Enron's hard assets may have
been undervalued
DOUBLE TROUBLE: The investigation into whether
Enron was carrying assets on its books at inflated
values developed as a result of actions taken by the
firm's new managers
NY TIMES NEWS SERVICE
Sunday, Dec 29, 2002,Page 11
taipeitimes.com
Broadening the inquiry into Enron's collapse, federal
investigators who have been examining the esoteric details
of off-the-books partnership schemes are now looking at
such basics as whether the company misled investors
about the value of hard assets like pipelines and power
plants, according to people involved in the case.
The new inquiry represents a focus on the sort of
run-of-the-mill accounting issues that have been raised in
numerous corporate fraud cases in the past. Under
examination, these people said, is whether Enron carried
assets on its books for billions of dollars more than their
actual worth.
One person involved in the case described this avenue of
investigation as an effort by federal officials to determine
whether Enron had "a WorldCom problem." Prosecutors
have charged executives of WorldCom, the
telecommunications giant that joined Enron in
bankruptcy court earlier this year, with shifting expenses
around on its books in an effort to mislead investors about
the company's financial health.
A year after Enron's collapse, investigators are engaged in
what has become a virtual post mortem of the company's
business dealings and its possible transgressions of
criminal law. Investigators are examining accusations of
self-dealing and accounting fraud, securities fraud
involving the company's broadband unit, energy market
abuses and insider trading.
The investigation is now reaching what people involved in
the case describe as an important turning point. In the
next few weeks, they said, federal prosecutors plan to
bring what is known as a superseding indictment against
Andrew S. Fastow, the company's former chief financial
officer, who was charged earlier this year in a 78-count
indictment.
The superseding indictment will add charges, name new
defendants, or both, according to these people.
Prosecutors are expected to settle on a course of action
soon, they said.
The investigation's new direction, if it proves fruitful, could
offer prosecutors not only a case that is easier for a jury to
understand, but also another means for pursuing
evidence of possible criminal activities up the management
ranks at Enron.
In indicting Fastow, prosecutors outlined the role they
believe was played by the company's former chief
accounting officer, Richard A. Causey, in improper
activities involving one off-the-books partnership. Any
evidence that they now develop of improper accounting
decisions might allow prosecutors to exert greater
pressure on Causey to strike a deal.
But people involved in the case said Causey had not
signaled a willingness to plead guilty to any charges. Reid
Weingarten, a lawyer for Causey, declined to comment.
Investigators have centered their attention on four areas:
accounting and partnership issues like those involving
Fastow; Enron's energy trading activities; possible insider
trading by Enron's former chairman and chief executive,
Kenneth Lay; and possible misrepresentations of the
financial prospects of Enron's broadband division.
The first area has already resulted in two guilty pleas, as
well as the filing of charges against Fastow. The trading
investigation, involving charges that the company
manipulated the California energy market during the
state's power crisis, has also resulted in a guilty plea, from
a former top trader.
The investigation of Lay, on the other hand, has run into
complications that may make it difficult to bring charges,
people involved in the case said.
Lay's lawyers have told the government that his stock
sales were forced by the falling price of Enron shares he
used to secure loans, leading to demands from financial
institutions that he post more collateral. And because Lay
sold his shares back to Enron, rather than into the open
market, it becomes harder for prosecutors to demonstrate
that he possessed information that the company lacked --
a key element of insider trading. No final decision has
been reached, however, on whether charges will be
brought, according to the people involved in the case.
Investigators examining Enron's broadband division,
touted by the company from 1999 to last year as being
core to the company's future growth, have been moving
aggressively.
In recent weeks, agents of the FBI arrived unannounced at
the homes of some broadband executives, confronting
them with what the agents said was potential evidence of
fraud.
Some former executives have begun cooperating with the
inquiry and have testified before a grand jury, people
involved in the case said. They include Lawrence M.
Lawyer, a former finance executive who pleaded guilty to
tax violations, and Timothy N. Belden, a former senior
trader who pleaded guilty to conspiring to manipulate the
California energy market.
The broadband investigation began as an examination of a
transaction known as Grayhawk. That deal allowed Enron
to profit by taking a position in its own stock before the
announcement of a big purchase of Sun Microsystems
computers intended to form the backbone of the
broadband unit's expansion.
Now, people involved in the case say, the investigation has
broadened to look at whether Grayhawk was part of a
wider effort to drive up Enron's stock price by issuing
misleading statements about the broadband division's
performance.
In particular, prosecutors are said to be examining
statements made at meetings with Wall Street analysts in
2000 and 2001 about the prospects and performance of
the division. In addition, they are looking at whether the
division failed to promptly recognize reversals of income
that had been booked on the basis of projections that
proved to be inaccurate.
The simultaneous investigation into whether Enron was
knowingly carrying assets on its books at inflated values
developed as a result of actions taken by the new
managers installed at the company after it filed for
bankruptcy protection.
Last April, the new management filed a statement with the
bankruptcy court saying that, by its estimates, the value of
the assets on Enron's balance sheet would have to be
written down by about US$14 billion.
Much of the reduction was the result of assets losing value
in the wake of the bankruptcy filing, the new management
team said. But the company's statement said there were
also potential problems with "valuations of several assets
the historical carrying value of which current management
believes may have been overstated due to possible
accounting errors or irregularities."
It did not identify those assets, but witnesses have told
government investigators that primarily three Enron
holdings are involved.
The largest of these assets, according to people involved in
the case, is Enron's Houston Pipeline, which moves energy
products throughout Texas.
The pipeline is worth about US$800 million, according to
former executives, but was carried on Enron's books at a
value of more than US$4 billion -- a sum unchanged since
Enron was created through the purchase of Houston
Natural Gas by InterNorth, another energy company.
In that acquisition, InterNorth paid several billion dollars
more than the total book value of Houston Natural Gas
and chose to write up the value of the gas company's
assets, a so-called fair value adjustment under accounting
rules.
At the time, the former executives said, Enron's
accountants argued that Houston Pipeline would be
extremely valuable in the future, when it could be used as
a hub in a nationwide pipeline system.
But, as the years passed, Enron sold parts of Houston
Pipeline. Since no acquirer was willing to pay the value
that had been assigned to the system, accounting rules
normally would have required Enron to record a loss on
those sales. To avoid that outcome, Enron shifted billions
of the fair value adjustment from the pipeline itself onto a
storage area associated with it.
Though the assumptions that had allowed Enron to inflate
the pipeline system's value were ultimately undermined,
the company never restated the value of the assets, people
who have examined the company's financial records said.
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