With an initial investigation of several special purpose entities (SPEs) used by Enron Corp. completed, the court-appointed examiner now will carefully scrutinize “a number of significant questions” about the complex off-balance-sheet transactions, including what role they played in the company’s collapse, whether they were illegally used to manipulate financial statements, and if the SPEs were illegal, whether the officers, directors or professionals involved may be liable.

Neal Batson, an Atlanta lawyer who was chosen as the court-appointed examiner of Enron by the U.S. Bankruptcy Court in Manhattan, filed a preliminary report on Saturday with his examination of six SPEs, which he said were representative of at least 50 used by the company. He determined that between 1997 and less than two months before it filed for bankruptcy, the company reported a series of “sales” worth $1.383 billion in cash, that he believes under law should be considered loans.

The 160-page preliminary report indicated that Enron used the SPEs to enter into hundreds of separate financial transactions over three years. The deals, said Batson, “had dramatic effects on both the balance sheet and income statement portions” of the company’s financial statements. However, Batson stated that he would not reach any final conclusions until he has reviewed all of the evidence and the applicable legal and accounting standards.

“Enron was prolific in its use of highly complex structured finance transactions using SPEs, with the result that billions of dollars of recourse obligations were not disclosed as debt in Enron’s balance sheet, and the proceeds of these recourse obligations were reported as revenue and cash flow,” the report said. The six transactions were named “Hawaii 125-0,” “Cerberus,” “Nikita,” “Backbone,” “SO²” and “Destec.”

Batson found that in most of the transactions, an Enron entity purported to sell an asset to an SPE in exchange for cash or other consideration. The cash was “most often obtained” through a loan to the SPE or an affiliated SPE. However, said Batson, “unlike most transactions in which a person sells an asset, in most of the selected transactions Enron or its affiliate agreed to repay the amount of debt the SPE incurred to finance the purchase price. Furthermore, Enron or its affiliate would continue to control the ‘sold’ asset and would receive the upside benefit if the asset ultimately generated proceeds in excess of the costs of the financing.”

The six transactions were reviewed by Batson for their economic impact on Enron, and did not consider whether the company used the transactions to sell assets or borrow money. The first $150 million was received in 1997 from the closing of the Destec transaction. The Hawaii transaction, consisting of two separate financial structures and 22 transactions, provided Enron with $353 million between March 2000 through the fall of 2001. Cerberus, first closed in November 2000 and restructured in January 2001, gave Enron the largest single amount, $517 million, the report stated. Backbone closed in December 2000, giving Enron another $113 million. Nikita and SO2 closed just months before Enron declared bankruptcy. Nikita closed in September 2001 and provided Enron with $80 million; SO2 closed in October 2001 and provided another $29 million.

“In sum, all six of the selected transactions involved significant commitments of Enron’s credit,” the report stated. “In five of the six, Enron’s credit played what appears to be a substantial — if not decisive — role in making the SPEs creditworthy. The documentation for all six of the transactions characterizes them as sales. Whether such transactions should be recharacterized as loans is one of the subjects of this report.” Batson stated that “each of the selected transactions (with the possible exception of the Destec transaction) appears to be, from both an economic and risk allocation perspective, a loan rather than a sale of an asset. As such, these transactions, in varying degrees, are susceptible to recharacterization as loans based upon the factors developed under applicable law.”

To review the entire report online, visit www.elaw.com, click on the Enron bankruptcy case and open the Sept. 21 filing. Batson’s report is available for free.

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