Houston
Enron never once disappointed stock analysts between 1997 and 2001.
The company would either meet or beat analysts’ bullish expectations every quarter until it finally filed for bankruptcy in December 2001.
Former Enron executive Mark Koenig, 50, explained Wednesday in U.S. District Court how Enron consistently achieved this flawless performance.
It simply reported what Wall Street wanted to hear.
Koenig, who headed Enron’s investor-relations efforts, has been jokingly called the executive vice president in charge of stock price. He pleaded guilty to aiding securities fraud and faces a $1.49 million fine and up to 10 years in prison.
In court, Koenig described the lies he told Wall Street. He testified against former Enron chairman Ken Lay and former CEO Jeff Skilling regarding their alleged roles in the company’s collapse.
Koenig, the first witness called, came to the stand wearing a blue suit, a red tie and fashionable glasses. He spoke in the deep, assuring voice he once used on investment analysts.
Seeing Koenig’s Boy Scout demeanor on the stand, it’s hard to imagine how he came to this end. He’s been married 26 years and has three boys. He grew up in Omaha and worked at InterNorth, the energy company his father served for 30 years. In 1985, InterNorth merged with Houston Natural Gas, creating Enron.
Colleagues have described Koe nig as intense, energetic, bad-tempered, intelligent, anxious, harsh and perfectionist. He worked closely with Lay and Skilling in a fast- paced environment that demanded growth and performance every quarter.
Like most fast-growing companies, Enron was caught up in the penny game, and Koenig played it well.
When companies report earnings to Wall Street, the crucial figure for stock analysts is earnings per share, or EPS, which is typically expressed in pennies.
Analysts regularly set EPS targets. The EPS targets of several analysts are combined into a consensus estimate.
When fast-growing companies like Enron fall short of the consensus estimate, even by a penny, investors dump their stock, sending the stock value lower.
When analysts’ expectations are surpassed, even by a penny, there’s often the opposite reaction: The stock rises.
At Enron, the goal was always to meet or beat expectations, Koenig said.
In January 2000, Enron was putting together its report for the fourth quarter of 1999. The quarter was long closed, and the company was prepared to meet analysts’ expectations by reporting EPS of 30 cents a share. Unexpectedly, however, that consensus estimate rose to 31 cents.
“When I first saw it, I was kind of sick about it,” Koenig said. “My job was to keep that estimate in line. And we’d had great success in meeting or beating this estimate in the past.”
Koenig said he expected this to result in a drop in Enron’s stock: “The tone we would have set by missing earnings would have been very negative.”
He discussed the situation with Enron’s top accountant, Richard Causey, who in turn talked to Skilling. Within several hours, fourth- quarter 1999 earnings were adjusted to 31 cents per share.
“Yes, it’s wrong,” Koenig told prosecutor Kathryn Ruemmler.
Why? she asked.
“I believe the results of the operation were 30 cents, not 31 cents,” Koenig said.
Koenig said that while Skilling approved the change, Lay didn’t know about it until the next morning: “When he went to bed, we were at 30 cents. When he woke up and was watching business news, it was 31 cents.”
Lay, however, did not seem concerned about the change. In fact, Enron would soon do it again.
On July 5, 2000, Koenig drafted a press release announcing earnings of 32 cents per share for 2000’s second quarter. In a July 17, 2000, draft, the figure was revised to 33 cents. Then when the release was sent to investors, it rose to 34 cents.
The release Koenig wrote also announced several positive developments, including a 20-year, “one-of- a-kind” contract that soon would be abandoned.
Lay was quoted in the release: “Enron has completed another excellent quarter.”
Al Lewis’ column regularly appears Sundays, Tuesdays and Fridays. Respond to him at denverpostbloghouse.com/lewis, 303-820-1967 or alewis@denverpost.com.
