As regulators and lawyers pick apart the details of Enron Corp.’s undoing, a letter written by a company executive to CEO Kenneth Lay last year raises the possibility that the company may have to reduce past earnings by another $1.3 billion. The letter discloses two investment vehicles — one not previously disclosed — which could cut into earnings more than its four-year restatement in an 8-K filing with the Securities and Exchange Commission (SEC) last November (see Daily GPI, Nov. 9, 2001).

Sherron S. Watkins, a vice president for corporate development at Enron, who had previously worked for Arthur Andersen LLP, sent Lay a letter last August offering some new details about Enron’s related-party transactions, which she said she was concerned about. In the letter, she notes, “employees question our accounting propriety consistently and constantly. This alone is cause for concern.”

Although Watkins now has declined to comment and instead is speaking through an attorney, her letter unveiled the existence of yet another off-balance sheet entity, Condor, which she noted had been financed with Enron stock and which made investments that generated $800 million in cash for Enron. (A search by NGI of Enron’s web site found no documents relating to Condor.)

Watkins’ letter, first revealed by The New York Times this week, also indicates that a previously disclosed entity, Raptor generated $500 million in revenue — which Enron apparently also has not written off. Raptor is a company owned by Enron entity LJM2, one of the partnerships formerly managed by ex-CFO Andrew Fastow that was consolidated on financial statements last year. However, neither the $800 million nor the $500 million appear to have been identified as written off by Enron or restated in its financial statements for the period ending last September.

According to Watkins’ letter, Raptor, which invested in publicly traded stocks, rose in value in the beginning, with $500 million in revenue in 2000. However, by the beginning of 2001, the investments dropped and the collateral — Enron shares — dropped as well. Raptor’s $1 billion loss was then written off in the third quarter.

“Raptor looks to be a big bet,” Watkins wrote to Lay. “If the underlying stocks did well, then no one would be the wiser. If Enron stock did well, the stock issuance to these entities would decline, and the transactions would be less noticeable.” Ironically, she wrote, “all has gone against us.”

Watkins also referred to Condor, which appears no where on Enron’s financial statements or in its restatements to the SEC. However, in her letter, Watkins referred to Enron recognizing “funds flow of $800 million from merchant sales in 1999 by selling to a vehicle (Condor) that we capitalized with a promise of Enron stock in later years.”

In its restated financial earnings statements filed with the SEC, Enron consolidated several of its off-balance sheet partnerships, which deducted about $1.2 billion from its net worth. The consolidation also reduced profits from the previous four years by about $586 million. In its regular third quarter earnings statement, released last October, Enron also took charges of more than $1.01 billion in failed investments in the third quarter, mostly related poor investments in the water business, broadband trading and retail electricity (see Daily GPI, Oct. 17, 2001). That write-off reduced shareholder equity and precipitated the horrifying rush toward bankruptcy.

Enron has made no comment about Watkins’ letter or any of its allegations.

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