Enron Execs Sold Stock as Losses Grew
A handful of senior Enron Corp. executives sold $44 million in company stock while concerns were growing inside the company that losses racked up by a group of obscure partnerships could spill into public view, records show.
The huge investment losses by the four so-called Raptor partnerships were disclosed months later and played a key role in forcing Enron in October to say it had overstated the value of the company by $1.2 billion, spurring the company’s filing for Chapter 11 bankruptcy protection Dec. 2.
Stock sales by Enron executives before the company’s descent previously have come under a spotlight, but the timing of the sales gained new significance with the release Saturday of an internal Enron investigation that detailed the executives’ knowledge of the Raptor problems.
Four Enron executives--including former President and Chief Executive Jeffrey K. Skilling and former Chief Financial Officer Andrew S. Fastow--sold about $44 million in stock from Aug. 7, 2000, when the Raptor problems became known internally, through March 26, 2001, when the partnerships were restructured to prevent disclosure of losses, according to a review of stock sales Tuesday.
There is no evidence that the sales were directly related to knowledge of the problems facing the Raptors. But any stock sales by executives based on information not available to the public could be construed as trading on inside information, a federal crime, according to a Washington securities lawyer who declined to speak for attribution.
The executives--Skilling, Fastow and Chief Accounting Officer Richard A. Causey and Chief Risk Officer Richard B. Buy--could not be reached for comment.
During the period Aug. 7, 2000, to March 26, 2001, Skilling had stock sales totaling $28.2 million, and Fastow sales totaling $4.3 million, according to data compiled by Thomson Financial, a securities research firm.
Causey’s sales totaled $7.1 million and Buy’s totaled $4.3 million, Thomson said.
The sales came at a time when Enron executives were concerned that losses by the Raptors could force damaging public disclosure. The fear of disclosing those losses led Enron to expand and restructure the Raptors during an eight-month period in 2000-01 to keep its losses off the corporate books, according to an Enron board committee’s internal report issued Saturday.
Only an elaborate reorganization of the Raptors last March 26 saved Enron from having to disclose a $504-million loss on its first-quarter financial statements, according to Enron’s internal report.
Starting April 18, 2000, Enron created the first of four Raptor entities so that losses in its investment portfolio (including stocks) would not show up on Enron’s income statement, the internal report said. The Raptors, which were little known beyond a small group of corporate insiders, allowed the energy company to hedge, or shield itself from, future losses on its investment portfolio by shifting some of the risk to the Raptors.
Enron provided the initial funding for three of the Raptors with shares of its own stock. Each one also received a modest investment from a related partnership headed by Fastow.
In essence, the Raptors agreed to cover potential losses on certain Enron investments. As long as the value of the Enron shares backing the Raptors held up, the entities would be able to pay their debts to the energy giant. Enron counted the debts owed by the Raptors as income, offsetting losses from its portfolio.
Soon after creating the Raptors, however, Enron executives learned how quickly they could slip into trouble.
According to the report, Skilling, Fastow, Causey and Buy attended an Aug. 7, 2000, meeting of Enron’s finance committee in which Treasurer Ben Glisan noted that the credit capacity of Raptor I was “almost completely utilized and that Raptor II would not be available” until months later. The committee recommended creating a Raptor IV, but before that could be activated executives created, without board approval, Raptor III without informing the board.
Unlike the other entities, Raptor III was not backed by Enron stock, making it what the internal investigation called an “extraordinarily fragile structure.”
One day after Raptor III became active, on Sept. 28, 2000, Causey exercised 61,097 stock options and sold an additional 19,536 shares, netting $5.4 million, according to the analysis by Thomson. That was one of only four days Enron’s chief accounting officer has traded shares, according to Thomson.
By late 2000, two of the entities, Raptor I and Raptor III, were essentially insolvent, lacking the credit to be able to pay back their debts, the report said.
Raptor III was in especially bad shape. Unlike the three other entities, Raptor III was essentially backed by shares of New Power Co., an Enron spinoff that quickly foundered after going public. But under the deal designed by Enron accountants, the more that New Power shares fell, the more money Raptor III owed Enron.
New Power went public Oct. 5, 2000. By mid-November, the stock had lost 50% of its value, threatening to wreak havoc with the Raptor structure and force Enron to disclose huge losses, according to the internal report.
On Nov. 7, Fastow sold 52,080 shares at $83 each for a gross of $4.32 million. Filings reviewed by Thomson did not indicate Fastow’s cost, so his net gain on the sales is unclear. Stock sales by Fastow earlier in the year--after the Raptors had been devised but before they showed signs of serious trouble--netted him an estimated $3.4 million.
To avoid having to disclose a huge loss, Enron executives on Dec. 22, 2000, merged the credit of the four Raptors under a 45-day pact, allowing Enron to avoid reporting a credit-reserve loss in its year-end financial statements.
In early January, Enron accountants began work to develop a more permanent solution to replace the 45-day agreement, according to the internal report. The accountants designed a complex restructuring that took effect March 26, 2001.
“We were told that, during the first quarter of 2001, Skilling said that fixing the Raptors’ credit capacity problems was one of the company’s highest priorities,” the report said.
Skilling has disputed that account. He told the board investigation team, led by Texas Law School dean William Powers, that he recalls being informed of the Raptors’ credit problems “in only general terms” and that he understood the matter to be “an accounting issue.”
The committee found that “either Skilling was not nearly as involved in Enron’s business as his reputation--and his own description of his approach to the job--would suggest, or he was deliberately kept in the dark by those involved in the restructuring.”
By February 2001, Enron accountants were providing daily reports of the credit status of at least two of the Raptors to Causey and Buy, according to the internal report.
Tension built through March 2001, according to the report, after executives became aware that Enron would have to take a pretax charge against earnings of about $504 million to reflect the shortfall in credit capacity of Raptors I and III.
Buy, who had not traded any Enron shares since becoming Enron’s chief risk officer in mid-1999, began an intense sell-off Jan. 2, 2001. According to Thomson’s analysis, the 54,874 shares he sold from that date through March 5 of that year are the only shares he has sold since taking that post. The sales netted him an estimated $2.8 million.
For his part, Enron’s since-ousted chairman and chief executive, Kenneth L. Lay, knew of the creation of the Raptors, the internal report said. But investigators said they found no evidence that Lay, who stepped aside as CEO in February 2001 in favor of Skilling, was aware of the entities’ debts and reorganization.
On Aug. 24, 2000, Lay exercised 140,230 options and sold 75,000 shares, netting a $4.09-million profit on the day. On Nov. 1, he settled into a pattern, selling blocks of 1,000 to 4,000 shares almost every day until August 2001.
In hindsight, the committee said, Enron’s top executives, as well as outside advisors including accounting firm Andersen, should have kept closer oversight ofthe Raptors and other partnerships.
“The creation, and especially the subsequent restructuring, of the Raptors was perceived by many within Enron as a triumph of accounting ingenuity by a group of innovative accountants,” the committee report said. “We believe . . . especially after the restructuring, the Raptors were little more than a highly complex accounting construct that was destined to collapse.”
Leeds reported from Houston, Mulligan from New York.
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