***Read this amazing Washington Post article on Enron (its a front page story in today's paper) -- incredible details are revealed...I have included some passages below...I continue to be shocked that Bush's Justice Department still has NOT indicted Lay, Fastow or Skilling...IMO, there seems to be a mounting pile of evidence about a massive conspiracy to commit fraud and deceive stakeholders***
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Losses, Conflicts Threaten Survival
CFO Fastow Ousted In Probe of Profits
By April Witt and Peter Behr
Washington Post Staff Writers
Wednesday, July 31, 2002; Page A01
[Fourth of five articles]
washingtonpost.com
<<...On Oct. 4, 2001, Kenneth L. Lay was on stage, one of the nation's most admired business executives presiding over an Enron Corp. energy summit at the Ritz-Carlton at Pentagon City. Appearing completely at ease, Lay told the assembled Washington policymakers that with more energy deregulation Enron and the nation would continue to flourish.
But Lay's Enron had only 59 days to live.
Back in Houston, Lay's treasurer, Ben F. Glisan, and another executive worked the phones, quietly breaking bad news to analysts for the nation's Big Three corporate credit-rating agencies: Enron was about to report significant losses for the third quarter. Its very survival depended on the rating agencies' pronouncements about its financial health.
But the Enron executives' efforts to explain the losses, more than half of which involved a secret series of financial deals code-named the Raptors, surprised and troubled the influential analysts.
"We were questioning and scratching our heads about the type of accounting they were using," John C. Diaz of Moody's Investors Service would later recall.
On Oct. 8, the company's outside board of directors -- friends and admirers of Lay -- gathered in Houston. Typically, board meetings were congenial celebrations of Enron tales of success. Directors accepted executives' confident assurances and a clublike atmosphere prevailed.
This time, company executives informed the board about the Raptors' losses, describing them as a one-time setback that didn't cast doubt on Enron's future. Board members also heard sketchy details about an anonymous employee who had raised questions about Enron's accounting. But Enron executives didn't identify the employee as Sherron Watkins, a company vice president, or disclose that her warnings were specifically about the Raptor transactions.
The directors later said they left the meeting thinking Enron was doing fine...>>
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<<...Elsewhere in the universe of people who lived and profited in Enron's orbit, fear was a contagion.
On Oct. 9, Nancy Temple, a 38-year-old lawyer in Arthur Andersen LLP's Chicago headquarters joined a conference call on Enron with two of the accounting firm's top lawyers. She jotted alarming news on her notepad: "Highly probable some SEC investigation."
Enron's third-quarter Raptor losses were not what most troubled Temple.
Andersen was deeply concerned about a Raptors accounting decision in the first quarter. With the four Raptors deals headed toward insolvency then, Enron had revived them by combining their debts and assets. Andersen's Enron audit team had approved the fix even though its own experts said it was improper.
Now, as internal scrutiny grew, Andersen partners felt they had to reverse that earlier decision.
Correcting this problem could require Enron to revise its first-quarter financial results. That news was sure to trigger a Securities and Exchange Commission inquiry into Enron's books -- with potentially grave consequences for the 88-year-old accounting firm.
Andersen's Enron files contained some big problems for the accounting firm and its client.
The firm's accountants had sparred among themselves for two years over high-risk methods that their Enron audit team had let the company use. The audit team had ignored the advice of Andersen's in-house experts more than once to please its demanding client. In that way, Andersen allowed Enron to exaggerate its earnings by hundreds of millions of dollars in recent years, investigators for Enron's board would later determine.
The accounting firm had good reason to fear the SEC. Less than four months earlier, the regulators had fined Andersen $7 million for allowing another large company, Waste Management Inc., to issue deceptive financial statements. In that case, Andersen had also rejected the advice of its own in-house accounting experts. Andersen was now operating under a "cease and desist" order, enjoining the firm from further accounting abuses.
Fear of violating the cease-and-desist order if they ignored their experts once again was evident from Temple's notes. "Restatement and probability charge of violating C + D in WM," she wrote.
In the Waste Management case, the SEC documented the violations by using records retrieved from Andersen's own files...>>
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<<...Temple had come to Andersen from a high-powered litigation firm, seeking a change of pace. She was new to the Enron case.
On Friday, Oct. 12, she sent a blandly worded e-mail to Houston, reminding Andersen workers there to comply with the firm's "document-retention" policy of destroying extraneous memos and e-mails.
On Monday morning, Shannon Adlong arrived at the accounting firm's suite of offices on the 37th floor of Enron's Three Allen Center. She was the secretary to David B. Duncan, Andersen's lead partner on the Enron account.
Adlong went to the break room. It was a mess.
"I noticed a couple of bags of shredding," Adlong said. "There was food everywhere, like they had been there the whole weekend."
She said a manager passing by mentioned that Duncan had gotten an e-mail saying that "we needed to start getting in compliance" with the document-retention policy.
Adlong noticed they were running low on bags. She ordered more. "AARRGGH: send more shredding bags," she wrote in an e-mail. "Just kidding. We have ordered some."..>>
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<<...Enron's Oct. 16 news release was a masterpiece of modern business spin. The company emphasized that setting aside the $1 billion in "one-time" losses, its profits had actually risen by 26 percent compared with the year before. The company was "very confident in our strong earnings outlook," Lay said in the release.
Lay repeated that rosy prognosis in a conference call with securities analysts later that day.
"We are committed to making the results of our core energy business more transparent to investors," he said, promising to provide more detail on the $1 billion in losses "later in the call."
But Lay followed up with vague details and nearly impenetrable jargon.
He attributed the largest part of the $1 billion loss -- $544 million -- to "certain investments" in tech stocks and the "early termination in the third quarter of certain structured finance arrangements with a previously disclosed entity."
He left out important facts. The "structured finance arrangements" were the Raptor deals. The "previously disclosed entity" was LJM2, a private Enron partnership that had been run by Enron's chief financial officer, Andrew S. Fastow, until July 2001. LJM1 and LJM2 had done $2 billion worth of business with Enron.
Lay also casually mentioned -- as if it were an aside -- that the value of shareholders' equity, the company's net worth, would be reduced by $1.2 billion because of an accounting error in connection with that "early termination."
Andersen auditors had discovered the $1.2 billion equity error in August, when they were digging through old records on the Raptor transactions in response to Watkins's memo. The error was Andersen's fault. It occurred when Enron funded the Raptors with shares of its stock. Enron got a note from the Raptor funds in return and Andersen wrongly advised Enron to count the note as shareholder equity.
David Fleischer of Goldman Sachs asked the key question: "How confident can we be that these will not be, you know, the last write-offs?"
Lay's response: "If we thought we had any other impaired assets, it'd be in this list today."
That was the toughest question Lay fielded. The analysts seemed satisfied.
Asked last week to comment on Lay's statements, a Lay spokeswoman responded: "Based on the information available to him from whatever source, Mr. Lay firmly believed his statements to be true."...>>
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<<...Watkins had warned Lay of a growing risk that the company's "funny accounting" would wind up in the newspapers.
On the morning of Oct. 17, it did. A Wall Street Journal article spotlighted Fastow's conflicting roles as both Enron's CFO and the head of LJM. The article pointed out that Enron's recent losses occurred in deals with Fastow's partnerships. But the newspaper quoted Lay as saying all was well -- no conflicts had been permitted.
The following day, another Journal story zeroed in on the $1.2 billion reduction in shareholder equity. The reduction troubled people on Wall Street because Enron had done a poor job of explaining it. Moody's had put Enron's long-term debt on review for a possible downgrade.
In cryptic bits and pieces, the story of LJM finally was coming out.
Lay traveled to Boston that day to try to mollify about 40 investment-fund managers and securities analysts. Enron treated them to an elegant lunch at the Four Seasons Hotel. Cued by a PowerPoint presentation, Lay led the analysts through predictions of ever-rising revenue.
What the analysts wanted to know about was the $1.2 billion error highlighted in that morning's paper. Instead, the Enron chairman attacked the critical press coverage, calling it an irresponsible wild goose chase. Lay vigorously defended Fastow and assured the audience there were no more losses coming from other private partnerships.
Gregory Phelps, who manages $1 billion in energy and utility stocks at John Hancock Advisers Inc., noticed that Lay was looking right at him.
"This is a one-time thing," Lay said, according to Phelps. "There is nothing else out there."
Lay took one or two more questions, then suddenly looked at his watch and stopped. Lay's aides said, " 'We have to go' and just hustled out of there," Phelps said later...>>
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<<...Early the next morning, Oct. 23, Lay and a small group of advisers huddled in the conference room adjoining his 50th-floor office suite. The mood was tense.
In just a few minutes, Lay was scheduled to preside over a live webcast chat with securities analysts. Enron had to address the growing firestorm about Fastow's role in the LJM partnerships.
Enron's publicists and executives had drafted a carefully worded script. It suggested that no one at Enron was responsible for the LJM partnerships. Failure, it would seem, was an orphan.
With minutes to spare before the conference, Ronald T. Astin, a lawyer with Enron's outside law firm, Vinson & Elkins LLP, was asked to help fix the script. He rewrote it to say that it was Fastow who presented the LJM proposal to the board.
Fastow read Astin's changes and exploded, Astin later told investigators. Fastow yelled that Astin was wrong about who was responsible for LJM. "It was Skilling!" he shouted.
At 8:30 a.m. Houston time, financial analysts from Boston to San Francisco joined the conference by phone and Internet.
"There has been a lot of recent attention to transactions Enron previously entered into with LJM, a private equity partnership," Lay said, addressing LJM and Fastow head on. "Let me reiterate a couple of things. We clearly heard investor concerns earlier this year, and Andy Fastow, Enron's chief financial officer, ceased all affiliations with LJM."
Lay added that Fastow was doing "an outstanding job."
"We're very concerned the way Andy's character has been kind of loosely thrown about over the last few days in certain articles," Lay said. Fastow's role at LJM had been monitored rigorously so that Enron's interests would never be compromised, he said.
This conference call was much tougher than the one a week earlier. One questioner after another pressed Lay and his aides for more information about Fastow and Enron's hidden debt obligations.
"There is an appearance that you are hiding something," said Fleischer, the Goldman Sachs securities analyst who once had been such a strong Enron booster that he compared the company's magical earnings growth to Michael Jordan's scoring.
"We're not trying to conceal anything," Lay responded. "We're not hiding anything."
After the analysts call, Lay went almost immediately to another arena, a Hyatt ballroom packed with several thousand Enron employees.
"Let me say right up front, I am absolutely heartbroken about what's happened," Lay said.
"Many of you were a lot wealthier six to nine months ago, are now concerned about the college education for your kids, maybe the mortgage on your house, maybe your retirement, and for that I am incredibly sorry. But we are going to get it back."
Lay read a series of questions from the audience. Nerves were frayed. Decorum had vanished. One employee had written: "I would like to know if you are on crack? If so, that would explain a lot. If not, you may want to start because it's going to be a long time before we trust you again."
That very day Lay took a $4 million cash advance from the company. Over the next three days, he would draw an additional $19 million. He immediately repaid $6 million of the amount by transferring his Enron stock to the company. That allowed him to unload stock but avoid an immediate reporting requirement. A board member later called this Lay's "ATM approach."...>>
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<<...Enron's board of directors was just beginning to grasp the predicament.
For years board members had gone along compliantly with Enron's management. One former executive described board questions as "Tee-ball stuff: Are you happy with everything?"
Board member Charles A. LeMaistre, president emeritus of the M.D. Anderson Cancer Center at the University of Texas, told the Wall Street Journal that Fastow's LJM compensation was a way to keep him at Enron.
"We try to make sure that all executives at Enron are sufficiently well paid to meet what the market would offer," he said.
But neither LeMaistre nor the other directors knew just how lucrative a deal LJM had been for Fastow. Everybody had always tiptoed around the subject.
In the first year of LJM's existence, the board didn't ask for details on Fastow's income. Skilling asked a few questions but didn't obtain the right answers. In October 2000, the board asked its compensation committee to get the answer.
LeMaistre, head of the committee, chose a roundabout route, asking Enron's compensation director to provide the outside income of all top executives. He said he hadn't singled out Fastow because he didn't want to start office gossip.
He didn't get the information, so he asked again. When that attempt failed, LeMaistre gave up, he told Senate investigators.
Even as October wore on and the furor over Fastow's partnership deals grew, LeMaistre remained timid about confronting the young executive about how much money he'd made from LJM. He sought out Enron's general counsel, James V. Derrick, for advice in adopting just the right tone. Derrick prepared a polite script for LeMaistre: "We very much appreciate your willingness to visit with us."
Armed with the script, LeMaistre telephoned Fastow and posed the question: How much?
It was $45 million, Fastow said.
LeMaistre wrote in the margin of his script: "incredible."
Fastow Departs
Fastow's answer stunned Lay, too, he said later. A day after publicly praising Fastow, Lay concluded he had to go.
Lay replaced him with former treasurer Jeffrey McMahon, who had questioned Fastow's conflicts in the spring of 2000 and soon found himself in another job with the company. Now, with those conflicts exposed to the light of day, McMahon took Fastow's job.
Lay announced Oct. 24 that Fastow had taken "a leave of absence."
"In my continued discussions with the financial community, it became clear to me that restoring investor confidence would require us to replace Andy as CFO."
That day, Carol Coale of Prudential Securities Inc., an early Enron skeptic, became the first analyst to break from the pack and issue a sell recommendation for Enron stock...>>
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<<...In the waning days of 1997, Fastow's team had created Chewco Investments L.P., a confidential partnership that Enron needed in order to keep more than $600 million in debt off the company's books, hiding it from analysts and ordinary investors. It was the first time the company had set up an off-the-books partnership run by one of its own employees, making it a precursor for the LJM1 and LJM2 private partnerships later run by Fastow.
Enron could have sought truly independent investors. But Fastow saw a different opportunity: Enron would create a private investment group and Fastow would assign his top deputy, Michael J. Kopper, to manage it.
Using code names to conceal their identities in the documents, Kopper and his domestic partner, a Continental Airlines employee named William Dodson, became Chewco's "owners." The pair put in $125,000 of their own and borrowed $11 million more from Barclays Bank. Enron guaranteed those loans, further undermining Chewco's independence from the company.
The deal had worked out splendidly for Kopper and Dodson. When Enron closed down the partnership early in 2001, it paid them $10.5 million -- nearly 100 times their investment. Earlier, McMahon, then Enron's treasurer, had clashed with Fastow over the size of Kopper and Dodson's windfall, arguing that it should be no more than $1 million. Fastow prevailed.
Kopper and Dodson have declined requests for interviews.
Chewco would prove disastrous for Enron. Accounting rules required that at least 3 percent of Chewco's funding come in the form of equity from outside investors in order for the partnership to be considered independent for bookkeeping purposes.
Through an apparent oversight back in 1997, Kopper and Dodson's stake in Chewco had fallen just short of the 3 percent outside equity stake required to make the deal conform to accounting rules.
In October 2001, leafing through the Chewco file, Glisan looked dejected. The error was plain to see.
"We're toast," Glisan said, according to one colleague's account.
Now Glisan would have to tell the beleagured Lay about another mistake. Because Chewco was no longer considered independent of Enron, the company would have to restate its earnings downward, taking a $405 million loss.
Technical Truth
Lay also had to deal with the SEC inquiry. Needing outside expertise, Lay hired former SEC enforcement chief William R. McLucas and his partners at the law firm of Wilmer, Cutler & Pickering. McLucas and his colleagues urged Lay to make an independent investigation of Fastow's conduct. Lay immediately agreed.
Williams Powers, dean of the University of Texas School of Law, was added to Enron's board to head the inquiry, aided by Wilmer, Cutler lawyers. Enron announced the appointment of the special investigative committee on Oct. 28. Soon, a squad of outside lawyers and accountants were fanning out through the company headquarters asking tough questions.
In this atmosphere a nervous Mordaunt told Enron general counsel Derrick that she'd invested with Fastow in an LJM deal. She didn't want Lay to be blindsided, she said.
Mordaunt was advised to talk to the outside attorneys, who had taken over most of the fourth floor of Enron's headquarters.
She told them her story: Nineteen months earlier, in March 2000, Kopper had invited her to join in a confidential investment deal that would take place when the LJM1 partnership was terminated. Fastow had organized it. Ben Glisan and other Fastow confidantes also got a piece of the deal.
They called the partnership Southampton Place, after a swank Houston neighborhood favored by many young Enron executives. Southampton bought out the interests of one of LJM1's principal investors, a British bank, and then Enron brought out Southampton, adding another step to the process -- and another round of profit-taking.
When the deal was concluded in May 2000, the partners' secret profits were astounding.
Glisan and Mordaunt had invested $5,800 apiece. Each got back a cool million. The Southampton investors had worked on both sides of the deals Fastow structured between LJM and Enron. Glisan and Mordaunt were responsible for protecting Enron's interests as the deals were struck, negotiating for Enron against LJM. Yet they had allowed themselves to be made rich by LJM's conflicted general partner -- Andy Fastow.
Once the outside attorneys began hearing about Southampton, the Enron executives who'd invested in it were finished.
Glisan and Mordaunt were confronted, fired and escorted from the building.
Glisan declined a request for an interview through his lawyer. Mordaunt's attorney, Hayden Burns, said she did not know the deal was improper when she invested. Mordaunt, in a second interview with Wilmer, Cutler attorneys, broke down. She felt distress because "there was so much about these transactions that she did not know," Burns said.
When McMahon had succeeded Fastow he asked Glisan whether he was involved in any outside partnerships. No, Glisan said, McMahon later told investigators.
So after Glisan was sent home in disgrace, McMahon called him.
Why had Glisan lied? McMahon asked him.
He had only invested in a subsidiary of a partnership that did business with Enron, Glisan replied.
So it wasn't a lie, technically, he said...>>
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<<...Enron's bankers were starting to get worried, and the company executives feared they would desert them. That would be the death blow. The company had borrowed billions of dollars from the leading banks of New York, Switzerland, Canada and Germany, backing the debt with promises of Enron shares. If Enron's stock price fell below specified trigger points and its credit was downgraded in tandem, the lenders could demand immediate payment, bankrupting the company.
The stock price had already fallen below the triggers. Only the company's investment-grade credit rating remained as a buffer against approaching disaster.
The three major private credit-rating firms had given Enron slack in the past. Now a decision by any one to severly downgrade Enron's credit would cut the company's lifeline of cash from banks, triggering a relentless sequence of loan defaults.
Lay still had friends in Washington, cultivated through six presidencies by his extensive political fundraising for both parties. His calls were taken by the top people.
On Oct. 28 and 29, Lay told two members of President Bush's cabinet about Enron's growing financial crisis. He said to Commerce Secretary Donald L. Evans that Enron would "welcome any kind of support" in heading off a threatened credit downgrade by one of the credit agencies, Moody's Investors Service.
Bush administration officials looked at Enron's plight, then backed away from any intervention.
On Oct. 29, Enron locked down its company 401(k) savings plan for two weeks, barring employees from selling Enron stock they had purchased for their retirement. More than $1 billion of the plan's funds had been invested in the company's stock at the beginning of the year, when the stock was selling for nearly $80 a share. Those savings were vaporizing as the price plunged.
Enron said the action had been planned for a long time to make administration changes to the savings plan. Enron employees later filed a lawsuit alleging that the company blocked them from selling in an effort to prevent the stock's collapse from accelerating.
During the lockdown, Enron's stock price dropped 28 percent, from $13.81 to $9.98...>> |
