Lay says 'witch hunt' triggered Enron demise

HOUSTON - Enron was a victim of a media "witch hunt" that ultimately sent the financially strong energy giant on a path to bankruptcy, former chairman and chief executive Kenneth Lay testified at his criminal trial on Tuesday.

In his second day on the witness stand, Lay told the jury that in October 2001 the Wall Street Journal began a "biased" stream of articles about dubious deals former chief financial officer Andrew Fastow conducted with Enron.

"We thought in fact the Wall Street Journal was on a witch hunt," Lay said under questioning from his lawyer George "Mac" Secrest.

"We didn't have any information that Andy Fastow had done anything inappropriate."

Lay, 64, is on trial with former CEO Jeffrey Skilling on charges that they hid from investors the decaying financial state of a company that was once the seventh largest in the United States.

The Wall Street Journal articles were the first to scrutinise the Fastow partnerships, which Enron used to hide billions of dollars in debt while inflating its profits. Those articles and the intense media coverage that followed helped drive the company into its December 2001 bankruptcy, then the largest in US history.

Still, Lay said, the company believed that Fastow's deals were legitimate and that any problems with them had been solved through an asset write-down that quarter and Fastow's break with the controversial LJM partnership months before.

"They had been reviewed and scrubbed quarterly since they were put in place by Arthur Andersen. We thought all that had become history, and it was now news," Lay said.

Auditor Arthur Andersen imploded and ceased accounting services after it was charged with wrongdoing at Enron. The company was found guilty of obstruction of justice, although that conviction was later overturned.

Lay faces six counts of conspiracy and fraud linked to the few months he returned to the CEO position abandoned by Skilling before the company collapsed, while Skilling faces 28 charges of conspiracy, fraud and insider trading.

Both men have denied any wrongdoing and would face decades in jail if found guilty.

Even four months before the bankruptcy, Lay said Enron's finances were solid and its core business were humming along.

"I believed fundamentally that the balance sheet was strong. I believed that then and I believe that now," he said.

Lay, who smiled and greeted the 12 jury members and four alternates as they entered the courtroom, presented a far more serious and tense demeanour on Tuesday, a sharp contrast to the relaxed, folksy manner he displayed on Monday.

At times, he appeared to grow irritated with the questions from Secrest, who had stepped in to replace Lay's lead lawyer Michael Ramsey. Ramsey has been absent from the courtroom for weeks since undergoing heart surgery earlier in the trial after suffering chest pains.

Lay became subdued when he described the US$20 million signing bonus he received when he resumed the CEO role in August 2001. He said he used the US$10 million cash portion of that to pay down part of the tens of million of dollars he owed in bank loans.

Despite his sharp criticisms of the Wall Street Journal, Lay admitted one article triggered the company to restate profits going back four years to trim US$400 million in earnings wrongly booked from a Fastow-run partnership.

Shortly after that, Arthur Andersen said it had found an error in its accounting on another partnership, and trimmed another US$100 million in earnings.

Lay said he and the board decided to remove Fastow after he discovered the CFO gleaned US$45 million from his partnerships and when he learned Enron's banks would engage in no new business with the company as long as Fastow stayed in his job.

Fastow has pleaded guilty to two counts of conspiracy and agreed to co-operate with prosecutors in exchange for a 10-year jail sentence.

Lay has blamed Fastow, the Wall Street Journal and a group of predatory investors for creating a "classic run on the bank" that led to the company's downfall.

- REUTERS