Posted on 12/05/2001 5:39:39 PM PST by NativeNewYorker
HOUSTON -- Around the beginning of October, Enron Corp. executives visited credit-rating-agency officials for talks about the company's third-quarter results. Those results contained what turned out to be a bombshell.
Enron mentioned in the talks that shareholders' equity, the difference between the company's assets and its liabilities, would be reduced by $1.2 billion because of transactions with certain partnerships, says a person familiar with the matter. Some of the credit analysts, regarding this as so significant it needed to be disclosed, privately urged Enron to report it to the Securities and Exchange Commission, this person says.
But Enron didn't do so, nor did the company explain it in its nine-page earnings announcement in mid-October. The only public inkling came during an earnings-report conference call, in a reference by the company chairman so fleeting that some analysts say they missed it.
It was vintage Enron: minimal disclosure of financial information that, in retrospect, was central to understanding the complex company. Only a few months ago, Enron was wowing Wall Street with its growth and innovation, racking up large, steady earnings gains as it pioneered the global trading of everything from power to weather contracts. But virtually unseen until the end was an Enron culture that contained the seeds of its collapse, a culture of highly questionable financial engineering, misstated earnings and persistent efforts to keep investors in the dark.
Senior Enron executives flouted elementary conflict-of-interest standards. The company hired legions of lawyers and accountants to help it meet the letter of federal securities laws while trampling on the intent of those laws. It became adept at giving technically correct answers rather than simply honest ones.
One senior Wall Street official recalls recently asking Enron officials whether the company had retained bankruptcy counsel. He was told no. He later found out that while Enron hadn't formally retained such representation, it had met with bankruptcy lawyers. "If you don't ask the absolute right question, you don't get the right answer," he says. "Enron does that a lot."
Yet public trust, above all, was what Enron had to have, in order to conduct its business as a trader and party to thousands of contracts. Once doubts began to seep into the public realm, thanks partly to that mysterious hit to equity and Enron's waffling about what it meant, other suspicious Enron moves began to emerge.
The company had transactions with certain partnerships that were run by its own officers -- but treated by Enron as separate. It offered only murky and fragmented information about these partnerships. One partnership, whose existence Enron didn't reveal for four years, was part of an arrangement that inflated earnings by several hundred million dollars during that period.
And the company's debt level was much higher than it revealed, thanks to the partnerships, which allowed Enron to keep some debt off its books. Meanwhile, executives made repeated public assurances that Enron's finances and business operations were healthy, only to have those statements refuted by subsequent revelations. Ultimately, these disclosures created a crisis at Enron, sending its stock plunging and its partners and clients fleeing.
While Enron has acknowledged that a loss of investors' confidence was at the root of its woes, company officials have consistently defended their actions as legal and proper. An Enron spokesman reiterated Tuesday that the company made every effort to put out accurate information. When something was found to be inaccurate, Enron took prompt steps to correct it, the spokesman said.
On Sunday, Enron filed for bankruptcy-law protection in New York federal court -- the biggest such filing ever. It simultaneously filed a multibillion-dollar suit against a company that last week backed out of a rescue pact, rival Dynegy Inc. Enron's stock, which touched $90 a share last year, closed Tuesday on the New York Stock Exchange at 87 cents.
Top officials now are the targets of some two dozen shareholder suits. They face a formal SEC investigation, a Justice Department criminal probe and congressional inquiries. The company, now struggling to avoid liquidation, has tapped existing credit facilities and lined up fresh capital exceeding $7 billion in recent weeks, and is looking for more.
Not every detail of this tangled tale has yet been fully unraveled. It's still not clear whether concealment and financial engineering were a central strategy at Enron for years, or just a last desperate resort when earnings were falling short. Questions also still surround the sudden midsummer resignation of Chief Executive Jeffrey Skilling, whose role in Enron's collapse remains uncertain.
What is clear, though, is that rarely in the annals of American business has an enterprise so mighty and so highly regarded fallen so far so fast.
Led by its chairman, Kenneth Lay, Enron during the 1990s morphed from a nondescript gas-pipeline company into the nation's biggest energy trader, matching utilities, power suppliers and other investors in a vast unregulated marketplace. It gradually turned into a trading juggernaut that increasingly disdained long-term ownership of hard assets.
Moving far beyond energy, Enron pioneered hundreds of different types of trading contracts, ranging from commodities such as water to exotic new financial instruments. The company assembled an immense pool of financial and trading talent among its 21,000 employees.
As Enron concentrated on trading of complex instruments, it came to resemble a vast financial-services empire, handling billions of dollars of other people's money. But to analysts and investors seeking to understand it, Enron wasn't very informative. Officials could be dismissive of inquiries, even rude. Closely questioned during a conference call last spring, Mr. Skilling called one company critic an "ah."
Many Wall Street analysts admitted to not fully understanding chunks of Enron, a company that had 3,500 subsidiaries and affiliates spread across the globe. During the booming 1990s, as Enron delivered plump earnings and stock gains, this didn't matter. Investors "were scared not to be in it," says Paul Patterson, an analyst at ABN Amro.
A Sudden Departure
The confluence of events that changed perceptions began in August with the sudden resignation of Mr. Skilling.
The former McKinsey & Co. consultant, who is 48, had become president in 1997. Last February he became CEO as well. Remaining chairman was his mentor, Mr. Lay, a friend and financial backer of President Bush and Vice President Cheney. In the early days of the Bush administration, Mr. Lay, who is 59, had been widely expected to take a cabinet post.
Messrs. Lay and Skilling made a formidable team. The courtly and amiable Mr. Lay had wide-ranging experience in government, academia and business, and his opinion was frequently sought in the energy world. Mr. Skilling, a Harvard M.B.A., was a brash, fiery figure who spoke rapidly and peppered his conversations with financial jargon.
Without warning, Mr. Skilling resigned on Aug. 14. He initially cited "personal reasons." But in an interview the next day he said his own frustration over Enron's weakening share price -- then about $43 -- played a major role in his decision. "I don't think I would have felt the pressure to leave if the stock price had stayed up," he said.
The abrupt departure forced Mr. Lay to retake the reins. He was reassuring to the public. "I can honestly say the company is in the strongest shape it's ever been in," Mr. Lay said at the time. He also promised that in the future, Enron would be more open and accessible to investors. Mr. Lay acknowledged that the company had "lost some credibility" with investors.
Dealings With Partnerships
The day of the announcement, Enron filed its report with the SEC for the three months ended June 30. Tucked in the 36-page document were several paragraphs describing deals involving hundreds of millions of dollars between Enron and unnamed partnerships headed by and partly owned by an unnamed "senior officer" of the company. The filing added that the officer had sold his partnership interests in July and "no longer has any management responsibilities for these entities."
But it wasn't Mr. Skilling who ran the two partnerships, known as LJM Cayman LP and LJM2 Co-Investment LP. It was Chief Financial Officer Andrew S. Fastow, a Skilling protégé who was still very much with the company. The "LJM" came from the first initials of Mr. Fastow's wife and two sons. A company spokesman said the dealings between Enron and Mr. Fastow's partnerships were perfectly proper and had been done to help Enron protect its assets against fluctuating market prices.
The partnerships had been around for two years and appeared in Enron SEC filings during that time. But the manner in which they were disclosed, with different pieces of information appearing in different filings, made it difficult to learn such basics as which senior executive was running the partnerships.
Worse, there was no way from the available information to understand just what the partnerships were doing or what impact they had on Enron's finances. Some stock and credit analysts say they had never heard about the LJMs until they read about them in the newspapers in recent weeks.
Mr. Fastow's LJM dealings were, however, well-known within Enron and a magnet for criticism. Part of LJM's activities involved buying Enron assets, and some officials balked at doing deals that could enrich a senior executive at the company's expense, say people familiar with the matter. At least two senior officials complained internally about the potential conflicts of interest. The concerns were turned aside by top management, say the people familiar with the events.
The anger might have been greater had those who complained known the extent of Mr. Fastow's financial gains from LJM. Internal partnership documents show that the CFO made millions of dollars a year from LJM, far more than his corporate compensation.
One private document for LJM2's successful effort to raise nearly $400 million boasted of "preferred access" to Enron deals and said that Mr. Fastow's economic interests would be "aligned" with the partners'. Late last year, Mr. Fastow and Enron were laying plans for a $1 billion LJM3 fund, though it never came to fruition. Enron later estimated that Mr. Fastow made more than $30 million from the LJM partnerships.
Mr. Fastow has declined repeated requests to be interviewed. His attorney points to Enron statements saying that all of the company's dealings with the partnerships were proper and thoroughly vetted by the board and top management.
In September, Enron faced questions from The Wall Street Journal about the partnerships. According to a person familiar with the matter, there were sharp internal disagreements over whether to make top officials available for interviews. This person says that at one point, Mr. Fastow shouted that he saw no "upside" to talking.
A Cryptic Reference
Then came Enron's Oct. 16 report of its third-quarter earnings. Although a $1 billion write-off for telecommunications and other ventures produced a big net loss, the company trumpeted a 26% increase in "recurring earnings" due to "very strong results" of its "core" businesses. The stock posted a gain for the day.
The news release contained a cryptic reference to a charge relating to the "early termination ... of certain structured finance arrangements with a previously disclosed entity." This seemed to be Enron code for LJM. In response to questions, the company said the LJM-related charge was $35 million.
Mr. Lay himself tried to put the LJM matter to rest. "I don't think we need to say anything more about that," he said in an interview at the time.
Later, however, an Enron SEC filing on Nov. 8 disclosed that the actual charge related to LJM dealings was $462 million. The $35 million figure represented cash paid to LJM in the termination, company officials now said, with the other hundreds of millions reflecting declines in the value of Enron assets held by LJM-related entities.
"It was not our intent to mislead," said Mr. Lay's chief of staff, Steve Kean, in mid-November.
On Oct. 17, the Journal revealed some of the partnerships' inner workings, their dealings with Enron and the fact that Mr. Fastow stood to make millions from his participation. Shortly afterward, Enron's stock began tumbling.
That same day, word of the $1.2 billion reduction in shareholders' equity started rippling through Wall Street. On Oct. 18, the Journal reported for the first time that the equity reduction stemmed from transactions related to the LJM partnerships.
During the earlier discussions with credit-rating agencies, Enron had attributed the equity reduction to an "accounting error," says the person familiar with those discussions. However, in an Oct. 17 interview with the Journal, Enron Chief Accounting Officer Rick Causey didn't mention an accounting error. He said that as part of its dealing with the partnerships, Enron had put up 62 million of its own shares. In return, it gained a $1.2 billion note receivable from the partnerships. When the arrangements were terminated, he explained, Enron simply canceled the note and retired the stock. The retirement of so many shares accounted for a $1.2 billion reduction in shareholders' equity.
A spokesman added that Enron didn't see this as a material transaction that needed to be publicly disclosed. The spokesman Tuesday said that he had been told by company officials at the time that it was "a balance-sheet issue" and didn't need to be included in the third-quarter earnings discussion.
However, in a Nov. 8 SEC filing, Enron declared that the equity reduction was largely due to an accounting error -- one that required the company to restate prior-year financial reports.
The SEC within a few days started an informal inquiry. It soon grew into a formal investigation, which meant the agency had power to subpoena witnesses and documents. At the same time, credit-rating agencies were beginning to put Enron on review for possible downgrade.
That was worrisome. Keeping an investment-grade rating was vital for the health of the trading operation, which produced more than 90% of Enron's third-quarter operating earnings. Moreover, a fall to "junk" status would trigger accelerated repayment of billions of dollars of obligations.
Fastow Out
In an effort to stanch the bleeding and restore confidence, Mr. Lay and other top officials, including Mr. Fastow, held a conference call on Oct. 23. Sparring with analysts and investors, the executives seemed defensive and even hostile at times. Mr. Lay wouldn't let Mr. Fastow answer questions about the partnerships, but expressed his "highest faith and confidence" in his chief financial officer.
The next day, the company announced Mr. Fastow was no longer Enron's CFO. Mr. Lay said the about-face was necessary to "restore investor confidence."
After the conference call, Enron top brass retreated from the public arena. Behind the scenes, Enron was frantically looking for a rescue strategy, approaching both competitors such as Dynegy and wealthy investors such as Warren Buffett for a cash infusion. So intense was the quest that one Enron attorney, a member of the Weil, Gotshal & Manges law firm, flew from Dallas to Houston for a planned two-hour meeting and didn't get back for two weeks.
Dynegy was intrigued by the notion of taking over a company that was five times its size and had long overshadowed it. Dynegy President Steve Bergstrom, an Enron alumnus, had a scheduled social lunch with an old friend, Stan Horton, who runs Enron's pipeline business. Mr. Horton asked if he could bring Enron Vice Chairman Mark Frevert and President Greg Whalley. In a private room at Houston's Plaza Club, Mr. Whalley popped the question: Would Dynegy be interested in buying Enron? "I was flabbergasted," says Mr. Bergstrom. "We were like the little kid on the block to them." He remembers thinking, "They're in worse trouble than I thought."
Mr. Bergstrom suggested having Mr. Lay call Dynegy Chairman and founder Chuck Watson, and within hours the two talked. Then they met face to face and privately Oct. 27 at Mr. Lay's home in Houston's exclusive River Oaks neighborhood, hammering out major points of a deal.
Dynegy's biggest shareholder, ChevronTexaco Corp., approved a $2.5 billion investment in Dynegy that Dynegy would use to give Enron a cash infusion. The first $1.5 billion would come right away and the rest at the closing. J.P. Morgan Chase & Co. and Citibank arranged a further $1 billion of credit, so that on Nov. 9, the two sides were able to announce a $9 billion all-stock betrothal. Mr. Lay, deflecting questions about Enron's woes, said the combination "is all about the future."
But amid the optimistic talk, new bombshells were exploding at Enron. Its Nov. 8 SEC filing disclosed for the first time company dealings with an entity called Chewco Investments LP. Just four days before the filing, the company had refused requests by The Wall Street Journal to discuss the entity or even acknowledge its existence.
As it turned out, Enron had plenty of reason to be sensitive about Chewco, named for the "Star Wars" character Chewbacca. Chewco had been set up in late 1997 during a rocky period for Enron, when the company was missing its quarterly earnings targets and losing a bit of its Wall Street credibility. Prudential Securities analyst Carol Coale recalls a meeting with Mr. Skilling during this period when, she says, he promised "some strong earnings growth" in the coming quarters.
Now it's known that between 1997 and the end of last year, Enron's dealings with Chewco and a related partnership known as JEDI (for Joint Energy Development Investments) kept hundreds of millions of dollars of debt off Enron's books. Moreover, business deals with the partnerships also allowed Enron to book $390 million in net income, roughly 13% of reported profits for the period, according to the Nov. 8 SEC filing.
Although Enron treated Chewco as an independent third party, there were lots of indications to the contrary. Chewco was managed by Michael Kopper, an Enron officer who later helped Mr. Fastow run the LJM partnerships. Early Chewco funding of $383 million came almost entirely via Enron through loans it arranged or guaranteed.
In its Nov. 8 filing, Enron said that Chewco and JEDI should never have been treated as separate parties. Retroactively folding them back into Enron was the principal cause of a restatement that slashed Enron earnings for the prior four years by $586 million, or 20%. The company said its financial statements for those years could no longer be relied upon.
These disclosures further rocked an already-shaken investment community. If Enron officials knowingly created and controlled Chewco as a sham third party to boost profits, they could be in violation of federal fraud statutes, says Jacob Frenkel, a former SEC attorney and federal prosecutor. At the very least, says Ronald Barone, head of Standard & Poor's energy and utility group, Chewco represented "financial engineering on the razor's edge."
Mr. Kopper, who last summer left Enron to run the LJM operation, declines to be interviewed. According to Enron, he bought out Mr. Fastow's partnership interests. A recent visit to LJM's offices, across the street from Enron's Houston headquarters, found no one willing to talk.
During the years in which Enron was issuing earnings statements it now says were incorrect, Mr. Lay, Mr. Skilling and other top executives of Enron sold hundreds of millions of dollars in Enron stock. Partly as a result, they and others face a raft of shareholder suits. Some Enron traders complained angrily at a company meeting last month about $62 million in severance the Dynegy deal would bring Mr. Lay. After a day of giving out conflicting signals, Mr. Lay announced he wouldn't take the severance.
Revelations about Chewco and LJM fueled concern about other surprises that might be hidden in dozens of other partnerships with which Enron did business. One problem: Millions of shares of Enron stock provided the underpinnings for at least some of those partnerships. As Enron's stock price fell, the stability of those structures was threatened, says one Enron insider, who speculates that Mr. Skilling's decision to resign might have been influenced by this development. "When he saw the stock price falling, I think he knew a crisis was coming," this person says.
Mr. Skilling won't talk about Chewco or anything else having to do with Enron. Since leaving in August he has remarried, grown a beard and hired a lawyer to help handle the mess. On a recent morning, outside his newly built mansion in Houston's River Oaks neighborhood, Mr. Skilling reiterated his desire to be left alone but didn't seem angry about being approached. "I understand it's a big story," he said in a soft voice.
On Nov. 19, Enron revealed more bad news. In another SEC filing, it said it could be forced to take a further $700 million pretax hit to earnings because of a plunge in the value of assets at yet another investment partnership. In addition, Enron said its declining credit rating had triggered $690 million in accelerated payments to investors.
Trading partners began to back away. The stock plunged anew, falling to about $5 a share by Thanksgiving.
One Last Effort
Dynegy executives say the Nov. 19 filing was pivotal in changing their thinking about the merger. Enron appeared to be burning through cash at a frightening rate, says Mr. Bergstrom, Dynegy's president, and it kept coming up with unpleasant surprises. "I think they knew more than they were telling," he says. Enron spokesman Mark Palmer replies that "if they had done their due diligence, they would have known about" Enron's condition.
The companies made one last stab at saving the deal over the Thanksgiving weekend, huddling at a resort in Westchester County, N.Y.
They slashed the deal's price to $4.17 billion. But in an ominous sign for Enron, neither of Dynegy's top two executives attended. And the revised deal was never made final. Analysts estimated that at least $4 billion more cash was needed to bolster trading partners' confidence, and no one was willing to put up that kind of money. A week ago, Enron's world caved in. Standard & Poor's, tired of waiting for the negotiations to produce a new rescue of Enron, dropped its credit rating below investment grade.
Other rating agencies followed. Later the same day, Dynegy formally called off the acquisition, and Enron traders walked away from their screens. About 4,000 Enron employees already have been laid off, with $4,500 in severance pay. Many face a further hit as retirement accounts, heavy with Enron shares they weren't allowed to sell, are decimated. After the collapse of the merger, some of the 7,500 headquarters employees headed to Houston bars to blow off steam.
One took the time to remove Dynegy's stock symbol and stock price from the electronic tote board in the Enron lobby. Left behind was Enron's stock price, by then measured in dimes, and the constantly replaying message at the bottom of the board: "Enron ... endless possibilities."
The company had transactions with certain partnerships that were run by its own officers -- but treated by Enron as separate. It offered only murky and fragmented information about these partnerships.
ahhhh, cheney was ceo of halliburton, an oil service company, as in drilling rigs
enron was a nat gas pipeline company that became primarily an electronic trading company, and to which cheney has no connection i've ever heard of
all of these guys probably know each other from both the "oil" business and politics, but i rather doubt there is any "boot" to come other than that some of the enron boys will probably see the inside of club fed
ken lay gave, ken lay raised, enron gave, as they were all entitled to do, and all of that is old news and public record, so unless cheney was some sort of bagman for illegal money (which i would rate the chance of at zero), this statement isn't even a bunny slipper, nevermind a boot
Cheney has refused to answer all questions
from whom?
on certain dealings between the Bush Administration and Enron
which dealings?
for some time now
for how long?
Folks from Enron have also found posts in the Bush administration.
who and which posts? and since when would political appointees related to contributors who haven't been demonstrated to have benefited get more than a yawn?
all smoke and no fire so far
the press can yell and scream all they want, no quid pro quo, no boot
The connections will play well among those predisposed to hype and grandstand, but will not stand up to grownup scrutiny.
The Bushies, from what I've read, aren't even returning phone calls from Enronites.
Enron also gave about the same amount ($100,000+/-) to the Clinton campaign in 1996. This was pointed out to you (along with the posted documentation) on a thread you were on a few days ago. Do a self-search for the thread. I know it's bad when the old memory starts to go...
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