Acting CEO Plans Legal Assault Amid Effort to Salvage Enron
Enron Corp. is planning a broad legal assault against those who helped bring the company down, according to acting Chief Executive Stephen Cooper, the corporate rescue artist who was selected three weeks ago to put the company back on the road to solvency.
Cooper said in an interview that the litigation would be extensive and rapid, although he declined to identify specific targets.
“Enron may have causes of action against institutions and individuals that could represent a meaningful asset for the estate,” said Cooper, a principal with Zolfo Cooper, a New York consulting firm that specializes in corporate restructuring. “I think you will see something sooner as opposed to later.”
The players were many in what has become a lurid corporate morality play, and all are potential defendants.
Enron filed the largest Chapter 11 bankruptcy in U.S. history Dec. 2, following a series of damaging disclosures of questionable transactions with partnerships controlled by company employees. The nation’s seventh-largest company collapsed less than seven weeks after it disclosed losses tied to the off-the-books partnerships, wiping out billions of dollars in investor wealth and more than 6,000 jobs.
An internal investigation by three Enron directors determined that abuses in accounting of partnership transactions masked at least $1 billion in recent losses, while a few company employees reaped millions of dollars in personal profits. Directors and executives, including former Chairman Kenneth L. Lay and former Chief Executive Jeffrey K. Skilling, failed to curb the missteps of subordinates, the report concluded. It also pointed to poor advice from Andersen, Enron’s auditor, and Vinson & Elkins, one of its outside law firms.
Still Sorting Out All the Issues
Cooper, who occupies Skilling’s old office on the 50th floor of Enron’s mirrored office tower in downtown Houston, said the company has not asked any former employees to repay the millions of dollars they earned from partnership transactions. That would include former Chief Financial Officer Andrew S. Fastow, former Enron Global Finance executive Michael Kopper and former Treasurer Ben F. Glisan.
“I think that the recovery vehicle in the main will be litigation,” Cooper said.
Cooper and his team are still “sorting out issues” related to Enron’s financial statements and the value of its trading book, the contracts that were not included in the recent sale of its energy trading operation. Since Enron filed for Bankruptcy Court protection, the value of those contracts has eroded to about $1 billion from about $7 billion.
“I certainly don’t believe at this particular point in time that anybody is engaging in transactions that aren’t completely above board,” Cooper said. “We will be presenting to the creditors committee on a regular basis our financial statements, which I believe, in the main, will be accurate.” Enron has not yet hired a new auditor to replace Andersen, which it fired.
Enron already has filed a $10-billion lawsuit against Dynegy Inc. alleging that its cross-town rival withdrew from a proposed merger with Enron in late November as part of a plan to wreck the ailing company. Dynegy has said it pulled out of the merger because Enron misrepresented the depths of its financial problems and lost its investment-grade credit rating.
The Enron that Cooper envisions will look much different from the market-dominating energy trader that Lay and Skilling built. The name will change, and the company will focus on its natural gas pipelines and power plants--the kind of hard assets Skilling said he disdained.
Cooper’s style, too, is unlike Lay’s grandfatherly and professorial demeanor and Skilling’s hard-driving image. Cooper insists on being called by his first name and dresses casually at the office, complete with baseball cap. He hasn’t decorated Skilling’s wood-paneled, deadbolted office.
To keep up employee morale, Cooper said he visits workers in response to e-mail and sends out weekly, unscripted voicemail updates. An all-employee meeting will be held soon, he said.
Enron’s overhaul is well underway.
Enron has agreed reluctantly to turn over to Dynegy its biggest pipeline, 16,500-mile Northern Natural Gas, which was a condition of the $1.5 billion that Dynegy invested in Enron as part of the aborted merger. Enron also recently gave away its vaunted energy-trading operation to New York investment banking firm UBS Warburg in a no-cash deal that would supply Enron with a cut of any future profit.
What remains is an assortment of smaller natural gas pipelines, including one that runs from Texas to California, and electricity generating plants. Enron has announced plans to shut down its remaining telecommunications operations and to unload Portland General, its Oregon utility, as well as many of the international power plants and other assets whose poor performance helped sink the company.
Cooper declined to detail which assets he is thinking of unloading because “we haven’t settled on a final configuration yet. But it will be substantially smaller by way of reported revenue than the old Enron.
“The company, if you remove the trading from the rest of the business, it’s actually got a very good, very solid, very revenue- and cash-flow- and earnings-predictable business, which is really its power and pipes business,” Cooper said. “So in my view, there is an eminently reorganizable entity here.”
‘Not Going to Wallow and Linger’
Cooper expects to present “a fairly on-point direction” for reorganization to its creditors committee in the second quarter and to have settled on a new version of the company within a year.
“We’re going to move this process forward very quickly. We’re not going to wallow and linger in Chapter 11 for a day longer than we have to.”
Although many have speculated that Enron will never emerge from bankruptcy and will instead be carved up and sold, Cooper said he is “not of that mind,” adding that in his 30-year career of reorganizing companies he has seen only a few instances in which liquidation made more sense for creditors than reorganizing the ongoing business. Those cases all involved substantial amounts of valuable real estate, he said.
Enron has a bit of that. Although it leases its Houston headquarters, Enron is building a tower nearly as tall next door. It has received $40 million in debtor financing to complete and sell that project.
Cooper flatly states that he is not interested in doing a post-mortem on Enron, but he did acknowledge the “very labor-intensive” process of sorting through “hundreds upon hundreds” of so-called special purpose entities, which are financial vehicles commonly used by corporations to finance projects separate from the company’s balance sheet and for other legitimate purposes, such as a sale and lease-back of a building.
Lawyers and accountants are examining the entities to determine the extent of Enron’s liabilities and the economic value to Enron of each vehicle, he said. A team of about 10 Zolfo Cooper employees, an unusually large number, is being assigned to Enron, Cooper said.
“There’s a difference between were the partnerships legitimate or not versus were they accounted for properly or not. Both of these are being looked at. We’ll just have to wait to see what the attorneys say as that gets sorted out,” Cooper said.
Special purpose entities “are not good or bad, they’re just instruments or vehicles which provide companies with financial flexibility to better manage their business, to better manage their balance sheet to fit the needs of their business,” Cooper said.
“The Enron phenomenon was the failure to transfer economic risk [from Enron to the partnerships] and the failure to disclose and the suspension of the corporate code of ethics and conduct that allowed people to get into a position where they had divided loyalties” by working for both Enron and the partnerships, he said.
“What we saw here was a case where they weren’t constructed properly, they weren’t reported properly and by allowing someone to be on both sides of the transaction, you couldn’t have really an arm’s-length transaction. It’s kind of like having you negotiate both sides of a prenuptial agreement.”
Despite its size, the Enron reorganization is much like every other he has handled, Cooper said. Those included Federated Department Stores Inc., Polaroid Corp. and Malden Mills.
Unique to Enron, however, is the furor surrounding the rapid and stunning collapse of the business, Cooper said.
“It’s become an enormous lightning rod for not only the upset of people directly involved in the company, but it’s become a lightning rod to coalesce all of these other national interests” involving such issues as accounting and corporate governance, Cooper said.
“I hope people will be able to relax and calm down and look at this as an opportunity for a fresh start for our external economic constituencies, a fresh start by way of an investment and a fresh start for our employees,” Cooper said.
“It’s sort of like when your car breaks down and you’re in the middle of nowhere and you end up hating the car. You’re kicking the tires. You’re kicking the bumpers. After you get over it, you realize that it’s still a good car. You get the tire or whatever fixed and you just keep going.”
