Enron Investigators Expand Probe To California Energy Trading
By Peter Behr and Carrie Johnson
Washington Post Staff Writers
Wednesday, January 8, 2003; Page E01
Federal prosecutors investigating the collapse of Enron Corp. are trying to determine whether manipulation of energy prices during California's power crisis helped the company distort its financial statements.
A California legislative committee investigating Enron has turned over to federal prosecutors several records, including one that shows Enron booked a $250 million profit from its West Coast energy trading operations on the last day of 2001. Enron spokesman Mark Palmer said early this morning that the company's current accountants had determined that the record showing the $250 million Dec. 31, 2001, trading profit was inaccurate. He said company officials don't know why the inaccurate report was prepared. Actual trading margins were much smaller, he said.
A federal grand jury in San Francisco has been examining whether Enron illegally ran up power prices in California during the state's energy troubles two years ago. Prosecutors from the Justice Department's Enron Task Force are looking more broadly at the company's California operations to determine whether senior executives were involved in rigging Enron's books.
State investigators have concluded that the report listing the $250 million year-end profit might be a clue to another instance of accounting manipulation by Enron. They said it most likely resulted from the complex accounting Enron used to estimate the long-term value of its trades. Enron routinely added such calculations to its operating profits.
Palmer would not respond to allegations that Enron had manipulated trading reserves. "That is a subject of investigation. Enron is cooperating with all investigations."
Enron would have triggered a political storm had it reported a huge profit early in 2001, during the California crisis, said Christian Schreiber, chief investigator for the committee headed by state Sen. Joseph Dunn (D). Schreiber said he believes that the company used accounting maneuvers to conceal excess amounts early in the year, then drew on those "reserves" to boost reported earnings in the spring and summer of 2001 as other business operations slumped badly.
"We think they were maneuvering profits between various days and months," Schreiber said. "They may have made an extreme amount of money on a given January day, and the profits from that day may not have shown up until May -- on a particularly bad day -- to balance the books."
Accounting rules allow companies to maintain reserve funds, but only if they are fully disclosed. Enron did not report large reserves from trading.
Prosecutors have been investigating for months whether Enron executives inflated company profits to pump up the price of the company's stock. If Schreiber's theory is correct, senior executives, at least for a time, were minimizing profits
Enron's former chief West Coast trader, Timothy N. Belden, pleaded guilty in October to federal fraud charges. He admitted that he helped rig electricity prices there through strategies with code names such as "Death Star" and "ricochet" and has promised to point prosecutors toward others involved in manipulating prices.
Belden worked closely with John J. Lavorato, head of Enron North America, the company's central energy trading division, and with Lawrence "Greg" Whalley, who was president of Enron Wholesale Services, which included the West Coast trading group. Whalley was Enron's chief operating officer after chief executive Jeffrey K. Skilling resigned in August 2001.
Prosecutors hope that Lavorato and Whalley can provide information about Skilling's involvement in the West Coast operations, sources familiar with the investigation said.
Lavorato's lawyer, B. Michael Rauh, said his client is helping prosecutors and is not a target of the investigation. Zachary W. Carter, Whalley's lawyer, said the former Enron executive has been "fully cooperative" with prosecutors and other investigators. He declined to discuss where his client stands with prosecutors.
The purported $250 million trading profit by Belden's group for Dec. 31, 2001, appears on an unaudited Enron "daily position report" of gains and losses throughout the Houston-based company's global operations.
Some of Enron's commodity trades were settled each day for cash, resulting in daily profits and losses. But Enron made a huge number of longer-term deals, buying and selling electricity, gas, other commodities and financial contracts, in transactions that were not settled for months or years.
Accounting rules permitted Enron to update estimates of the value of those contracts constantly based on daily power prices, called "marking to market," and the profits and losses were counted as if cash had been received or paid out. The transactions gave Enron executives the opportunity to store excess profits for use later, Schreiber said. "It is very difficult to figure out what is real. Everything is suspect," he said.
Enron's reports of large year-end trading profits -- which the company now disavows -- also appears in an investigative report the Federal Energy Regulatory Commission issued in August. Based on unaudited Enron daily position reports, FERC said that trading profits from Belden's operations grew steadily in 2000 and 2001 to a cumulative $1.8 billion.
But nearly half of that two-year return -- about $800 million -- was recorded in December 2001, after the company had closed its energy trading desks, the FERC report said. FERC officials say they could not determine the accuracy of Enron's trading reports.
Enron trading reports show an equally improbable trading profit of $348 million on natural gas contracts in December 2001, energy consultant Robert McCullough said.
"It makes no sense at all. There is no possible way this could be due to trading operations," he said.
McCullough has been analyzing Enron's trading operations for more than a year for West Coast utility companies seeking refunds from Enron and other power suppliers.
John Arnold, who was one of Enron's top natural gas traders, said the company made large trading profits in 2000, but declined to go into Enron's trading profits in December 2001. "I have little interest in discussing this any more," Arnold said in an interview.
UBS Warburg bought Enron's trading operations out of bankruptcy court a year ago and hired more than 600 Enron employees, including Whalley and Lavorato. They received million-dollar retention bonuses in November 2001 as inducements to remain with the company during unsuccessful merger negotiations with Dynegy Inc.
Lawyers for Whalley and Lavorato declined to comment on the circumstances surrounding their departures from Enron.
© 2003 The Washington Post Company |
