, Fastow said: "I think most of the statements in there are false."

The testimony stands in stark contrast to Lay's claim that he believed Enron was healthy right to the end.

Fastow said he suggested major restructuring for Enron, including a possible merger, before Lay said in a September 2001 online chat with employees that the company was sound and had a strong balance sheet.

In mid-October 2001 Enron disclosed hundreds of millions of dollars in third-quarter losses and slashed shareholder equity by $1.2 billion. Six weeks later, the company sought bankruptcy protection.

Fastow faced a tough cross-examination yesterday from Daniel Petrocelli, the head lawyer for Skilling, who was Enron's chief operating officer in the late 1990s and CEO for six months in 2001.

Petrocelli focused on Fastow's willingness to watch his wife, Lea, serve a year in prison rather than come clean with investigators about kickbacks he received from Enron in 1997.

"So you sacrificed your wife to protect your own self-interests, correct?" Petrocelli asked.

"I did not go in and plead guilty before that point in time, that's correct," Fastow replied.

Lea Fastow served a year in prison for submitting a tax return that failed to classify as income the kickbacks intended for Fastow.

Fastow has pleaded guilty to two conspiracy counts and agreed to serve up to 10 years in federal prison.