Posted on 12/22/2001 5:51:13 AM PST by independentmind
By the way, given that the board and the auditors certainly had to know of the involvement of corporate officers as "partners" of Enron, what do you think happened to the normal concern over corporate opportunity? Wouldn't decent corporate counsel say "no way?"
What killed Enron was a crisis in confidence in the company. That crisis effectively blocked Enron from access to credit markets which it needed for day to day operations.
The losses that it had incurred through the shadowy partnerships was bad. But those losses weren't nearly enough, by themselves, to destroy the company.
It was the failure to be open about them all along. The fear that there were more of these yet to be revealed is what cut off the credit market.
When that happened, Enron was toast.
Have you run across that, that you can aim me toward?
I've posted articles on Enron also as you know, and don't recall noting that info. Makes me think "Money Laundry".
Agree. I said from the beginning this thing was going to grow larger and uglier. I feel its only begun.
This is funny. Has Mr. Dingell ever taken a look at the Federal Government's "superbly complex financial reports"?
Hint: Clinton's administration never had a surplus.
In terms of partnerships, there are several, whose purpose I don't fully understand as of yet. The partnerships which Andersen admitted should have been consolidated are not the ones in which the CFO (Fastow) was involved.
Here's the 10/17/2001 WSJ article which started the ball rolling:
Enron Posts Surprise 3rd-Quarter Loss After Investment, Asset Write-Downs
By John Emshwiller and Rebecca Smith
Staff Reporters of The Wall Street JournalEnron Corp. Tuesday took a $1.01 billion charge mostly connected with write-downs of soured investments, producing a $618 million third-quarter loss. The loss highlights the risks the onetime highflier has taken in transforming itself from a pipeline company into a behemoth that trades everything from electricity to weather futures.
In addition to the size of the charge, a particular slice raises anew vexing conflict-of-interest questions. The slice is connected with a pair of limited partnerships that until recently were run by Enron's chief financial officer. The company said the charge connected with the partnerships is $35 million and involves the "early termination ... of certain structured finance arrangements."
Two years ago, the chief financial officer, Andrew S. Fastow, entered into the unusual arrangement with his employer. With the approval of the board of Enron, Mr. Fastow set up and ran the partnerships that stood to make him millions or more, according to partnership documents. While the company says that this arrangement was proper, some corporate-governance watchdogs have questioned whether a chief financial officer, who is responsible for overseeing the financial interests of the company, should have been involved in such a partnership that was, among other things, looking to purchase assets from Enron.
The two partnerships, LJM Cayman LP and the much larger LJM2 Co-Investment LP, have engaged in billions of dollars of complex hedging transactions with Enron involving company assets and millions of shares of Enron stock. It isn't clear from Enron filings with the Securities and Exchange Commission what Enron received in return for providing these assets and shares. In a number of transactions, notes receivable were provided by partnership-related entities.
Mr. Fastow's role as chief financial officer made him privy to internal asset analyses at Enron. An offering memorandum for the LJM2 partnership said that this dual role "should result in a steady flow of opportunities ... to make investments at attractive prices." Mr. Fastow would find his interests "aligned" with investors because the "economics of the partnership would have significant impact on the general partner's wealth," according to this document.
In a written statement in response to questions, Enron, based in Houston, said "there never was any obligation for Enron to do any transaction with LJM. Enron and its Board established special review and approval processes with its senior management and external audit and legal counsel to ensure that each transaction with the LJM partnership was fair, in the best interest of Enron and its shareholders, and appropriately disclosed."
Mr. Fastow, through an Enron spokesman, declined to be interviewed.
In announcing the third-quarter loss, Enron said the partnership-related write-offs were part of a larger $544 million charge related to the diminished value of investments in a retail-power business, broadband telecommunications and technology. In addition, there was also a $287 million write-off resulting from its investment in Azurix Corp., a water company Enron spun off and then repurchased. In all, Enron posted a third-quarter loss of 84 cents a share, compared with a gain of 34 cents a share in the year-earlier period. Revenue rose 59% to $47.6 billion.
At 4 p.m. Tuesday, Enron's stock was up 67 cents a share to $33.84 in composite trading on the New York Stock Exchange, but remains far below its 52-week high of $84.88. On Monday, the day before the earnings announcement, Enron stock dropped by about 7%.
In an interview, Enron's chairman and chief executive, Kenneth Lay, said the write-offs were designed as part of an effort to "find anything and everything that was a distraction and was causing a cloud over the company."
The quarterly loss is the latest in a series of setbacks faced by Enron recently after years of almost unbroken success. There have been mounting problems from expensive moves into the water and telecommunications businesses.
And there has been a steady stream of executive departures, most notably the surprise resignation in August of Enron's president and chief executive, Jeffrey Skilling, who said he left for personal reasons and because of the fallen stock price.
The partnership arrangement involving Mr. Fastow, the highly regarded chief financial officer, first surfaced in an Enron SEC filing in 1999, but only recently has it attracted Wall Street's concern. In late July, Mr. Fastow severed his relations with the partnerships, according to a company SEC filing. Company officials said that move was partly related to questions raised by analysts and large Enron shareholders.
Little about the inner workings of the LJM partnerships has been disclosed to date. Private partnership documents reviewed by The Wall Street Journal indicate that Enron agreed to a partnership arrangement with potentially huge financial rewards for Mr. Fastow.
The LJM Cayman partnership raised a relatively modest $16 million, according to the documents. The more ambitious LJM2 aimed to raise at least $200 million, the documents show. Among investors were Credit Suisse Group 's Credit Suisse First Boston, Wachovia Corp. and General Electric Co.'s General Electric Capital Corp. The Arkansas Teachers Fund committed $30 million, of which $7.4 million had been tapped by late last month. Bill Shirron, a fund manager there, said the LJM arrangement had "already returned $6 million to us." It's been "a home run so far," Mr. Shirron added.
According to the LJM2 offering document, the general partner, made up of Mr. Fastow and at least one other Enron employee, received a management fee of as much as 2% annually of the total amounts invested. Additionally, the general partner was eligible for profit participation that could produce millions of dollars more if the partnership met its performance goals over its projected 10-year life. In exchange, the general partner was obliged to invest at least 1% of the aggregate capital commitments.
In an interview earlier this year, Mr. Lay said the LJM arrangement didn't produce any conflicts of interest. Such related-party transactions, involving top managers or directors, aren't unusual, he said. "Almost all big companies have related-party transactions."
Typically, related-party transactions involve dealings with partly owned affiliates or a contract with a firm tied to one of the company's outside directors. It is rare for a top executive to be in a position where he could have conflicting fiduciary responsibilities. The LJM2 offering document states that the responsibilities of Mr. Fastow and other partnership officials to Enron could "from time to time conflict with fiduciary responsibilities owed to the Partnership and its partners."
Some institutions approached as potential LJM investors demurred partly because of such potential conflicts.
Enron has publicly stated that the partnership deals were aimed to help it hedge against fluctuating values for its growing portfolio of assets. In the past decade, Enron has seen its asset base rocket to more than $100 billion. As a result of this rapid growth, Enron has at times been strapped for capital and has sought ways to bring in outside investors to help bolster its balance sheet.
Charles LeMaistre, an outside Enron director and president emeritus of the M.D. Anderson Cancer Center at the University of Texas, said he viewed the partnership arrangement partly as a way of keeping Mr. Fastow at Enron. "We try to make sure that all executives at Enron are sufficiently well-paid to meet what the market would offer," he said.
Enron's interest in retaining Mr. Fastow may have been heightened by an exodus of top managers who were cashing out large stock-option grants after the company's success in 1999 and 2000. Mr. Fastow's yield from options for the 12 months through Aug. 31 was $4.6 million, according to disclosure reports compiled by Thomson Financial. Mr. Lay netted about $70 million from exercising options during this period, while Mr. Skilling, the former president, realized nearly $100 million.
October 18, 2001Enron Says Its Links to a Partnership Led to $1.2 Billion Equity Reduction
By Rebecca Smith and John R. Emshwiller
Staff Reporters of The Wall Street JournalEnron Corp. shrank its shareholder equity by $1.2 billion as the company decided to repurchase 55 million of its shares that it had issued as part of a series of complex transactions with an investment vehicle connected to its chief financial officer, Andrew S. Fastow.
Enron didn't disclose the big equity reduction in its earnings release issued on Tuesday, when the Houston-based energy giant announced a $1.01 billion charge to third-quarter earnings that produced a $618 million loss. But the company briefly mentioned it in a subsequent call with security analysts and confirmed it in response to questions Wednesday. As a result of the reduction, Enron's shareholder equity has dropped to $9.5 billion, the company said.
In an interview Tuesday, Enron Chairman Kenneth Lay said that about $35 million of the $1.01 billion charge to earnings was related to transactions with LJM2 Co-Investment LP, a limited partnership created and run by Mr. Fastow. In a conference call Wednesday with investors, Mr. Lay said that the 55 million shares had been repurchased by Enron, as the company "unwound" its participation in the transactions. In the third quarter, the company's average number of shares outstanding was 913 million.
According to Rick Causey, Enron's chief accounting officer, these shares were contributed to a "structured finance vehicle" set up about two years ago in which Enron and LJM2 were the only investors. In exchange for the stock, the entity provided Enron with a note. The aim of the transaction was to provide hedges against fluctuating values in some of Enron's broadband telecommunications and other technology investments. Mr. Causey didn't elaborate on what form those hedges took.
Subsequently, both the value of Enron's stock and the value of the broadband investments hedged by the entity dropped sharply. As a result, Enron decided essentially to dissolve the financing vehicle and reacquire the shares. When Enron reacquired the shares, it also canceled the note it had received from the entity.
In addition, Enron was receiving increasing criticism from analysts and major shareholders concerning the apparent conflict of interest involving the role of its chief financial officer in the partnership, from which he stood to make millions of dollars. In July, Mr. Fastow formally severed his connections to LJM. Mr. Fastow has declined to be interviewed.
Given all the complexities of the LJM-related financing vehicle and the questions it raised outside the company, "the confusion factor wasn't worth the trouble of trying to continue this," Mr. Causey said.
Enron downplayed the significance of the share-reduction exercise. Mark Palmer, an Enron spokesman, described it "as just a balance-sheet issue" and therefore wasn't deemed "material" for disclosure purposes.
Jeff Dietret, an analyst for Simmons & Co. in Houston, said that a large reduction of equity could be "a flag for the rating agencies" because it could adversely affect a company's debt-to-equity ratio. Enron said Wednesday that as a result of the equity reduction, its debt-to-equity ratio rose to 50% from 46% previously.
On Tuesday, after Enron reported its big quarterly loss, Moody's Investors Service Inc. put Enron's long-term debt on review for a possible downgrade. Moody's said the move was related to "significant write-downs and charges reflecting substantially reduced valuations" in several of Enron's businesses. In recent years, Enron had moved aggressively into broadband telecommunications and the water business, both of which failed to produce expected returns.
Enron, which as of June 30 had $33.6 billion in current liabilities and long-term debt, has lately been attempting to shed assets to pay down debt.
October 19, 2001Enron CFO's Tie to a Partnership Resulted in Big Profits for the Firm
By Rebecca Smith and John R. Emshwiller
Staff Reporters of The Wall Street JournalA limited partnership organized by Enron Corp.'s chief financial officer, Andrew S. Fastow, realized millions of dollars in profits in transactions it did with Enron, according to an internal partnership document.
The partnership, in some instances, benefited from renegotiating the terms of existing deals with the Houston energy company in ways that improved the partnership's financial positions or reduced its risk of losses.
Mr. Fastow, and possibly a handful of partnership associates, realized more than $7 million last year in management fees and about $4 million in capital increases on an investment of nearly $3 million in the partnership, which was set up in December 1999 principally to do business with Enron.
The profits from the deals were disclosed in a financial report to investors in the partnership, LJM2 Co-Investment LP, that was signed by Mr. Fastow as the general partner and dated April 30. In one case, the report indicates the partnership was able to improve profits by terminating a transaction early.
The LJM2 arrangement has become controversial for Enron, as shareholders and analysts have raised questions about whether it posed a conflict by putting the company's chief financial officer, who has a fiduciary duty to Enron shareholders, in a position of reaping financial rewards for representing LJM2 investors in business deals with Enron. Investors in LJM2 include Wachovia Corp., General Electric Co.'s General Electric Capital Corp. and Credit Suisse Group 's Credit Suisse First Boston.
Attention has focused on Mr. Fastow's partnership activities at a tumultuous time for Enron, which over the past decade grew enormously by becoming the nation's biggest energy-trading company.
This year, though, it has been hit by a string of troubles, from soured business initiatives to executive departures. On Tuesday, Enron announced a $618 million third-quarter loss, because of a $1.01 billion write-off on investments in broadband telecommunications, retail energy services and Azurix Corp., a water company. A small chunk of that write-off, about $35 million, was attributed to ending certain LJM2-related transactions. That termination also produced a $1.2 billion reduction in Enron shareholder equity as the company decided to repurchase 55 million shares that had been part of LJM2 deals.
At 4 p.m. Thursday in New York Stock Exchange composite trading, Enron was down 9.9%, or $3.20, to $29 a share. Within the past year, the stock had topped $80 a share.
Enron officials didn't have any comment about the LJM2 partnership document. Enron has consistently said its dealings with LJM2 have been proper. They said the LJM2 deals, like ones done with other parties, were aimed at helping hedge against fluctuating market values of its assets and adding sources of capital.
Mr. Fastow has declined several requests for an interview about LJM2. In late July, he formally severed his ties with LJM2, as a result of what Enron officials said was growing unease by Wall Street analysts and major shareholders. Mr. Fastow has been finance chief of Enron since 1997 and has been with the firm 11 years, which included extensive work setting up and managing company investments.
Michael Kopper, a former Enron executive who an Enron spokesman said is now helping to operate LJM2, declined to comment. He also wouldn't describe his relation to LJM2.
In his April 30 report, Mr. Fastow said the partnership, which raised $394 million, had invested in several Enron-related deals involving power plants and other assets as well as company stock. The document said LJM2 sought a 29% internal rate of return. That was down from a 48% targeted rate of return at the end of 2000, which the document said was due in part to a decline in the value of LJM2's investment in New Power Co., an Enron-related energy retailer. In some transactions, LJM2 did much better than the 29% target, though this sometimes involved renegotiating individual deals.
In September 2000, the partnership invested $30 million in "Raptor III," which involved writing put options committing LJM2 to buy Enron stock at a set price for six months. Four months into this deal, LJM2 approached Enron to settle the investment early, "causing LJM2 to receive its $30 million capital invested plus $10.5 million in profit," the report said. The renegotiation was before a decline in Enron's stock price, which could have forced LJM2 to buy Enron shares at a loss of as much as $8 each, the document indicated.
Worked for a while, didn't it? :-)
"Enron Finance Partners LLC borrowed money to purchase Enron’s uncollected bills from Enron. When the bills were paid, the affiliates reinvested the money in short-term commercial paper issued by Enron and its North America unit, court papers said. The three companies were set up as so-called bankruptcy remote vehicles, meaning they couldn’t be pulled into a bankruptcy case. J.P. Morgan says Enron is holding cash, commercial paper and uncollected bills that belong to Sequoia and Cherokee. While Enron sold its uncollected bills to the three affiliates, it still acted as bill collector, or servicer. In that capacity, Enron held the uncollected bills, commercial paper and cash that ultimately belonged to Sequoia and Cherokee, according to the lawsuit…”
Wow do you notice any Obama-Enron parallels here?
Also, I’de like to suggest the following tags for this post:
PROMISES/MALINVESTMENT/DECEPTION OPERATION/FUNKY LIKE FANNIE AND FREDDIE/ MANIPULATION EDUCATEES SOROS-LIKE GODMEN/MANIPULATIVE TECHNOCRAT EDUCATEES/RADICAL EXTREMIST ACADEMICS/SOCIALIST MOLES/CLOWARD PIVEN/ PSI-OPS, PSYCH OUT/OBAMA-ENRON OPERATION, EXCUSES AND MISDIRECTION/ECONOMIC CALCULATION IN THE SOCIALIST COMMONWEALTH/OBAMA SPEECHES, PEOPLE BELIEVE HIM, MEANWHILE DEBT ON THE RISE, UNEMPLOYMENT AND RADICAL EXTREMISM VERY HIGH/AMERICA IS UNDERGOING A REVERSE GLASNOST PERESTROIKA, IN LATE STAGES OF SOCIALIST REVOLUTION
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