The last in a series of reports by Enron Corp.’s bankruptcy examiner said that even if they aren’t legally culpable, former Chairman Kenneth Lay and former CEO Jeffrey Skilling “breached their fiduciary duties” and may be liable for repaying millions of dollars to the company.

Lay and Skilling “are included within a circle of responsibility for the company’s financial demise,” wrote Neal Batson, who was appointed by the courts after Enron declared bankruptcy in December 2001. He submitted his fourth and final report to the court last week.

In response to the final report, Skilling attorney Bruce Hiler said in a statement that Batson’s report was based on “incomplete and untested information.” He added that his client had done nothing wrong.

Michael Ramsey, an attorney for Lay, also blasted the final report. “There is no allegation of crime, no claim of intentional wrongdoing and no assertion of fraud. … The bankruptcy examiner suggests only negligence, which we strongly deny.”

To date, neither Lay nor Skilling have been charged with any wrongdoing, although they face numerous lawsuits from creditors and shareholders. However, many of the bankrupt firm’s former managers, including CFO Andrew Fastow, face numerous criminal charges for their parts in Enron’s bankruptcy. Fastow is scheduled for trial in early 2004.

According to the 1,334-page report, Lay and Skilling “failed to respond appropriately to the existence of ‘red flags’ indicating that certain senior officers” were misusing transactions to disseminate inaccurate financial information.

Among other things, the report found that Lay and Skilling had breached their fiduciary duties by failing to “provide adequate oversight” of Enron’s use of special-purpose entities (SPEs), which were used to hide the company’s massive debt.

“There is evidence that they were in possession of facts necessary to conclude that (some of) these transactions lacked any rational business purpose,” Batson wrote.

The final report does not contain any revelations of misconduct at Enron, however, it widens the circle of people that Batson contends were responsible for the problems. For example, Batson wrote that there is “sufficient evidence to conclude” that several in-house lawyers and outside law firms committed malpractice in their work for Enron. Those cited included former Enron general counsel James Derrick and the company’s principal outside law firm, Houston-based Vinson & Elkins LLP.

J. Clifford Gunter III, an attorney for Derrick, said, “The examiner merely suggests in perfect hindsight that Mr. Derrick failed to inform himself of certain events. We respectfully believe that all of the evidence when considered in context clears Mr. Derrick even of this limited criticism.”

And Harry Reasoner, a senior Vinson & Elkins partner, also disputed that his firm committed any malpractice. He said the law firm had hired an outside panel of legal experts who found that the firm’s actions in regard to Enron had been “appropriate and met our legal and ethical obligations.”

The final report focused on the role in structuring and managing the SPE transactions by Lay, Skilling and other Enron officials. It also examined former accountant Arthur Andersen, which helped the company abuse accounting rules, Batson concluded. He also found that three financial institutions — Credit Suisse First Boston (CSFB), Royal Bank of Scotland (RBS) and Toronto-Dominion Bank — “aided and abetted” Enron officials. All three institutions, said Batson, had knowledge of Enron’s “wrongful conduct” regarding the SPEs.

As a result, it would be fair to subordinate the banks’ claims to those of other Enron creditors, according to the report. CSFB is seeking recovery of $417 million, RBS $537 million and Toronto-Dominion $57.8 million.

Batson also found four transactions authorized by Lay and Skilling and Enron’s outside directors apparently had no “rational business purpose.” One deal was called “Rhythms,” and was part of an SPE known as LJM1. Three other deals called “Raptors,” were with an SPE known as LJM2.

“There is evidence that Lay, Skilling and the outside directors were aware of facts demonstrating this lack of rational business purpose,” Batson wrote. “From this evidence, an inference can be drawn that they acted in bad faith by approving the transactions and, therefore, breached their fiduciary duties of good faith.”

Lay and Skilling, specifically, knew or should have known that their employees were misusing SPE transactions “in a manner that resulted in the dissemination of materially misleading financial information.”

The report also concluded that Lay and Skilling may have to repay loans to Enron.

Between May 1999 and October 2001, Lay borrowed $94.3 million from Enron and repaid it using company stock. In May 1999, Skilling repaid $2 million with Enron stock. However, Enron’s compensation committee, which approved the transactions, did not have authority to require Enron repurchase its stock in such a manner, Batson wrote.

Should Enron choose to invalidate these stock paybacks, it would return 2.13 million Enron shares to Lay, who would then have to repay the loan plus interest. Skilling would receive 26,425 Enron shares and would have to pay off his loan plus interest. Enron now is worth less than 5 cents a share.

According to Batson, neither Lay nor Skilling have been forthcoming during his investigation. Batson said Lay gave a one-day interview, while Skilling invoked his right not to incriminate himself to avoid talking. Neither executive used e-mail frequently, and didn’t retain many documents. However, the examiner concluded that there is sufficient evidence that they failed to oversee their subordinates.

In related news, Enron has delayed a key bankruptcy hearing to Dec. 9 to continue negotiations with court-appointed examiner Harrison J. Goldin, who has raised concerns about the firm’s reorganization plan.

Goldin was appointed to investigate the firm’s Enron North America Corp. unit and to represent the interests of its creditors. Goldin has indicated that support for the Chapter 11 plan submitted by Enron is fading.

Enron’s attorney Brian Rosen said that Enron sought adjournment to allow for negotiations “on certain issues” with creditors and Goldin.

At the hearing, which is now scheduled to take place on Dec. 9, a week after the two-year anniversary of Enron’s bankruptcy filing, U.S. Bankruptcy Judge Arthur J. Gonzalez will decide whether Enron has adequately spelled out terms of its plans in its so-called disclosure statement.

That document, if approved by the judge, would be mailed to Enron’s creditors, who will then cast their vote on the firm’s reorganization plan.

©Copyright 2003 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.