Enron's Skilling denies 'cookie jar' cash reserve

HOUSTON - Former Enron Chief Executive Jeffrey Skilling denied today that Enron used a bogus cash reserve "cookie jar" to smooth out its earnings and disguise massive trading profits.

Skilling's testimony in his third day on the witness stand at his criminal trial was an effort to counter claims by a former top executive that the company reaped massive profits from trading power during the California power crisis in 2000 and illicitly dumped the money into a "cookie jar" account to cover possible earnings shortfalls in the future.

"There were no cookie jar reserves at Enron," Skilling said under questioning from his own lawyer, Dan Petrocelli.

Skilling, 52, and former Enron CEO and Chairman Kenneth Lay, 63, are charged with lying to analysts and investors about the financial health of the company, which collapsed in December 2001 into the then-largest-ever US bankruptcy.

Skilling faces 28 charges of conspiracy, fraud and insider trading at the trial, which has lasted nearly three months, and Lay faces six charges of conspiracy and fraud.

Both men have pleaded not guilty and face decades in prison if convicted.

Petrocelli has been methodically guiding Skilling through the criminal indictment, seeking to refute government witnesses and specific charges against the former executive who helped turn Enron from a quiet pipeline operation into the seventh-largest US company.

Earlier in the trial, the former head of Enron's North American energy wholesale unit, David Delainey, testified that Skilling embraced him at a meeting in October 2000 after Delainey told him his unit had sharply surpassed profit targets. The extra funds were put into an $800 million (457 million pounds) reserve account, he said.

Skilling said he remembered being very happy with Delainey's news.

"I may have kissed him; I certainly hugged him, but I may have kissed him," Skilling said.

But he countered the claim that the company put the extra earnings into a reserve account illegally, saying the company's reserve accounts held only $363 million, and that money was designated to cover potential liabilities in the volatile California power markets.

Skilling said the reserve account was vetted by internal Enron accountants and the company's outside auditor, Arthur Andersen -- a firm which itself imploded because of its connections to the scandal at Enron.

Under US accounting rules, companies can only set aside reserves for specific purposes or liabilities and cannot create accounts that can be used as slush funds.

Prosecutors have also contended that Enron did not want to report sharply higher than expected profits from its wholesale unit's trading arm because analysts would begin to question the volatility of its business.

At the time, Enron was portraying itself to Wall Street as an energy "logistics" firm rather than as a trader in an effort to appear more stable and achieve a higher stock price.

Skilling also contradicted statements by Delainey that he hid losses at Enron's broadband internet business by folding part of that unit into its wholesale unit.

During his testimony, Delainey had said after he became CEO of Enron Broadband Services, the unit was hit with a $200 million liability. He said he questioned shifting that loss to the wholesale unit, but was pressured by Skilling at a March 2001 meeting into the move to protect the new business.

However, Skilling said transferring that charge was part of an internal restructuring designed to create efficiencies, and he never pressure Delainey at the meeting.

"I said 'Are you sure you want to do this' ... and he said 'yes,'" Skilling said. "He's the guy that has to live it. He's the guy running the business.

- REUTERS