The fourth and final report by the court-appointed examiner of Enron Corp. concludes that even if they are not legally culpable, former Chairman Kenneth Lay and former CEO Jeffrey Skilling “are included within a circle of responsibility for the company’s financial demise.”

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 in December 2001. Fastow is scheduled for trial in early 2004.

According to the 1,334-page report completed by auditor Neal Batson, 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 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 went out of business because of its association with Enron, and 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 “in breaching their fiduciary duties.” All three had knowledge of Enron’s “wrongful conduct” regarding the SPEs.

As a result, it would be fair to subordinate their 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.” Batson wrote that “by failing to respond to such red flags, Lay and Skilling were at least negligent and, therefore, breached their fiduciary duties as officers.”

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. He 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, Batson 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.

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