A federal bankruptcy judge in New York last week endorsed Enron Corp.’s selection of bankruptcy specialist Stephen F. Cooper as acting CEO of the embattled company, after the Securities and Exchange Commission (SEC) abandoned its opposition to his appointment.
Cooper, 55, was hired in late January to succeed former Enron head Kenneth Lay, who resigned in the face of mounting investigations and legal problems stemming from the financial collapse and bankruptcy of the Houston-based energy trading company.
The SEC initially opposed the appointment of Cooper, calling the terms of his contract excessive. The agency withdrew its objection, however, after Enron revised the terms of Cooper’s contract to address some of the concerns. His employment contract required the approval of the court.
Cooper still will be paid $1.32 million a year to restructure Enron, but he no longer will be assured a bonus of $5 million once he successfully guides the troubled company out of bankruptcy. Under the revised contract, however, U.S. Bankruptcy Judge Arthur Gonzalez has the option to award Cooper a bonus that he feels is more appropriate.
The modified contract also permits Cooper to hire up to 15 employees from Zolfo Cooper LLC, a New York consulting firm in which he is a managing partner, to help restructure Enron at salaries of $864,000 each.
Enron also filed a retention and severance package with the U.S. Bankruptcy Court to retain “employees whose skills and experience are critical to the successful restructuring of the company.” The plan has been reviewed and approved by the Creditors’ Committee, which the U.S. Trustee appointed in the company’s bankruptcy proceeding. The total value of the severance and retention plan will range from $47.4-$130 million, depending on asset sales and other cash collections.
The severance component of the plan extends to “all eligible employees in the debtor companies (those in bankruptcy) who are not covered by other plans.” The pay would be based on years of service, with a maximum of eight weeks base pay and a minimum of $4,500. “The retention components of the plan will retain employees whose skills or knowledge are critical to the company’s liquidation of certain assets and reorganization, so as to maximize value for the company’s creditors.” The plan remains subject to the court’s approval, and creditors and other interested parties will have a period of time, set by the court, to comment.
In a related development, the SEC last week joined forces with Enron creditors in seeking the appointment of an independent examiner with expanded powers to investigate the energy trader’s financial downfall and potential conflicts of interest in the bankruptcy case, according to a report in The New York Times. Judge Gonzalez is expected to approve an order appointing an outside examiner this week.
The agency said it was backing a move by several creditors, including various retirement and pension funds, who are concerned that an investigation by the creditors committee would be compromised because of the number of members that have longstanding ties to Enron. Among those with possible conflicts of interest are Wall Street banks like Citigroup, Credit Suisse First Boston and J.P. Morgan Chase, the Times noted.
“We support the appointment of an examiner because an independent person with no relation to the transactions could investigate and report back to the court on whether there is money available to pay investors and other estate creditors,” said Alistaire Bambach, an SEC enforcement official, in the article.
One of the names being tossed around as potential examiner was former New York Gov. Mario Cuomo, the Washington Post reported.
In another development, the Labor Department confirmed that Enron last week reneged on an agreement to pay an independent investment firm to oversee its three retirement plans. “Enron basically just flip-flopped” on its signed agreement, a department spokeswoman said. “What they did was pretty shocking…We’re letting them know in no uncertain terms that we are displeased.”
Enron reportedly denied backing out of the agreement, but Labor Department officials said this latest action would delay the transfer of control of the pension funds from Enron executives who were accused of not looking out for the interests of employees and retirees when the company stock tanked last fall, the Times said.
In February, the Labor Department had reached an agreement to replace Enron’s administrative committee with State Street Bank and Trust of Boston, as overseer of the company’s retirement plans. Enron had agreed to pay all fees associated with State Street’s assumption of fiduciary duties up to $1.5 million annually for a period of three years, rather than the fees being deducted directly from employee plans. The agreement, which came out of the department’s probe of Enron, was subject to approval by Judge Gonzalez.
Lawyers for Enron backed out of the agreement during a hearing last Tuesday before Gonzalez, the Labor Department reported, which prompted the judge to say he would not approve payments to State Street out of the company’s assets, according to the Times story. Enron’s creditors also are against the deal, insisting that any payments to State Street should come from the assets of the retirement plans, not the company.
Labor Department officials said they expect Enron to keep its agreement, but they would not say what their next course of action will be.
On another front, a special federal grand jury impaneled in Houston to investigate Enron is focusing on the joint ventures that basically were the company’s undoing: a group of joint ventures that enabled Enron to hide losses while still generating incredible revenue for some of the company’s former executives. The new jury panel has taken over responsibility for the sitting grand jury that handed down the indictment last month against Arthur Andersen LLP, Enron’s former auditor.
Apparently, the grand jury is most interested in four special purpose entities of Enron, better known as the Raptor vehicles, and is also investigating the Southampton Place partnership, all put together by former CFO Andrew Fastow.
The Raptor partnerships have received the most media attention, and were a major focus of the special internal report compiled by William Powers, dean of the University of Texas School of Law. According to the report, Enron’s Raptor partnerships, created two years ago, were used as a risk management tool to hedge the profit and loss of the company’s investments. The complex partnerships, backed almost entirely with company stock, allowed Enron to report gains on its income statements. Southampton Place was a limited partnership created in March 2000 by several Enron executives who invested money to purchase a stake in an off-balance-sheet joint venture managed by Fastow himself.
Meanwhile, the federal Overseas Private Investment Corp. (OPIC) has asked the Department of Justice to examine whether Enron misrepresented its financial condition when it obtained more than $1 billion in taxpayer-backed financing and insurance to expand its international business.
OPIC’s inquiry, announced last Monday, is an expansion of the federal investigation into Enron and its former executives. It asked the Justice Department to investigate “any possible misrepresentations in regard to both insurance and finance contracts and applications.” OPIC suggested in a letter to Justice that if Enron had misled the federal government, its insurance coverage could be cancelled and loan guarantees terminated. Enron and its partners then would have to secure new financing for projects already under way or completed.
Following Enron’s bankruptcy, OPIC cancelled support for two Enron power projects that were scheduled to be built in Brazil. However, OPIC has about $454 million in outstanding loans and $2-$5 million in insurance costs related to Enron projects, mostly from deals approved in the 1990s.
In further action, Enron investors and former employees are expected to add the names of major law firms and investment banks — such as J.P. Morgan Chase, Citigroup Inc., Merrill Lynch & Co. and Credit Suisse — as defendants to their lawsuits in which they are seeking billions of dollars in damages as a result of the collapse of Enron, knowledgeable sources told Bloomberg News.
J.P. Morgan and Citigroup were identified as potential targets because they had access to the details of Enron’s finances as lenders and vendors of financial services, plaintiffs’ lawyers said in the Bloomberg report. Merrill Lynch and Credit Suisse were cited as potential defendants because they continued to promote Enron stock during the period in which the company misstated its income and debt, it noted. The investment companies declined to comment.
Shareholder-plaintiff groups, such as the regents of the University of California, are expected to announce their expanded lawsuits today (April 8) at a new conference in San Francisco, the article said. Plaintiffs reportedly are looking for deeper pockets with Enron in bankruptcy and auditor Arthur Andersen facing a precarious legal and financial future.
Meanwhile, the Department of Justice has signaled it is willing to consider a deal to settle its criminal obstruction case against Chicago-based Arthur Andersen, as long as the auditor acknowledges that it “illegally shredded documents,” the Wall Street Journal reported last Thursday. A senior Andersen official indicated that the company might accept such a deal, provided it wouldn’t be required to plead guilty in court, it said.
In yet another development, the Senate Permanent Subcommittee on Investigations announced that it will hold its first hearing into the Enron scandal on May 7. The panel, which is chaired by Sen. Carl Levin (D-MI), said it will call “selected” members of Enron’s board of directors to testify about their actions that preceded the company’s collapse.
Levin so far has issued more than 50 subpoenas to Enron board members, company officers, Enron Corp., and Arthur Andersen. In preparation for the hearing, the committee’s staff has reviewed more than 350 boxes of Enron-related documents.
“We will be trying to find out exactly what the board members knew about the accounting gimmicks, the off-the-book entities, the deceptive financial statements, and the hidden guarantees and buy-backs,” Levin said in a prepared statement last Thursday.
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