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Enron Controversy Grows Personal; Venue Change Reviewed
Former Enron Corp. CEO Jeffrey Skilling has claimed in recent interviews that he was unaware of the details of off-balance sheet transactions that pushed the company toward bankruptcy in December, but The Wall Street Journal reported Wednesday that internal company documents indicate management and the board of directors considered the dubious deals “integral” to Enron’s growth. In recent days, Skilling has denied intimate knowledge of the transactions, while former CFO Andrew Fastow, who set them up, has indicated through attorneys that he did so with Enron management’s full knowledge.
Meanwhile in New York City, the bankruptcy judge overseeing Enron’s case may decide next week whether to move the venue to Houston. Judge Arthur Gonzalez has deferred until next week a decision to depose current CFO Jeffrey McMahon to testify about why Enron filed for Chapter 11 in New York instead of in Houston, where it is headquartered. Dynegy Inc., which had intended to merge with Enron before pulling out in late November, wants McMahon to give a deposition on why Enron chose New York. Dynegy wants the bankruptcy case moved to Houston; Enron is opposed.
Enron does not want McMahon deposed, telling the court this week it was “unnecessary, unduly burdensome and disruptive.” In a motion, Enron said of the request for the deposition that “officers are often misused as a tool of harassment and [depositions] should not be allowed unless there is no other source for the same information.” Instead, Enron argues that general counsel Mark Haedicke, one of four people Dynegy had requested to supply depositions, could testify instead.
Gonzalez has scheduled the change-of-venue request for Monday (Jan. 7).
In documents obtained by the Journal, the newspaper reports that they “reinforce the notion that top Enron officials, including Chairman Kenneth Lay and former President Jeffrey Skilling, were directly involved in the creation and oversight of the partnerships, which were run by former Chief Financial Officer Andrew Fastow.” Skilling was promoted to CEO in January 2001 and then abruptly resigned six months later, citing personal reasons. Fastow was ousted in late October 2001 following the release of third quarter earnings and subsequent reports about the off-balance sheet transactions. Lay remains chairman and CEO of the bankrupt company.
The Journal’s documentation includes an internal memorandum between an Enron attorney and Skilling regarding procedures to monitor the transaction partnerships. Also cited are documents from meetings of Enron’s board and the board’s finance committee. According to the Journal, the Enron documents indicate that in mid-1999, the company began using the partnerships to “confront changing business conditions.” Lay has already said that Enron’s partnerships were used to help the company, and has said the transactions were reviewed by the board and management to prevent conflicts of interest.
Both Congress and the Securities and Exchange Commission (SEC) are investigating the partnerships, and more than 60 lawsuits have been filed by shareholders against the board and management. Some of the lawsuits allege the company was negligent in allowing the partnerships.
The Journal cited a June 1999 board meeting which indicates Skilling said that “because of changing accounting rules affecting off-balance sheet transactions, Enron had been analyzing new types of financing vehicles…Lay and Skilling were identified as being designated by Enron’s board to help ensure that the company received fair consideration in one of the early partnership deals.” The draft version of minutes from a October 2000 meeting of the Enron board’s finance committee cites then-CFO Fastow as talking about “the need for outside private partnerships to help manage the company’s finances so that Enron could “continue to grow.” Enron planned to continue making “significant capital investments. … some of which would not generate cash flow or earnings for a number of years,” the Journal said.
In 1999, one group of off-balance sheet deals, the LJM partnerships, was started and managed by Fastow. The Journal cited Enron documents that “show that an early transaction involved the hedging of the value of an Enron investment in Rhythms NetConnections Inc., a data-communications company. According to one document, Mr. Fastow discussed how Enron could protect the value of that holding through a complicated swap arrangement that also involved Enron stock and a $50 million LJM payment.”
In its November 2001 filing with the SEC, in which it restated its earnings for the past four years, Enron said that it had incorrectly accounted for the Rhythms/LJM transaction, and had retroactively reduced its reported net income for 1999 and 2000 by about $100 million, or 5%.
The Journal found internal documents showing that Enron’s board and “top management were aware of the possible conflicts of interests in having Enron’s chief financial officer running partnerships that eventually did hundreds of millions of dollars of business with the company.” In a June 1999 presentation to Enron’s board, the Journal cited the “huge profit potential in Mr. Fastow’s partnership compensation formula, under which he stood to reap as much as half of partnership profits in addition to management fees.” Enron has already revealed that Fastow recouped more than $30 million from the outside partnership management activities.
However, to avoid potential conflicts of interests by the former CFO, Enron’s board set up a review process for the outside partnership transactions. The review included “approval by Skilling and two other senior Enron officials,” said the Journal.
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