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Enron Hid Losses, Ex-Worker Says

Energy: Manager warned executives $500-million deficit was attributed to another unit to create illusion of profit.

January 25, 2002|LEE ROMNEY and WALTER HAMILTON | TIMES STAFF WRITERS

A former Enron Corp. manager warned top company brass in August that more than $500 million in losses from the firm's energy services unit were being hidden in another division so the unit could misleadingly report profit to Wall Street, a copy of her e-mail reveals.

The allegations by former employee Margaret Ceconi were made in an Aug. 29 e-mail to Chairman Kenneth L. Lay, who Wednesday resigned from the empire he built.

Ceconi's e-mail apparently wasn't connected to another whistle-blower memo sent by Vice President Sherron S. Watkins to Lay in mid-August.

Although Watkins warned that losses hidden in off-balance-sheet partnerships could cause Enron to "implode in a wave of accounting scandals," Ceconi's concerns focused on the juggling of losses within Enron units. A copy of her e-mail was obtained by The Times.

According to Ceconi, whose allegations were reported Thursday in the Houston Chronicle, losses of more than $500 million were transferred from Enron Energy Services to Enron Wholesale Services--the firm's lucrative trading unit--in a financial sleight of hand to deceive investors and analysts.

Until last spring, the energy services unit was co-headed by Thomas E. White Jr., who now is Army Secretary. He could not be reached for comment Thursday.

"EES has knowingly misrepresented EES' earnings," Ceconi wrote. "This is common knowledge among all the EES employees, and is actually joked about. But it should be taken seriously."

Ceconi wrote the e-mail--a rambling memo in which she lashes out at Enron management--after she was fired from EES. She complains in the memo that she was "fraudulently" recruited with misleading information about EES and then unfairly let go.

Enron spokesman Mark Palmer could not be reached Thursday. In the Chronicle he characterized Ceconi as a "disgruntled" employee, but would not comment on the specifics of her memo.

Ceconi could not be reached for comment. But her attorney, Demetrios Anaipakos, said her concerns about the accounting practices outweighed her personal beefs with Enron. "She felt that EES was being portrayed as a money-making operation when it was exactly the opposite," he said.

EES provided energy services to commercial and industrial firms, promising them predictable long-term energy supplies and improved energy efficiency. Enron touted the unit as having huge growth potential.

According to a filing with the Securities and Exchange Commission, Enron revamped the EES unit last year, moving some commodity "risk-management activities" to the Wholesale unit.

As part of the restructuring, Enron restated its second-quarter 2000 results for EES. Originally, the unit had revenue of $840 million and operating income of $24 million. After the restatement, revenue was cut in half to $420 million, but profit almost doubled to $46 million.

The restructuring could have been "an attempt to move a money-losing operation into a segment that was more profitable," said Randy Beatty, dean of the accounting school at USC, who reviewed the SEC document for The Times.

Some analysts said Enron repeatedly restructured operations to boost the financial results of individual units. "They kept restructuring the business segments so they could shift earnings from one section to another," said Prudential Securities analyst Carol Coale.

Accounting experts said companies can freely restructure their operations, thus altering the reporting of profits and losses. But, said William Kinney, an accounting professor at the University of Texas in Austin, such reorganizations should be done for valid business purposes, not just to "move things around."

"It's subject to abuse if you're trying to hide bad performance," Kinney said. But proving intent is difficult, he said.

Anaipakos said Ceconi, who left a senior job at GE Capital to join Enron in late 2000, received a call from someone in human resources after she sent the e-mail. "She was told her allegations were being taken seriously, [but] I can say she never heard from them again," he said.

Ceconi, now employed by a Houston consulting firm, also contacted the SEC by phone twice in August and September to voice her concerns, Anaipakos said.

"Some would say the house of cards [is] falling," Ceconi wrote in the e-mail to Lay, which also complained of favoritism and discrimination at the company.

"You have to decide the moral or ethical things to do, to right the wrongs of your various management teams. I wish you luck."

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