Internal Report Cites Extensive Abuse at Enron

An internal report on the collapse of Enron Corp. painted a scathing picture of corporate greed and mismanagement Saturday, concluding that accounting abuses masked more than $1 billion in losses in a one-year period alone.

The report assigned widespread blame to Enron management, the Andersen accounting firm, company lawyers and the board itself for creating and failing to oversee a series of partnerships that sparked the company’s Dec. 2 bankruptcy.

It leveled its sternest criticism at Andrew S. Fastow, the former Enron chief financial officer who engineered a series of partnerships that “became, over time, a means of both enriching himself personally and facilitating manipulation of Enron’s financial statements.”

“Enron employees involved in the partnerships were enriched, in the aggregate, by tens of millions of dollars they should never have received,” said the report.

The analysis was done by a three-member panel led by William Powers Jr., dean of the University of Texas School of Law in Austin, who was added to the board Oct. 31 to lead the probe.

“Individually, and collectively, Enron’s management failed to carry out its substantive responsibility for ensuring that the transactions were fair to Enron--which in many cases they were not,” it said.

As a detailed record of Enron’s murky partnerships, the report may serve as a road map to congressional investigators and federal regulatory agencies examining the collapse of Enron, which went from the nation’s seventh-largest company in revenue to a Dec. 2 bankruptcy, becoming a symbol of corporate abuse and greed.

The 203-page report was released just ahead of ousted Enron Chief Executive Kenneth L. Lay’s appearance Monday before a Senate committee. It noted that Lay, a major fund-raiser for President Bush, was “captain of the ship” for most of the time that abuses were occurring and “bears significant responsibility for . . . flawed decisions” of subordinates.

The report provided a detailed account of the partnerships run by Fastow, who was forced out as chief financial officer amid growing concerns over Enron’s finances.

Fastow earned at least $30 million from the partnerships he ran, known as LJM, the report says, the three-letter acronym representing the names of his wife and two children. Though the board approved a highly unusual structure that allowed Fastow to run the outside entities, Fastow hid the outsized profits he was making, according to the report.

In a partnership known as Southampton Place, for example, Fastow’s $25,000 investment ballooned into $4.5 million in two months, said the report, which was filed late Saturday in U.S. Bankruptcy Court in New York.

“What he [Fastow] presented as an arrangement intended to benefit Enron became, over time, a means of both enriching himself personally and facilitating manipulation of Enron’s financial statements,” the report said.

Fastow associate Michael Kopper pocketed at least $10 million while four others made up to $1 million each.

Enron’s disintegration was “the result of failures at many levels and by many people,” the report concludes. “Many of those consequences could and should have been avoided.”

The report also indicates that the company’s top management had received a warning signal about the controversial partnerships and the conflicts of interest they represented far earlier than previously known.

In March 2000, then-Treasurer Jeffrey McMahon approached then-President Jeffrey K. Skilling with “serious concerns about Enron’s dealings with the LJM partnerships,” the report said, citing an account from McMahon.

The report said that if McMahon’s version--disputed by Skilling--is correct, “it appears that Skilling did not take action . . . after being put on notice that Fastow was pressuring Enron employees who were negotiating with LJM.”

Fastow and McMahon could not be reached for comment.

A spokeswoman for Skilling said the report in its whole “bears out what Mr. Skilling has been saying for months. Mr. Skilling was not involved in any improprieties.”

The report also criticizes the company’s public disclosures about its financial condition--a focal point for the scores of investors and employees who have sued the company over their severe losses in Enron stock.

Enron revealed the existence of the partnerships in SEC filings, the report points out. But the disclosures were “obtuse” and “failed to convey the substance of what was going on between Enron and the partnerships.”

The report rebukes almost every aspect of the partnerships, including LJM Cayman, LJM-2 Co-Investment and Chewco Investments. They are described as intended largely to shield from view the mountains of debt that the company was hoping to keep off its balance sheet.

“Our investigation identified significant problems beyond those Enron has already disclosed,” the report states, including fundamental flaws in the very structure of the partnerships.

The partnerships appear to have been “designed to accomplish favorable financial statement results, not to achieve bona fide economic objectives,” the report says, adding that some of the accounting was “clearly wrong.”

For example, some partnerships ostensibly had arrangements to bring in outside partners to shield, or hedge, Enron from risk.

But the supposed hedging was actually a charade because they were done largely with Enron stock, the report finds. Thus, the partnerships were vulnerable to a decline in Enron stock, and vice versa.

Enron sold assets to LJM to remove them from its books. But, the report says, the transactions appeared to be maneuvers to hide losses from investors. In five of seven such sales, Enron repurchased the assets, sometimes within months, the report says.

Also, the LJM partnerships claimed profits on each deal even when the assets appeared to have fallen in value.

In all, such transactions “resulted in Enron reporting earnings . . . that were almost $1 billion higher than should have been reported” for the year ending in the third quarter of 2001.

The report harshly criticizes Enron’s outside professional advisors, the accounting giant Andersen and law firm Vinson & Elkins.

“Andersen did not fulfill its professional responsibilities in connection with its audits of Enron’s financial statements, or its obligation to bring to the attention of Enron’s board, concerns about Enron’s internal controls over related-party transactions,” the committee report states.

An internal Andersen e-mail from last February suggests that Andersen had concerns about disclosures of the partnerships. But according to the report, an Andersen partner told Enron’s audit committee one week after that e-mail that “disclosure [had been] reviewed for adequacy” and that Andersen would sign off on Enron’s financial statements.

Andersen officials dismissed the report out of hand Saturday night.

“The authors of this report were handpicked by Enron’s board, and it’s now clear that the report’s conclusions are extremely self-serving,” said Charlie Leonard, a spokesman for Andersen.

Leonard said the report didn’t contradict congressional testimony given by Andersen’s chief executive, who said Enron withheld vital information related to one of the off-book partnerships, Chewco. He also said the Enron committee rebuffed attempts by Andersen to provide information about its activities.

The committee report said Vinson & Elkins, the Houston law firm that prepared partnership-related documents for Enron, “should have brought a stronger, more objective and more critical voice to the disclosure process.”

Joe Householder, a spokesman for the firm, said Saturday: “We are confident that when all the facts are known about the role we played, it will be seen that we met our professional obligations.”

Enron was formed in 1985 by the merger of two fairly conventional natural gas pipeline operators. But Lay and his handpicked successor, Skilling, transformed Enron in the 1990s into a nimble trading company that had little interest in expensive hard assets, such as natural gas fields and power plants.

When times were good, up until only a few months ago, the MBAs and PhDs that roamed Enron’s Houston trading floor were taking one of every four wholesale trades in electricity and natural gas.

Enron’s well-paid executives were dreaming up new markets to deregulate and making them happen, cozying up to powerful politicians and regulators to craft laws and policies to Enron’s benefit, pushing accounting rules to their limits and beyond to burnish Enron’s financial statements and keep that all-important stock price climbing.

But Enron exploded spectacularly in a span of less than seven weeks, the victim of a near-fatal cash crunch caused as investors, banks and trading partners shunned the energy merchant after a series of damaging financial disclosures.

Troubles in some controversial off-balance-sheet partnerships slashed more than $1 billion from shareholders’ equity and forced Enron to reduce nearly five years of earnings by almost $600 million. Critics contend more debt and losses are hidden in dozens of other partnerships.

Since Dec. 2, Enron has held a new distinction as the largest resident ever of U.S. Bankruptcy Court--a descent that left more than 6,000 of its 21,000 employees out of work and shattered the savings of thousands more employees and investors who held large chunks of Enron stock.

Enron has a new interim chief executive, a restructuring specialist named Stephen Cooper. It has given its core energy trading business to UBS Warburg in exchange for a cut of any future profits, and it has sold its biggest pipeline to Dynegy Inc.

Enron, its executives and directors are the subject of dozens of lawsuits as well as investigations by several congressional panels, federal agencies and regulators. Lay and Skilling are both scheduled to testify before Congress this week.

The Enron debacle has also claimed a life: Former Enron Vice Chairman J. Clifford Baxter, a critic of the partnership deals, was found shot to death in his car. The death was ruled a suicide by the Harris County, Texas, medical examiner’s office.

Also on the committee were Herbert S. Winokur Jr., chairman of Capricorn Holdings Inc., a private investment firm based in Greenwich, Conn., and Raymond S. Troubh, a financial consultant. Troubh joined the Enron board in mid-November.

The panel said it reviewed more than 430,000 pages of documents and interviewed more than 65 people.

It hired its own lawyer, William R. McLucas, former SEC enforcement chief, and its own accountant, Deloitte & Touche.

The 55-year-old Powers, who received his law degree from Harvard Law School in 1973, teaches torts and product liability law, among other subjects. Powers is scheduled to testify Tuesday before Congress.

The complexity of the report, and its late filing, left little time for immediate reaction.

“We haven’t seen the report,” said White House spokesman Jimmy Orr. “We haven’t had a chance to review the report. The report has not been delivered to the White House. Therefore it would be inappropriate to comment on a report we have not seen.”

But one Enron executive who had raised objections to the partnerships, and who asked not to be named, said Saturday that there is a measure of vindication in its findings

“It’s nice,” the executive said, “for someone else to say there was something rotten in Denmark.”

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Times staff writers Nancy Rivera Brooks, Richard Simon, Warren Vieth and David Streitfeld contributed to this report.