In a company meeting in Houston last Thursday, Enron CEO Stephen Cooper revealed that the company owes creditors at least $11 billion more than it estimated in its original bankruptcy filing, but the figure could go as high as $50 billion more. Enron listed $31.2 billion in debts when it filed for bankruptcy in December.

Despite what he called “great assets,” Cooper said, “they don’t approach $60 or $70 or $100 billion.” However, he believes the company will not be forced to file for Chapter 7, which would require it to liquidate instead of reorganize. Instead, he reiterated what he said weeks ago: Enron will return as a smaller company, built around natural gas and electricity.

In a late development Friday, U.S. Bankruptcy Judge Arthur Gonzalez in Manhattan moved Enron’s $10 billion breach-of-contract lawsuit against Dynegy Inc. to Houston from New York. The bankruptcy energy trader brought the suit against its former rival after Dynegy backed out of negotiations to acquire Enron last year. In Houston, U.S. District Judge Melinda Harmon will preside over the case.

Enron employees, which number around 20,000, have become demoralized since the collapse of the company, and there are more changes ahead, Cooper warned, including layoffs. Still, he attempted to boost enthusiasm by reinstating a few “luxuries” that had been taken away. The repossessed water coolers soon will be returned, and employees also will be able to use their company identification cards as debit cards to purchase coffee in a building snack bar.

Said Cooper, “We’re not prisoners of war. We’re going to try to get back some of these amenities over the next few weeks.” Enron, he said, had become the “poster child” for “all that has gone wrong with corporate America. We’re just going to have to behave differently.”

Enron received approval by Judge Gonzalez last Thursday to file its plan of reorganization by Oct. 2, 2002, a six-month extension. Enron also has until July 17 to complete a report that details its assets and debts. However, the court will require Enron North America, the corporation’s once mighty cash cow, to file its deadline by Aug. 31, which basically separates the two companies. The ruling on Enron North America is considered a victory for Enron creditors, who alleged the corporation was siphoning money from it.

Gonzalez also ruled Thursday that insurers may begin paying the legal expenses of Enron officers and directors being sued, which will allow them to immediately begin drawing on Enron’s $450 million in liability policies. However, at least three of the 10 insurance companies that have underwritten the policies have indicated they may not pay for claims because of “misrepresentations” by Enron when the contracts were written.

The judge also approved the sale of most of the assets from Enron’s wind turbine business to General Electric Co. for $325 million. GE’s Power Systems unit will also assume about $33 million in debt. The transaction is expected to close May 10, however, it is subject to an April 25 hearing by creditors to determine how the proceeds will be divided. Enron Wind, founded in 1997, is one of the largest remaining assets that is not encumbered by a lien.

Earlier in the week, Gonzalez ruled that an independent examiner will have 120 days to issue a report after investigating the transactions that led to the energy trader’s bankruptcy. Included in the review will be a look at advice given by accountants, law firms and banking institutions. Gonzalez said in his order that the examiner would issue a report on Enron’s special-purpose entities, off-balance sheet partnerships, accounting irregularities and other transactions.

The examiner also will determine “whether or not there is a legal mechanism for holders” of Enron stock, other than the Enron affiliates, to receive a share in recoveries by the creditors once the bankruptcy case is concluded. Enron owes creditors more than $40 billion, according to court documents. Subject to Gonzalez’s approval, U.S. Trustee Carolyn Schwartz of the U.S. Justice Department was expected to name the trustee to oversee the review.

In a review completed last week, an independent examiner found that Enron Corp. probably has enough cash reserves to operate at least three more months without funding by Enron North America. Examiner Harrison J. Goldin completed the review for the court after it was suspected that Enron Corp. was diverting funds from Enron North America. Enron Corp. sold Enron North America to Swiss bank UBS AG in January, but contracts formed with parties before the sale, known as the “book,” still are in Enron Corp.’s control. In 2000, Enron North America accounted for more than 95% of the company’s $101 billion revenue.

Between the time Enron Corp. filed for bankruptcy last December and February, when the court froze the transfers, Enron North America sent an estimated $481 million to its parent.

If Goldin had discovered serious mismanagement of the trading unit’s funds, the report could have recommended that an independent trustee manage the unit or the entire corporation — and that still could happen. Goldin, appointed by the U.S. Department of Justice, asked Gonzalez for another 90 days to study the intricate financial relationship between the corporation and the trading subsidiary. In that time, he said wants to determine whether the transfers from Enron North America should remain frozen, and how much money sent to Enron Corp. after the bankruptcy should be repaid to the trading unit. Goldin’s report still must be approved by the judge, along with the additional time request.

In another major development, David Duncan, the chief Arthur Andersen accountant who oversaw Enron, pleaded guilty last week to criminal obstruction of justice and agreed to become a cooperating witness in the federal government’s ongoing investigation of the Chicago-based auditor and Enron.

Duncan, who was fired in January, was charged with “knowingly, intentionally and corruptly” persuading and attempting to persuade Andersen employees to shred Enron-related documents in an attempt to foil a Securities and Exchange Commission (SEC) probe into financial improprieties and irregularities at Enron last fall, the Associated Press reported. The document shredding, according to court papers, was reported to have taken place between Oct. 23 and Nov. 9 of last year.

The former Andersen auditor would provide the Department of Justice (DOJ) with critical information to help prove its obstruction of justice case against the embattled Big Five accounting firm and to seek future indictments against bankrupt Enron and former and existing executives.

Duncan is the first known player in the unfolding scandal to become a cooperating witness with the federal government, news reports said. Efforts to reach Duncan attorney Barry Flynn for a comment last week were unsuccessful.

The news of Duncan’s intention to turn in a guilty plea was first reported by The Washington Post and The New York Times.

Duncan most likely would testify for the government against Arthur Andersen at a May 6 trial for obstruction of justice for the auditor’s role in the Enron scandal, assuming Anderson and DOJ do not reach a settlement before then, the Post reported. As the former head of the Enron account, he would be able to guide the government through the complex maze of off-the-book partnerships that concealed Enron debt and inflated profits.

Arthur Andersen was indicted last month by a federal grand jury in Houston on one count of obstruction of justice for “knowingly, intentionally and corruptly” ordering employees to shred Enron-related accounting documents. Duncan’s decision to cooperate with the government last week put increasing strain on Andersen officials, who have been trying to avoid a criminal trial, news reports noted.

Arthur Andersen reportedly was nearing a settlement with the government Friday in which it would admit for the first time that some of its partners and lower-level employees obstructed justice by shredding Enron-related documents, according to The Wall Street Journal. Under a “deferred” prosecution agreement, the federal government would drop its indictment of Andersen and place the accounting firm under probation for unspecified period of time, the newspaper said.

Andersen had placed the blame for document destruction squarely on its Houston office, which had been headed by Duncan prior to his dismissal in January. Duncan had been called to testify before a House subcommittee, but he invoked his Fifth Amendment right against self-incrimination.

In other action, Enron shareholders filed an expanded lawsuit in federal court in Houston last week, claiming that major investment banks and law firms played an “instrumental role” in helping Enron to perpetrate schemes that defrauded pensioners and investors of billions of dollars.

The expanded lawsuit named J.P. Morgan Chase, Citigroup, Merrill Lynch, Credit Suisse First Boston, Canadian Imperial Bank of Commerce, Bank America, Barclays Bank, Deutche Bank and Lehman Brothers as key players in a series of fraudulent transactions that ultimately cost Enron shareholders more than $25 billion. It further charged that a number of top bank executives profited personally from the schemes.

Two law firms — Enron’s former corporate counsel Vinson & Elkins and Chicago-based Kirkland & Ellis — were added to the list of Enron defendants as well for their alleged “significant and essential” role in the fraud.

This was the first legal action to accuse banks and law firms of playing a major role in Enron’s financial machinations that ultimately led to the financial collapse and bankruptcy of the company.

The expanded lawsuit also accused 28 Enron directors and officers of engaging in insider trading to the tune of about $1.2 billion, which was approximately $171 million more than was disclosed previously. Two Enron insiders, former CEO Kenneth Lay and board of director Robert A. Belfer, together sold $144 million more than had been reported previously, it said.

The 485-page amended Enron shareholder lawsuit, which named the University of California as the lead plaintiff, was filed in the U.S. District Court for the Southern District of Texas in Houston.

A number of the financial institutions cited in the complaint were alleged to have set up clandestinely controlled Enron partnerships, used offshore companies to disguise loans and facilitated phony sales of overvalued Enron assets, enabling Enron executives to deceive investors, plaintiff lawyers contend.

“Instead of protecting the public from the Enron fraud, the bankers knowingly chose to become partners in deceit,” said William Lerach, lead counsel for the University of California. “They were not only willing participants but profiteers. Their executives followed the example of Enron’s insiders, getting rich off thousands of unwitting pensioners and other investors.”

For their part, the law firms issued false legal opinions, helped structure non-arm’s-length transactions, and helped prepare false submissions to the Securities and Exchange Commission (SEC), the lawsuit alleged.

The lawsuit detailed a number of the banks’ complex transactions on Enron’s behalf:

These transactions between the banks and Enron were intended to bolster the value of Enron stock and the company’s apparent creditworthiness. Bank officers were aware that if the stock price fell, Enron would be forced to issue additional stock that would diminish the company’s investment rating and limit access to new capital, likely collapsing the schemes from which the banks were profiting, it said. This gave the banks strong incentives to keep Enron afloat.

When Enron’s financial manipulations first surfaced and the stock collapsed in November 2001, the lawsuit claimed that executives of J.P. Morgan Chase and Citigroup pressured Moody’s Investor Service to keep Enron’s credit rating in place until the banks could arrange a bailout sale of Enron to avoid insolvency and forestall a full-scale investigation into the company’s dealings.

The amended lawsuit also extended the responsibility of Enron’s auditing firm, Arthur Andersen, to include 24 executives and several of the auditor’s internal entities, such as Andersen Worldwide SC, and affiliates in Brazil, the Cayman Islands, India, Puerto Rico and the United Kingdom.

©Copyright 2002 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.