Feb. 6 (Bloomberg) -- Enron Corp. managers discussed ``aggressive'' accounting practices during a two-day meeting in 2001 presided over by ex-Chairman Kenneth Lay, a former company executive testified.

Mark Koenig, Enron's former head of investor relations, told a jury at the fraud trial of Lay and former Chief Executive Officer Jeffrey Skilling that officials debated the accounting practices Enron used to meet earnings targets at a managers' meeting on Sept. 5-6, 2001, after Skilling stepped down as CEO.

Former Chief Financial Officer Andrew Fastow and former accounting chief Richard Causey defended the company's accounting when other officials challenged them, Koenig testified in his third day on the witness stand in the fraud trial.

``Mr. Causey's and Mr. Fastow's point was the accounting was aggressive, but it benefited a lot of the people at the table,'' said Koenig, who was one of the managers at the meeting.

Federal prosecutors called Koenig as the first witness in its prosecution of Lay, 63, and Skilling, 52, accused of orchestrating the fraud that forced the seventh-largest U.S. company into bankruptcy in December 2001. Prosecutors intend to use Koenig's testimony to help prove that Skilling conspired to defraud investors and enrich himself.

Enron had more than $68 billion in market value before it filed for bankruptcy in December 2001, wiping out thousands of jobs and at least $1 billion in retirement funds almost overnight. The company's workforce of 32,000 has dwindled to about 300 employees. Investors suing over the company's collapse claim accounting fraud led to at least $25 billion in losses.

Financing Questions

The two executives are accused of leading a wide-ranging fraud that involved hiding billions in debt and losses in off- book partnerships and misleading investors and employees about Enron's financial condition. Prosecutors contend Skilling and Lay deceived investors so they could sell millions in company shares at inflated prices.

At the September 2001 meeting Koenig said he advised Lay and other participants that he'd been getting questions from investors about Enron's financing, including its true debt level.

Koenig said managers discussed the threat posed by problems with two of its off-the-books entities, known as Whitewing and Marlin. Fastow created the entities to handle more than $1 billion in Enron-related financings without having them recorded on the company's books.

Looming Debt

The entities' makeup included triggers that required immediate payment if Enron's stock price fell below $27 and credit agencies downgraded the shares, he said.

``The stock had gone through that trigger price, but the credit had not been downgraded'' at that point, Koenig said. While the company hadn't been required to make immediate payment, officials worried about the looming debt, he said.

Sixteen former Enron officials, including Fastow and Causey, have pleaded guilty to criminal charges stemming from the fraud and agreed to cooperate with prosecutors.

Koenig also testified that during the third quarter of 2001, Enron's balance sheet miscategorized $1.3 billion as one-time losses. The losses came from Enron's water-trading business, its retail division, its broadband subsidiary and various investments, he said.

``Had even a small portion been listed as recurring losses, clearly the company would have been well below analysts' expectations'' for the quarter, Koenig said. ``We had seen even a penny or two would have a detrimental effect on the stock price.''

Retail Losses

Koenig testified last week Enron officials knew about more than $700 million in losses at its retail unit that Skilling didn't reveal on conference calls with investment analysts. Officials manipulated earnings reports to hide or downplay the losses, he said.

The 50-year-old Koenig, who has pleaded guilty to aiding securities fraud at Enron, wasn't able to link Skilling or Lay directly to those manipulations. He also acknowledged during his testimony that be lied about his involvement in the effort to mislead investors about Enron's performance.

In cross-examination, Daniel Petrocelli, Skilling's lawyer, asked Koenig to direct him to the document that showed the two executives led the conspiracy to deceive investors about Enron's financial performance.

``Did you ever see a single document that said Mr. Skilling or Mr. Lay was breaking law?'' Petrocelli asked. Koenig said he didn't see such a document.

Lies Highlighted

Petrocelli highlighted the fact that Koenig has admitted he lied to federal investigators and a grand jury about his role in Enron's earnings manipulations to protect himself.

``You're still in the mode of trying to protect yourself, aren't you?'' Skilling's defense lawyer asked.

``I don't feel in the last three days I've protected myself in any way,'' Koenig said in response to a follow-up question from Petrocelli.

Koenig faces a maximum sentence of 10 years in prison in connection with his guilty plea. Prosecutors could ask a judge to cut his sentence for his cooperation in the Skilling and Lay case.

Lay is charged with seven counts of fraud and conspiracy, plus four counts of bank fraud that will be tried separately after his first trial. Skilling faces 31 counts of fraud, conspiracy and insider trading.

The case is U.S. v. Skilling, No. 04-cr-25, U.S. District Court, Southern District of Texas (Houston).

To contact the reporters on this story: Jef Feeley in Wilmington, Delaware jfeeley@Bloomberg.net; Laurel Brubaker Calkins in Houston at laurel@calkins.us.com.

Last Updated: February 6, 2006 13:33 EST