UBS Warburg, a subsidiary of Switzerland-based UBS AG, beat out Citigroup as high bidder for Enron Corp.’s once mighty wholesale energy trading unit on Friday, according to the U.S. Bankruptcy Court of New York. No details of the bid were released, but Bankruptcy Judge Arthur Gonzalez was expected to making a ruling on whether to accept the bid after Enron had presented it to the court Friday. Enron lawyer Martin Bienenstock has requested a court ruling on the bid — whether to accept or deny it — be made on Tuesday.
Meanwhile, there were new developments throughout the week, as Enron’s close ties to the Bush administration were detailed. The Justice Department opened the week by launching a criminal investigation into Enron’s management practices also, but most stunning was a revelation last Thursday that well-paid Big 5 auditor Andersen has destroyed Enron files that may be pertinent to the numerous civil and criminal investigations.
Bienenstock did not disclose terms at a hearing before Gonzalez, but said those details would be made public Monday morning by Enron. In court, Bienenstock called the decision to sell to New York-based UBS a “very positive development” as Enron attempts to reorganize under Chapter 11. Bienenstock said Enron’s trading unit was the company’s most important business and “was something that was dead that we were trying to bring back to life.” UBS Warburg will assume “none of Enron’s past, current or future liabilities or trading positions,” it said in a statement. The parties will file executed documents with the bankruptcy court by 8:30 am. EST on Monday at www.nysb.uscourts.gov.
Before the announcement, trading in shares of Enron were halted Friday morning on the New York Stock Exchange and over-the-counter, pending news. The stock was trading at 67 cents when trading was halted.
It was unclear how the Enron-UBS joint venture will pan out, but under a proposal by Enron made in December, a 51% joint venture partner would form a new company with Enron to be called New Energy Trading Co., or NETCO. Enron would contribute information technology and back office systems among other things, in exchange for a 49% stake. UBS Warburg said its winning bid called for Enron to “retain a residual interest in the income of the business.”
“With UBS’s AA credit rating and Enron’s proven industry expertise, we believe this will maximize the value of the trading operation going forward,” said Enron CEO Kenneth L. Lay. “This is a key milestone as we build the new Enron and work to establish a platform for restructuring the company and emerging from Chapter 11 bankruptcy protection.”
As the controversy around Enron deepens, the bankrupt company would resolve at least one of its problems with the auction completed. Gonzalez also still must rule on a change of venue motion to move the bankruptcy process to a Houston court instead of Manhattan, which was requested by several of Enron’s creditors, including former merger partner Dynegy Inc.
On Friday, as revelations about communications between White House officials and Enron CEO Kenneth Lay were further revealed, the Securities and Exchange Commission (SEC) announced it would expand its investigation of the collapse of the energy company by also examining Andersen’s news that it has destroyed some of the pertinent auditing records related to Enron.
In a stunning development last Thursday, Andersen, which for Enron alone last year earned $25 million in accounting fees another $27 million in consulting fees — notified the SEC and Justice Department “that in recent months individuals in the firm involved with the Enron engagement disposed of a significant but undetermined number of electronic and paper documents and correspondence relating to the Enron engagement.” Andersen said it is also “notifying congressional committees and other agencies investigating the Enron collapse.”
Andersen has asked former U.S. Sen. John Danforth to conduct an “immediate and comprehensive review of Andersen’s records management policy and to recommend improvements.” Danforth served in the Senate for almost 20 years, from 1976 to 1995. He also is the former attorney general of Missouri and is now a partner with the law firm of Bryan Cave LLP.
In its written statement, Andersen said, “The firm has assured the SEC, the Justice Department, congressional committees and other agencies that it will continue to cooperate fully with their investigations. After government agencies have had a full opportunity to consider these matters, Danforth also will advise the firm to ensure that all appropriate remedial and disciplinary actions have been taken.
“Andersen’s suspended document policy required in certain circumstances the destruction of certain types of documents. In recent months, documents, including electronic files related to the Enron engagement, were disposed of or deleted. Millions of documents related to Enron still exist, and the firm has successfully retrieved some of the deleted electronic files. The firm is continuing retrieval efforts through electronic backup files, and is continuing in its efforts to fully learn and understand all the facts related to this issue.”
Rep. Billy Tauzin, (R-LA), whose House Energy and Commerce Committee is among those agencies investigating, called the documents’ destruction “a deeply troubling development.” He said, “anyone who destroyed records simply out of stupidity should be fired. Anyone who destroyed records to try and subvert our investigation should be prosecuted.”
SEC’s enforcement chief also expressed alarm. “Destruction of documents is obviously an extremely serious matter. Documents are an essential ingredient in our investigations,” said Stephen Cutler, SEC’s director of enforcement, in a statement. “The destruction of documents by Arthur Andersen will not deter us from pursuit of our investigation and will be included within the scope of our investigation.” SEC, in fact on Friday, expanded its probe of Enron to include Andersen.
Arthur Bowman, editor of the newsletter Bowman’s Accounting Report, told Reuters Thursday that Andersen’s disclosure was “pretty damning.” Calling the ramifications “huge,” Bowman said, “you can just imagine the litigation industry lining up to feast on Andersen’s bones.” He said most accounting firms keep their audit records for at least three to four years, adding it was the first time he had seen such a disclosure in the 22 years he has covered the industry.
Enron’s extensive ties to the Bush administration also were revealed last week when the White House revealed two Cabinet officers had been contacted several times by both Enron CEO Kenneth Lay and President Greg Whalley about the mounting financial problems in October and November 2001.
U.S. Treasury Department Under Secretary Peter Fisher, who handles domestic finance, revealed that he and Whalley had spoken “six to eight times” in late October and early November as the company’s stock and market confidence plummeted.
“As Enron’s negotiations with its bankers for an extension of credit neared a decision point, the president of Enron asked Under Secretary Fisher to call the banks,” said Michele Davis, a department spokeswoman. “Under Secretary Fisher inferred he was being asked to encourage the banks to extend credit. He made no such calls.”
The calls to Fisher apparently were follow-ups to conversations Lay had with Treasury Secretary Paul O’Neill. The Treasury Department confirmed on Thursday that Lay had called O’Neill on Oct. 28 and Nov. 8, 2001. Following the Oct. 28 conversation, O’Neill asked Fisher to investigate whether Enron’s problems were a threat to securities markets.
“The undersecretary’s job is to monitor capital markets and the effects of any major economic development on the markets,” said Davis. “In that role, he is in contact with people in the market everyday to be aware of their concerns.”
Fisher was executive vice president of the New York Federal Reserve Bank and helped broker a 1998 deal for Long-Term Capital Management by 14 of its creditors. The Reserve Bank determined then that financial markets faced some problems if the management fund was forced to unwind its positions, and to avoid that, investors were invited to invest $3.6 billion into the hedge fund to ensure its survival. Apparently, Enron officials were asking to be considered for a similar deal.
Also as expected, the Senate panel investigating Enron issued 51 subpoenas on Friday requesting Enron documents and Andersen documents, as well as subpoenas to 49 current and former officers and board of director members.
“We are going to be looking into the circumstances surrounding the board members’ Enron stock and option trades, the conduct of the board’s audit committee, the conduct of the board with respect to both internal and external audits,” said Sen. Carl Levin (R-MI), chair of the Permanent Subcommittee on Investigations. He said the subcommittee is investigating “offshore entities, special purpose entities and limited partnerships that Enron used.”
The House Energy and Commerce Committee, another of six congressional committees investigating Enron, also has requested the personal files of several top Andersen executives following news that Andersen may have destroyed pertinent files. Included in its request are files of Andersen partner David Duncan and five other Andersen executives who worked with Enron. Committee spokesman Ken Johnson said many of the missing files were e-mails between executives at the companies.
Finally, a nationwide criminal investigation was launched on Wednesday by the Justice Department — but even in this investigation, revelations about Enron’s financial power are having an affect. Already recused from the investigations are at least one attorney in the Houston office, as well as Attorney General John Ashcroft, who received more than $57,000 in campaign contributions from Enron and Lay in his Missouri gubernatorial bid in 2000.
The unprecedented nationwide investigation by the Justice Department was a positive step, said Enron attorney Robert S. Bennett, of Skadden, Arps, Slate, Meagher & Flom. Bennett, who represents the company and no executives, told several media outlets that he was “pleased” that the criminal investigation had been announced because Justice was “centralizing” its focus, unlike the other investigations. Reportedly, the Justice Department’s team will include lawyers in the criminal division and prosecutors in several cities, including Houston, San Francisco and New York City. Besides looking into Enron’s management practices, it also will investigate whether the company manipulated the California power market in 2000 and 2001.
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