Advertisement

THE FALL OF ENRON

Internal Report Cites Extensive Abuse at Enron

Review: Panel puts the blame for the firm's collapse squarely on corporate management, accounting firm, lawyers and the board itself for inadequate oversight.

February 03, 2002|WALTER HAMILTON and JEFF LEEDS | TIMES STAFF WRITERS

NEW YORK — 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.

Advertisement
Los Angeles Times Articles
|
|
|