In the first-ever probe of a company’s online trading system or its derivatives trading practices, the Commodity Futures Trading Commission (CFTC) has launched a full investigation into Enron Corp.’s commodities activities, centering on whether the former trading giant committed fraud or manipulated markets through improper trading on commodity exchanges. An Enron spokesman said the company would cooperate with the inquiry.

The investigation now under way includes a probe of derivatives trading in the bankrupt company’s EnronOnline business, and is different from the federal investigations at the Securities and Exchange Commission (SEC) and the U.S. Justice Department. However, the CFTC is cooperating with their investigations, according to the agency.

While the CFTC does not have the authority to regulate over-the-counter derivatives — including those traded electronically — it has some leeway to probe incidents of possible fraud or manipulation. (The SEC’s jurisdiction covers accounting discrepancies.) Apparently, CFTC will thoroughly review what Enron traded, how it traded it, and what businesses it traded with. If violations are found by the CFTC, Enron may be fined or forced to surrender profits from the improper trades, CFTC said.

According to financial statements, Enron’s derivative portfolio was worth about $19 billion. In recent years, traders have been allowed to use new types of derivatives, including those for electricity prices, weather and bandwidth, and Enron’s portfolio included all of them. Enron also used credit derivatives, which are used as a type of insurance policy if there is corporate bankruptcy. The credit derivatives are a promise to return a lender’s money in exchange for a premium.

In a follow up to an earlier story, after the SEC filed an objection to the hiring of Stephen Cooper as Enron’s interim CEO, Enron said it would revise its employment agreement with the bankruptcy specialist and his team (see Daily GPI, March 11). Instead of working as an independent contractor, Enron has asked the U.S. Bankruptcy Court for the Southern District of New York to allow Cooper to be hired as a full-time employee until the restructuring is completed.

The court was expected to first hear the case on Wednesday, but objections to Cooper’s contract now may be filed through March 15, according to court documents. Judge Arthur J. Gonzalez is scheduled to hear the case now on April 4. The SEC filed the objection Friday, calling the terms of his million dollar contract and bonus guarantee inappropriate. Enron had requested approval to hire Cooper at an annual salary of $1.32 million a year and a bonus of at least $5 million once the restructuring is completed.

Meanwhile, faced with the possibility of criminal obstruction-of-justice charges by the U.S. Justice Department and potential bankruptcy related to its dealings with Enron Corp., Arthur Andersen LLP is apparently hoping to find another Big Five accounting firm to merge with, according to reports on Monday. Steadily losing some of its biggest and oldest customers, Andersen also may be charged this week for the admitted destruction of thousands of Enron’s audit documents.

Deloitte Touche Tohmatsu has been named as a leading candidate to take over Andersen’s business, but insiders claim that Deloitte may have no interest in the potential liability facing Andersen, according to reports in the Wall Street Journal and the New York Times. However, without a partner to shore up that portion of the business totally unrelated to Enron, Andersen may have to file for Chapter 11 bankruptcy protection, with a sale or merger allowed under court protection from creditors and lawsuits.

On March 3, the chief of the Justice Department’s criminal division told Andersen lawyers at a meeting in Washington, DC that he was prepared to seek an indictment against the accounting firm, according to the Wall Street Journal. Paul Volcker, former Federal Reserve Board chairman, was recruited by Andersen in February to head an independent panel to consider reforms and restructuring for Andersen. On Monday, Volcker said Andersen needs to sever its auditing business from its consulting business, with “no financial movement, no financial incentives to shift business from one to the other, no revenue sharing, no profit sharing…no nothing.”

Volcker said the changes would guard Andersen’s auditing work against influences from consulting contracts with the same company. Enron had paid Andersen approximately $23 million for auditing work in 2000 and almost $25 million for consulting. The panel was supposed to release its findings March 22 but opted to release the details to the public sooner because of reports that the company may merge or face criminal charges.

The panel headed by Volcker recommends that auditors rotate work out for corporate clients at least every five years. Andersen also should “respect a suitable ‘cooling off’ period before seeking or accepting employment with an audit client,” the panel said in a statement. Andersen also should examine past and future management responsibility, as it works through the Enron-related crisis, said Volcker, with management changes expected. He would not comment about whether Andersen would merge or would file for bankruptcy.

The last time a major accounting firm failed was in 1990 when Laventhal & Horwatch filed for bankruptcy protection. Laventhal was known as a Big Eight accounting firm, but when it declared bankruptcy, its audit clients were quickly picked up by other accounting firms without any major disruption, according to the SEC. In the past Andersen has been considered the conservative leader among accounting firms.

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