Examiner to Probe Enron Subsidiary
Hoping to resolve a simmering dispute among Enron Corp. creditors, a U.S. Bankruptcy Court judge said Thursday that he will appoint an independent examiner to review the company’s largest subsidiary.
The examiner will study the finances of Enron North America Corp., an apparently profitable unit that included Enron’s once-formidable energy-trading operation.
Creditors have clashed over the management of Enron NA and the possible payouts it could generate. The confrontation could have major implications for the future of Enron and for the bankruptcy case.
Energy companies that traded with Enron NA say they should be repaid directly from the unit’s assets, which some estimates put as high as $10 billion. The energy firms worry that the parent is siphoning cash from Enron NA, dissipating their potential recovery.
From Dec. 2--the day of Enron’s bankruptcy filing--through Jan. 23, Enron NA generated $579 million in cash flow, said Rhett Campbell, an attorney at Thompson & Knight in Houston who represents 25 energy firms. That money was funneled to the parent company, which issued the unit a promissory note, Campbell said. As of Jan. 23, Enron had spent $250 million of that cash, he said.
The energy companies asked Judge Arthur J. Gonzalez to bar the parent firm from dipping into the unit’s cash flow. Gonzalez refused to grant that request. Instead, he said he would name an examiner who will compile a report on Enron NA’s finances within 20 days of being appointed.
A lawyer for the energy companies praised the judge’s ruling. “It’ll help build a situation that protects our interests,” said David Bennett, a Thompson & Knight attorney. The appointment of an examiner is “the next best thing” to stopping the flow of cash to the parent, he said.
The energy companies’ request was opposed by the official committee of unsecured Enron creditors, which is composed primarily of financial firms. Instead, the official committee proposed “a few modest remedies” to protect Enron NA’s assets, Campbell said.
Luc Despins, an attorney representing the creditor committee, refused comment after the hearing.
Thursday’s action could be the opening salvo in a larger conflict between the creditors. Among other requests, the energy firms have asked to have a trustee appointed to oversee Enron NA’s operations. If granted, that could significantly affect the way Stephen Cooper, Enron’s acting chief executive, attempts to restructure the company.
Also Thursday, Rep. Henry Waxman (D-Los Angeles) released details of a 1999 videotaped meeting with employees in which Enron executives urged employees to invest all of their 401(k) retirement money in Enron stock.
During an appearance before a House panel last week, Enron human resources vice president Cindy Olson testified that the company wanted to talk to employees about diversifying their investments, but didn’t want to cross a “fine line” by giving workers investment advice.
But the videotape shows a woman named “Cindy”--who appears to be Olson--telling employees they should “absolutely” invest all their 401(k) money in Enron stock, Waxman said in a letter to Sen. Joseph Lieberman, D-Conn., chair of the Senate Governmental Affairs Committee.
Waxman said former Enron president Jeffrey Skilling can be seen nodding in agreement.
Waxman noted that Olson, who could not be reached for comment, sold over $1 million of Enron stock on Feb. 16, 2000--less than three months after the meeting took place.
In another development Thursday, Vanity Fair magazine asserted that Enron’s concealment of losses dated at least to 1987, far earlier than previously disclosed, and was brought to the attention of former Chairman Kenneth L. Lay.
In an article, the magazine said the concealment dated to a rogue, fraudulent trading operation within a former Enron unit known as Enron Oil Co., which led to losses of $185 million and the imprisonment of the unit’s former president, Louis Borget.
Confronted with evidence of the fraud, which was turned up by Enron internal investigators and the accounting firm Andersen in 1987, Lay rejected their advice to fire Borget and another executive, Vanity Fair said, citing an unnamed former Enron auditor and other sources.
The magazine quoted former Enron accountant Jan Avery as saying that she and other auditors were pushed to use accounting gimmickry to cover up debts and losses. That practice with special Enron partnerships finally exploded into scandal last fall and drove the firm into bankruptcy.
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Times staff writer Thomas S. Mulligan contributed.
