Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: Sully- who wrote (4072)	8/7/2002 12:18:53 PM
From: stockman_scott	Read Replies (1) \| Respond to of 89467

U.S. widens investigation of Enron Investigators examining alleged fraud ahead of bankruptcy By John R. Wilke THE WALL STREET JOURNAL msnbc.com WASHINGTON, Aug. 7 — Federal investigators are examining whether Enron Corp. and its executives committed accounting fraud when it borrowed $1 billion in an unsuccessful last-ditch attempt to stave off bankruptcy late last year, lawyers close to the case said. THE JUSTICE Department and the Securities and Exchange Commission are investigating the transactions to determine whether Enron improperly used two of its publicly regulated pipeline subsidiaries to secure the loans and then transferred the money to Enron’s accounts with no plans to repay the companies, the lawyers said. An Enron spokesman defended the transactions as “common” and “an acceptable practice,” and said they were fully disclosed at the time. He declined to discuss the loans or their accounting treatment in detail. The investigation of the loans widens the publicly known dimensions of the Enron inquiry and raises new questions about the role of the company’s former chairman and chief executive, Kenneth Lay, who presided over Enron as it took out the loans to raise cash. Up to now, much of the public focus of the inquiry has been on Enron’s maze of off-balance-sheet partnerships that allegedly were used to hide debt, inflate reported profit and enrich Enron executives and other insiders. Mr. Lay’s role in these partnerships had been less direct than those who profited from them, and he is expected to argue that their creation followed the advice of auditors and lawyers, and that other Enron executives oversaw the partnerships. As a result, prosecutors feared it might be difficult to build a case against Mr. Lay. But the pipeline-backed loans happened after the Enron chairman had returned to his dual role as CEO, following the abrupt resignation of CEO Jeffrey Skilling in August 2001. Mr. Lay declined to comment, a spokeswoman said. ADDITIONAL SCRUTINY The pipeline investigation also will bring additional scrutiny to the role played by Enron’s two major bankers — J.P. Morgan Chase & Co., which lent $450 million, and Citigroup Inc., which put up $550 million, in the transactions last November. Enron used part of the proceeds to pay off an earlier, unsecured $250 million loan it had received from Citigroup. Senate investigators have charged that the earlier loan was part of a flood of financings by Citigroup and J.P. Morgan that were disguised as commodity trades, and conducted through offshore shell companies. Executives of Citigroup and J.P. Morgan have testified before the Senate that they did nothing wrong. The first public scrutiny of the pipeline loans arose last week with disclosure of a special audit conducted in March of the two Enron subsidiaries, Transwestern Pipeline Co. and Northern Natural Gas Co., by the Federal Energy Regulatory Commission. The commission issued a toughly worded order late Thursday, demanding that the pipeline companies explain why their dealings with the troubled parent didn’t violate utility-accounting rules. Suggesting that Enron may have milked the two subsidiaries for cash, the order raised the possibility that FERC would forbid them from recovering the money from ratepayers. During their audit, energy regulators were told by a finance executive for the pipeline subsidiaries that Enron had ordered the units to take out the loans to stave off its bankruptcy, and that neither pipeline company expected the loans to be paid back. The commission didn’t identify the finance director who made that assertion. Investigators also found evidence that millions of dollars more may have been swept from the companies’ accounts. The investigators discovered that Enron set up a series of subsidiaries to do business with its pipeline companies, and failed to maintain required records of many transactions. The investigators found that the pipeline companies and Enron pooled funds, which is permitted under certain circumstances. But the companies didn’t maintain written cash-management agreements, and were unable to support many of the liabilities listed in their accounts receivable from the parent company, the investigators said. An Enron spokesman said that its pipeline companies have always been permitted to take out loans and share their proceeds with the parent. “It’s fairly common for a parent to draw funds from a subsidiary,” said John Ambler, a spokesman for Enron Global Services, in Houston. “If they want to stop it now, that’s another thing. But when we acted [last year] it was an acceptable practice.” Mr. Ambler declined to comment on the criminal inquiry into the pipeline’s accounting. “We will continue to cooperate with the investigations,” he said. LOOTING OF UTILITIES FERC’s order came amid fears by regulators that Enron’s move could be repeated by other energy firms reeling from recession and market disruptions — an echo of the Depression-era looting of utilities that inspired many of today’s electricity and gas regulations. In response, the energy commission proposed rules last week that would strictly limit a parent’s ability to strip cash from its publicly regulated subsidiaries. These units are typically run as separate companies under federal rules and are permitted to recover costs from ratepayers and sell bonds to the public. The tough new rules would apply to most federally regulated interstate oil or gas pipelines and electric utilities, and are intended to shield customers from having to pay higher rates to help utilities recover the costs of inappropriate financial dealings. Among other provisions, companies will be required to maintain investment-grade status in order to pool cash with affiliates, and these regulated affiliates must maintain stockholder equity of at least 30%. In its order last week, the energy commission noted that the pipelines are still liable for the entire $1 billion in loans and that the companies “will experience an increased credit risk [and] a significantly higher cost of capital,” which could lead to higher rates for customers of the pipelines. FERC ordered the companies to explain why the loans “were not imprudently incurred and therefore unrecoverable” by passing the higher costs on to ratepayers. The Enron spokesman said that neither company had sought to raise rates because of the loans and that Transwestern wouldn’t be allowed to file for higher rates until 2006. Copyright © 2002 Dow Jones & Company, Inc. All Rights Reserved.