Enron Probers Facing Complex Task
Prosecutors Focusing on Mid-Level Workers to Unravel Executives' Actions
By Susan Schmidt
Washington Post Staff Writer
Wednesday, May 29, 2002; Page E01
It is likely to take more than the long, hot summer ahead in Houston for prosecutors with the Enron task force to decide whether they have enough evidence to file charges against former high corporate officials, such as chairman Kenneth L. Lay, chief executive Jeffrey K. Skilling and chief financial officer Andrew S. Fastow.
Instead of shredded documents that led to the swift indictment and quick obstruction-of-justice trial of Enron Corp.'s auditor, Arthur Andersen LLP, investigators probing the cause of Enron's bankruptcy and the loss of investors' billions must contend with deciphering complicated partnership documents and esoteric accounting practices.
The Enron task force is concentrating now, sources said, on mid-level Enron employees, hoping to induce testimony against their former superiors. For example, sources said Justice Department officials have been communicating with the attorney for Kristina Mordaunt, a Fastow aide who was fired last fall after disclosing that she made $1 million in a few months from a $5,800 investment in one of the off-the-books partnerships Fastow ran.
Mordaunt told investigators for a special committee of the Enron board that she was approached by Michael J. Kopper, another Fastow aide, but thinks he was acting on Fastow's behalf.
So far, the government is not known to have entered into plea deals or immunity agreements with anyone from Enron. In fact, many senior and second-tier executives have not even been interviewed yet, company officials and lawyers say, because the Andersen trial has preoccupied the government.
Senior Justice Department officials were heavily involved in negotiations leading up to the trial, and Enron task force chief Leslie Caldwell has been a frequent presence in the courtroom. Only when the trial is over will the six to eight task force prosecutors and 30 FBI agents -- half in Houston and half in Washington -- be able to fully concentrate on Enron.
Among the potential crimes are accounting fraud, securities fraud and insider trading, lawyers close to the case said. The Securities and Exchange Commission, which is charged with protecting shareholders, is conducting a parallel civil investigation.
Some aspects of Enron's finances are just coming to light, including the company's apparent manipulation of trading on the California electricity market, and its use of tax shelters to boost earnings by $1 billion. The government will have to determine whether the tax deals, coupled with the accounting maneuvers outlined in the special board report, amount to securities fraud, by giving a misleading picture of the company's financial health.
"I view this as a long-term investigation, and we are really at the beginning stages of it," said one defense lawyer intimately involved in the case. "Sometimes the government finishes where they started, and many times they finish someplace completely different."
Lay and Fastow refused to testify before Congress on Enron's collapse. Skilling testified and claimed that the company was in good shape financially when he resigned last August. He emphasized that Andersen approved the accounting that was criticized in Enron's failure.
The testimony in the Andersen trial has been a mixed bag for Enron principals, lawyers involved in the case said. A cornerstone of Skilling's and other Enron officials' defense is that they sought and received the advice and approval of accountants, lawyers, and investment bankers on the complicated deals that had the effect of hiding Enron's debt and boosting profits.
That contention may have been bolstered somewhat by the government's key witness in the trial, former Andersen partner David B. Duncan, who pleaded guilty to obstruction. Duncan admitted illegally destroying documents but said he stands by the legitimacy of the accounting work Andersen performed for Enron.
Duncan's plea agreement protects him from prosecution for accounting violations, so it would have cost him nothing to admit wrongdoing in that area.
"By Duncan holding tight, that's a pretty strong pillar for us to cling to," said one defense lawyer. Duncan's assertion may make it tougher for the government to build an accounting fraud case against Enron officials, he said.
On the other hand, the trial has shown that other senior Andersen accountants, expert in complex off-balance-sheet partnerships, objected strongly to Enron's accounting methods and made that clear to Duncan. When Enron officials complained about one of those experts, he was taken off the Enron account.
Duncan also testified that Enron officials deceived him about the lack of financial independence of two supposedly separate partnership entities, Chewco and Southampton Place, the source of Mordaunt's windfall.
The SEC is most interested in transactions like these, where Enron officials were on both sides of a deal, sources close to the investigation said. Civil action is likely in instances where the companysuffered financially, the sources said. Prosecutors are looking for evidence of criminal intent in transactions that were layered to conceal the beneficiaries, they added.
Southampton's transactions with Enron were detailed in the board committee's special report in February. Fastow and employees who worked for him, including company treasurer Ben F. Glisan, Mordaunt, and Kopper, made millions of dollars on small investments. Fastow received $45 million from the company's off-the-books partnerships, profits Enron's top management and directors say they did not know about.
Some of the employees were involved in negotiating on the company's behalf in other transactions with Fastow. Investigators are looking into whether the huge returns they made were an inducement or reward for favorable terms to Fastow in other deals.
The government is also examining whether there was fraud in Enron's creation in 1997 of Chewco, the first off-the-books partnership run by an Enron employee, Kopper. Chewco never had the required 3 percent amount of capital from outside investors, something Andersen's auditors said they didn't learn until last fall.
When the company belatedly recognized Chewco was undercapitalized, it was forced to restate its financial results for five years, reducing profits by more than $500 million.
The Enron task force is also trying to unravel the intricacies of the Raptors transactions, whichwere created, at Skilling's urging, to protect, or hedge, Enron's investments in high-tech start-ups. The Enron board committee concluded that the company overstated its earnings by $1 billion in 2000 and 2001 because of improper accounting involving the Raptors.
Investigators also are trying to determine whether Skilling committed perjury when he told Congress under oath that he was unaware of any off-the-books partnerships designed to hide losses from investors. Other Enron officials told the board committee that the financial health of the Raptors was a high priority for Skilling.
Sources said Lay's vulnerability may lie in his sale of Enron shares last fall, after Sherron Watkins, who worked for Fastow, warned him that Enron was about to "implodein a wave of accounting scandals." Stock sales by Skilling and Army Secretary Thomas E. White, a former Enron official, are also under scrutiny.
The company's broadband business is under the investigative microscope, too, because of reports that Enron used questionable accounting to book earnings on deals where there was no real profit or cash flow.
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