Talk of Crime Grows Louder, Spurred by Report
The New York Times
February 4, 2002
NEWS ANALYSIS
By KURT EICHENWALD
he report released Saturday
evening by a special
committee of the Enron
Corporation (news/quote)'s board
clearly raises the specter that at
the foundation of the company's
downfall was a series of
multimillion- dollar crimes, legal
experts and former prosecutors
said yesterday.
Until now, much of the
investigation into Enron's free fall
has been focused on complex
transactions that, while
suspicious and poorly executed,
appeared to fall within the
framework of workaday corporate
finance. These include the now
notorious off-balance sheet deals
that shifted assets and debt from
the company's books and into a
byzantine collection of
partnerships, many of them
controlled by Enron's former
chief financial officer, Andrew S.
Fastow.
But with the committee's report,
if it proves accurate, investigators
into the company's collapse will
seek to pinpoint whether the
same kinds of fraudulent acts
that were at the foundation of the
savings and loan scandals of the
late 1980's and early 1990's
occurred at Enron, too. These
include false valuation of assets,
bogus deals between related
parties, and millions of dollars
pocketed by participants along
the way.
"This report is a road map for the
Department of Justice to bring a
criminal indictment," said John
J. Fahy, a certified public
accountant who was once a
federal prosecutor in New Jersey.
With its detailed description of seemingly irrational
transactions that served no economic purpose other than
to pump up Enron's earnings, the report has shifted the
focus from the company's balance sheet, which lists assets
and liabilities, to its income statement, which describes
revenues and profits.
To those uncomfortable with the internecine workings of
finance, that may sound like a distinction without a
difference.
But in truth, the shift allows the federal inquiries trying to
unravel the Enron collapse to move from an area weighed
down by dueling professional opinions to the familiar
stomping ground of criminal prosecutions.
"Moving from the balance sheet to the income statement
makes the case a lot easier for a prosecutor to bring and a
lot easier for a prosecutor to explain to a grand jury," Mr.
Fahy said.
To prove any case against Enron, prosecutors would have
to establish that potential defendants intended to commit
a crime. Under the law, a person can participate in
activities that result in false information being given to
investors without committing a crime, so long as he
believed - even falsely - that the activities were
appropriate.
That is what created difficulties for a criminal case based
on Enron's incorrect accounting for the partnerships as
separate entities. Executives at Enron could point to
approvals from Arthur Andersen, the company's
accounting firm, as evidence that they intended nothing
improper.
But with the report's conclusion that certain transactions
served no purpose other than to manipulate the reported
earnings of the company - and with certain executives
personally receiving millions of dollars in undisclosed
profits from their partnership dealings - the hurdle of
proving intent to commit a crime has been dramatically
lowered.
"It's going to take a herculean salesmanship job to
persuade a jury that the Enron executives involved in this
could not appreciate the fraudulent nature of these
transactions," said Christopher J. Bebel, formerly a
federal prosecutor and a lawyer with the Securities and
Exchange Commission who is now with Shepherd, Smith
& Bebel in Houston.
"Their reliance on the advice of experts is starting to go
out the window," Mr. Bebel added, "and the accountants
could end up being key witnesses for the government in
some respects."
Members of Congress, who have been investigating the
Enron debacle, made it clear yesterday that what they are
seeing now appears to fall within the realm of a criminal
conspiracy.
"We're finding what may clearly be securities fraud,"
Representative Billy Tauzin, Republican of Louisiana and
chairman of the House Energy and Commerce Committee,
said on NBC's "Meet the Press."
Most criminal fraud prosecutions must show that
participants had some financial motive to participate in an
illegal scheme, and in this instance, former prosecutors
said, there are plenty of examples of such benefits. Enron
insiders received millions of dollars in undisclosed
compensation from their dealings with the partnerships;
Mr. Fastow alone, whose spokesman has declined
comment, received at least $30 million from his
partnership dealings.
An array of other insiders received huge sums in a deal
offered to them by Mr. Fastow and another executive,
Michael J. Kopper, who declined to be interviewed by the
committee. Two participants in the deal earned about $1
million in profits in just two months from an investment of
$5,800 each, the report said.
"The magnitude of these returns raise serious questions
as to why Fastow and Kopper offered these investments to
the other employees," the report said.
Ultimately, if the report proves correct that profits were
improperly manipulated, the range of charges that would
be under consideration are the standard mix for corporate
frauds, according to former federal prosecutors. They
include, at their base, securities fraud from the filing of
false information regarding corporate profits with the
Securities and Exchange Commission. Those, in turn,
lead to charges of mail fraud and wire fraud relating to the
transmission of that information, both to the S.E.C. and to
the investing public.
Despite the dozens of people involved in the transactions,
the report describes an atmosphere of compartmentalized
information, where few people understood the full scope
of anything that was going on.
Employees had little understanding of their roles and
responsibilities in the transactions; in one particularly
stunning passage, the report describes how an executive
who negotiated a deal with Enron on behalf of one of the
partnerships believed that, instead, she was acting on
behalf of the energy company.
But, for investigators, the most damning information
relates to the repeated instances in which the company
engaged in transactions that served no purpose other
than to inflate the earnings Enron reported to investors
and the public.
Indeed, the portrait painted by the report is one of a
corporation where facts were fungible, capable of being
massaged and manipulated to create whatever outcome
most benefited the executives involved. It describes, for
example, transactions with backdated documentation,
done for the apparent purpose of taking advantage of a
high price in a stock that was at foundation of the deal. By
the time the deal was actually done, the price of the stock
had fallen dramatically, but Enron was able to book
millions more in profit by simply pretending that the
transaction had taken place weeks before it did.
Repeatedly, the report said, there were transactions in
which Enron sold an asset to a partnership near the end
of an accounting period, only to buy them back later after
profits had been booked. The partnership involved in
those transactions never lost money on any deal, the
report said, even when the value of the asset being bought
and sold had declined. Indeed, the report said, there are
suggestions that Enron guaranteed the partnerships
involved against loss.
Ultimately, certain transactions were simply bogus, the
report concluded. For example, the most complex series of
transactions involve a group of four partnerships known as
Raptor I-IV. Purportedly, the transactions were designed
to allow Enron to hedge certain investments it made -
transactions in which the risk of an investment is shared
with another party for the purpose of minimizing potential
losses. But in truth, the report said, the Raptor
transactions were simply a complex group of partnerships
controlled by Enron, used as a secret dumpsite where
troubled Enron businesses - and the poor financials that
accompanied them - could be hidden.
Even worse, the report concluded, is the potential that,
since Enron was essentially on both sides of each deal,
the transactions were merely an illusion.
"The fundamental flaw in these transactions is not that
the price was too low, the report said. "Instead, as a matter
of economic substance, it is not clear that anything was
really being bought or sold."
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