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Enron Case Proceeds on Multiple Fronts
The latest developments in the Enron case include the appointment of an examiner to monitor cash flows at Enron North America, reports that Arthur Andersen is seeking a total settlement of claims against the accounting firm relating to Enron, and statements by Enron’s interim CEO Stephen Cooper that the bankrupt company is planning a “broad legal assault” against individuals who forced the company into bankruptcy.
In addition, a congressional committee released documents last week in which attorneys representing the Enron special investigative committee, who interviewed former CEO Kenneth Lay on Jan. 16, painted a picture of someone who was constantly traveling, had little knowledge of the company’s day-to-day activities and trusted what his top executives, chiefly Jeffrey Skilling, told him (see separate report, this issue).
The examiner was ordered by U.S. bankruptcy court Judge Arthur Gonzalez last Thursday, based on petitions by some of the creditors who said they were concerned that Enron Corp. might be improperly dispersing cash proceeds from Enron N.A.’s former energy trading operations to other Enron subsidiaries, some of which have not declared bankruptcy.
The creditors estimated that Enron N.A. could have access to as much as $8 billion from the cancellation of energy contracts effected before UBS Warburg took over trading operations. The creditors had asked for other restraining measures, but had to be content with the examiner and the judge’s order to provide better accounting of cash at Enron N.A.
***Meanwhile, Arthur Andersen is seeking to pull itself out of the Enron quagmire by attempting to negotiate a settlement with Enron shareholders, unsecured creditors and employees in Enron’s 401(k) retirement plan, according to a story last week in the Wall Street Journal.
The current settlement offer is between $700 million and $800 million, the Journal says, relying on “someone involved in the process” for its information. Andersen is looking for a one-time settlement that also will encompass any potential civil claims by the Securities and Exchange Commission. The firm has been accused of botching its job as Enron’s auditor and shredding documents relating to the audits after Enron’s bankruptcy, when it appeared there would be an investigation.
In attempting to put the Enron case behind them, sources say the firm may have to pay as much as a billion dollars, with the money coming from Andersen itself, its insurers and possibly from individual partners. The company has lost clients since the Enron debacle surfaced and is concerned a continuing scandal also will harm its recruiting efforts.
***Andersen and the accounting firm’s law firm are apparently close to completing an internal review into when and how its employees destroyed documents relating to the bankrupt company’s business practices. Details of the report by Davis Polk & Wardwell were expected to be released soon, but Andersen also indicated that its investigation is ongoing.
Andersen CEO Joseph Berardino said in mid-January that the company’s internal review was in its “final stages” and would be publicly disclosed when completed. He also promised that Andersen would be “very forthcoming.”
Past statements by Chicago-based Andersen have placed the blame squarely on its Houston office, which was headed by former employee and chief Enron auditor David Duncan. Duncan, who was fired in January, invoked his Fifth Amendment right against self-incrimination and refused to answer questions when called before a House subcommittee in January.
***In another action, two insurance companies are attempting to avoid paying out on policies on Enron directors, telling the bankruptcy court in New York City there were “material misrepresentations” involved in initiating those policies, according to an article in the New York Times. If the two firms, the St. Paul Mercury Insurance Co. and the Royal Insurance Co. of America, are successful in nullifying the policies, nine other insurance companies with similar policies on officers and directors of Enron could follow suit. The Times said directors and officers have an estimated $350 million in insurance coverage.
***Meanwhile, current CEO Cooper, brought in to facilitate restructuring, told the Los Angeles Times last week that the bankrupt company is planning a “broad legal assault” against individuals who forced the company into bankruptcy. Cooper said the legal actions would be “extensive and rapid,” but he did not divulge details or names.
He said, “Enron may have causes of action against institutions and individuals” that could result in a “meaningful asset for the estate….sooner as opposed to later.” Cooper said the company has not asked any former employees to repay money they earned from dubious partnership transactions. Former CFO Andrew Fastow reportedly made about $30 million on some off-balance sheet transactions and former Enron Global Finance executive Michael Kopper, who worked for Fastow, made about $10 million. Others also made more than $1 million in transactions handled by Fastow, according to reports.
“I think the recovery vehicle in the main will be litigation,” Cooper told the Times. In the meantime, he said he and his team are “sorting out issues” related to the company’s financial statements and the value of its trading book, the existing contracts that have accumulated that were not included in the sale of the energy trading operation to UBS Warburg Energy.
By the second quarter, Cooper said he expects to present a “fairly on-point direction” to reorganize Enron and present it to the two creditors’ committees. A “new” Enron is expected to be up and running within a year, he noted. “We’re not going to wallow and linger in Chapter 11 for a day longer than we have to.”
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