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Independent Enron Examiner to Be Named

Probe: Bankruptcy Court judge's unusual order gives an investigator broad powers in the case.

April 10, 2002|THOMAS S. MULLIGAN | TIMES STAFF WRITER

NEW YORK — In a rare action, the federal bankruptcy judge in the Enron Corp. case on Tuesday ordered the hiring of an independent examiner with sweeping powers to investigate the off-balance-sheet transactions and accounting irregularities that helped bring down the company.

The order by Judge Arthur J. Gonzalez was an acknowledgement that the case is so complex and so rife with conflict-of-interest allegations that it requires an outsider without ties to any of the warring parties, said Alistaire Bambach, a lawyer for the Securities and Exchange Commission.

Under a compromise reached last week among Enron, the SEC and a Florida state pension plan, Gonzalez stopped short of naming a trustee to take over management of the crippled firm as well as to conduct the investigation and any litigation that arises from it.

Instead, the examiner will run the inquiry, while corporate turnaround specialist Stephen F. Cooper continues as Enron's chief executive. Cooper's employment, at an annual salary of $1.32 million, was approved Thursday after the SEC and the Florida plan dropped their objections.

The examiner will be named, perhaps as early as this week, by a court official, subject to Gonzalez's approval. Parties to the case will submit names of candidates, said Bambach, a lawyer in the Manhattan regional office who represents the SEC's enforcement division in the bankruptcy.

The order gives the examiner 120 days to file a preliminary report. Bambach said the full investigation probably will take much longer.

As outlined in Gonzalez's five-page order, the probe will focus on Enron's controversial "special purpose entities," partnerships allegedly designed to boost company profits while concealing debt; transactions that were hedged, or backed up, by Enron stock; accounting irregularities; and deals under which Enron assets may have been improperly transferred before the Dec. 2 bankruptcy filing.

Some creditors have alleged that $55 million in retention bonuses paid out to Enron executives just days before the bankruptcy filing constituted such a "fraudulent conveyance" of company assets.

Gonzalez's order requires Enron to provide "all documents and information that the [examiner] deems relevant" and leaves open the possibility that the investigation could be expanded.

"That is very broad access to information," said Lynn M. LoPucki, a UCLA bankruptcy-law professor. Normally, bankruptcy examiners must obtain specific court orders for information, but this arrangement allows the examiner to demand material without returning to court.

Moreover, the order gives the examiner power to waive attorney-client privilege, meaning that the examiner may request copies of pre-bankruptcy communications between Enron employees and their lawyers.

"If you want to know what advice counsel gave Enron, you can ask," Bambach said, adding: "This could subject professionals who advised Enron to liability."

Normally, the attorney-client privilege waiver is reserved for bankruptcy trustees, not examiners, Bambach said.

Enron, through its bankruptcy lawyers, hailed the judge's order. It "provides creditors, Enron and Enron's shareholders with the best of all worlds," said Martin J. Bienenstock of Manhattan law firm Weil, Gotshal & Manges.

"It allows the company to be run by Stephen Cooper, the creditors' choice, without disruption so the reorganization can be completed in the shortest possible time," Bienenstock added.

The Florida pension plan, which lost $334 million on Enron investments, and some other creditors had pushed for a trustee, arguing that members of the official creditors' committee were reluctant to probe Enron for fear of bringing attention to their own roles in its collapse.

J.P. Morgan Chase and Citigroup, for example, both members of the official creditors' committee, this week were named as defendants along with seven other banks and securities firms in a massive lawsuit that accuses the banks of helping Enron to defraud investors of $25 billion.

Also Tuesday, former New York City Comptroller Harrison J. Goldin--who was named examiner last month in a separate, more limited part of the Enron bankruptcy case--reported finding no evidence that Enron has improperly transferred money out of Enron North America, its energy-trading subsidiary, since the bankruptcy filing.

Separately, Enron vice president Sherron Watkins, who has testified that she tried to warn company executives about the financial threats the firm faced, asked the bankruptcy court to order the company to pay $235,000 for legal advice she has received.

Jeffrey K. Skilling, Enron's former chief executive, also asked the court for legal fees, although his motion, filed Tuesday night, does not specify the amount sought.

Skilling, who is represented by the law firm of O'Melveny & Myers, argued that present and former executives of Enron are the proper beneficiaries of insurance policies that the company purchased to protect its officers.

He said appropriate legal fees should be paid for those named in the policy without regard to their circumstances.

Along with former Enron Chairman Kenneth L. Lay, Skilling has been excoriated for having cashed out tens of millions of dollars worth of Enron stock before the company's collapse.

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