HOUSTON — A government witness in the trial of former Enron CEOs Ken Lay and Jeff Skilling testified yesterday that Skilling said, "They're on to us," after an obscure investment newsletter criticized Enron for using related-party transactions to hit earnings numbers.

Kevin Hannon, 45, who pleaded guilty to one count of conspiracy and is cooperating with the government, said Skilling made the remark at a meeting of top executives in May 2001. Other Enron executives at the meeting included Lay, then the company's chairman; CFO Andrew Fastow; chief accounting officer Rick Causey and Enron president Greg Whalley.

As Hannon explained it, the gathering was a monthly meeting of Enron's policy committee. Because a negative article about Enron had appeared in a recent issue of the newsletter Off Wall Street, the executives discussed the criticisms that had been leveled at the company. The criticism captured the executives' attention, Hannon said, because of its bearish position that Enron's stock was worth only $27 a share, well below its level at the time. Every member of Enron's policy committee was heavily vested in the stock.

According to Hannon, Whalley described the newsletter's criticism of Enron's relatedparty sales — transactions with partnerships it controlled — most of which were conducted with Fastow's LJM Partnerships, as "pretty much on target."

Asked to defend the related-party transactions, Hannon testified that Fastow said, "LJM is a good deal for me."