A report released Saturday evening on the collapse of Enron Corp. sheds tremendous new light on the questionable financing arrangements that ultimately led to the company's December bankruptcy, and confirms a story first reported by Salon on how the company's controversial shell partnerships grew to resemble get-rich schemes, where $6,000 investments quickly ballooned into $1 million payoffs.
The 218-page report -- conducted by the Enron board's special investigation committee formed on Oct. 28 and headed by University of Texas Law School dean William Powers Jr. -- details "the tragic consequences" of the complicated partnerships and "accounting errors" which, the report concludes, "were the result of failures at many levels and by many people: a flawed idea, self-enrichment by employees, inadequately designed controls, poor implementation, inattentive oversight, simple (and not-so-simple) accounting mistakes, and overreaching in a culture that appears to have encouraged pushing the limits."
The dealings led Enron to overestimate its worth by almost $1 billion, ultimately resulting in the collapse of what was once the nation's 7th largest company.
Salon reported last week that, according to four current or former Enron executives, two former Enron employees -- then-treasurer Ben Glisan and then-vice president Kristina Mordaunt -- invested approximately $6,000 in one of the company's controversial partnerships and made $1 million apiece. The Enron investigation confirms this report, and elaborates on the complex web of financial dealings that set the stage for their windfall investments -- which some former Enron executives compared to bribes.
"Our review indicates that many of those consequences could and should have been avoided," the report states. It faults former CEO Ken Lay, former chief executive Jeff Skilling, former chief financial officer Andrew Fastow, the Enron board of directors, and accounting firm Arthur Andersen LLP. Fastow, Glisan and former Fastow deputy Michael Kopper "declined to be interviewed either entirely or with respect to most issues," the report states.
At one point, the report refers to financial chicanery that benefited specific individuals. "Enron enployees involved in the partnerships were enriched, in the aggregate, by tens of millions of dollars they should never have received."
According to the report, Fastow offered interests in one partnership "to Kopper and four other Enron employees. These investments, in a partnership called 'Southampton Place,' provided spectacular returns. In exchange for a $25,000 investment, Fastow received (through a family foundation) $4.5 million in approximately two months. Two other employees, who each invested $5,800, each received $1 million in the same time period."
The "two other employees" are Glisan and Mordaunt, who were fired from Enron in November 2001 when an internal investigation discovered their investments in LJM -- one of the most controversial partnerships set up by Fastow.
From September 1999 until Fastow sold his interest in another partnership, LJM2, to Kopper in July 2001, Enron and the LJM partnerships engaged in almost 20 transactions. Many of the transactions, the review states, "call into question the legitimacy of the sales themselves and the manner in which Enron accounted for the transactions." For example, the LJM partnerships seemed to turn a profit on every transaction, even when the asset it had purchased appears to have declined in market value. Moreover, Enron sold assets to the LJM partnerships that the company either could not -- or would not -- sell to other buyers.
In many if not all of these transactions, the problem of Fastow's conflict of interests reared its head in alarming ways. He seemed to either influence, or possibly orchestrate, deals between Enron and the partnerships that appeared to exist only to skim money from Enron and enrich the partnerships.
At the end of 1999, for example, Enron decided it wanted to sell certificates it had purchased from a trust called Yosemite for $37.5 million. Enron employees in charge of the certificates offered the certificates to LJM2, under the impression that they had to do so. LJM2 insisted on a fee of at least $1 million to purchase the certificates before it re-sold them to another Enron partnership called Condor. The Enron employees offered $100,000.
"Fastow then called one of the employees to complain that he was negotiating too hard about the fee, and that he was holding up a transaction that was important for Enron to complete before year-end," the report states. The Enron employee went to his supervisor, Jeff McMahon, the current treasurer of the company. McMahon told the review committee that "he confronted Fastow about pressuring the employee," after which "LJM2 retreated" and accepted the $100,000 offer.
And what was LJM2 being paid for anyway? Condor loaned LJM2 $35 million. With that money, LJM2 bought the Yosemite certificates from Enron and then sold them to Condor. With that sale, Condor's loan to LJM2 was then repaid. As the report states: "In other words, Condor bought the certificates from Yosemite, with the money and certificates passing ever so briefly--through LJM2. For that, LJM2 earned $100,000 plus expenses."
The deck therefore appeared to be stacked, with Fastow playing executive roles in both Enron and the partnerships. The committee pinpointed at least 13 transactions "between Enron and LJM2 in which the individuals negotiating on behalf of Enron reported directly or indirectly to Fastow."
According to the report, Fastow "placed his own personal interests and those of the LJM partnerships ahead of Enron's interests," and "failed to disclose" to Enron's board of directors "important information it was entitled to receive."
Glisan, too, was faulted for conflicts of interest. Glisan "was a principal hands-on Enron participant in two transactions that ultimately required restatements of earnings and equity," the report states, referring to two partnerships named Chewco and Raptor. The report states that there "is substantial evidence" that Glisan knew that "Chewco failed to comply" with certain accounting requirements and that he made accounting judgments that "went well beyond the aggressive."
Former chief executive Skilling told the investigative committee that he remembered Fastow "proposing that the Chewco outside investors be members of Fastow's wife's family." Skilling told Fastow that "he did not think that was a good idea." Some Chewco management duties appear "to have been performed by Fastow's wife, who had previously worked in Enron's finance group," though the review board could not determine "if she received compensation for performing these services."
Not that she would need to. The committee says that Fastow's partnership capital increased by more than $31 million in 1999 and 2000, and that he received $18.7 million in 2000.
The report also sheds light on the involvement of individuals like Mordaunt and Glisan, saying Fastow "used his position in Enron to influence (or attempt to influence) Enron employees who were engaging in transactions on Enron's behalf with the LJM partnerships," a nicely-termed phrase for what one former Enron executive told Salon: "To many employees at Enron, this looks and smells like a bribe," the former employee said. "'I' - Fastow - 'will give you money, you shut up.' Or put another way, 'Here is the payoff for helping me set up the structures that helped me rake in more than $30 million.'"
The two weren't merely "Enron executives," the former employee says, "they were the treasurer and one of the top lawyers in the company. And both of them worked on LJM-related deals. That is what makes it sickening."
The committee's report indicates its members believe that Fastow, Glisan, Mordaunt and others violated Enron's Code of Conduct, which says that no full-time officer or employee should "[o]wn an interest in or participate, directly or indirectly, in the profits of any other entity which does business with or is a competitor of" Enron unless that arrangement has been OK'd in writing by the Chairman of the Board and Chief Executive Officer.
"We have seen no evidence that Fastow or any of these employees obtained clearance for those investments, as required by Enron's Code of Conduct," the report states. The report notes that Fastow was apparently given permission to participate in the shell partnerships, but "this arrangement was fundamentally flawed."
The investigation confirms Salon's earlier report that other Enron executives were stunned to learn of the windfall profits being earned by their friends and colleagues. "Unbeknownst to virtually everyone at Enron, several Enron employees had obtained, in March 2000, financial interests" in one of the partnerships, the report states, naming Fastow, Kopper, Glisan, Mordaunt and two other employees of the Finance division, Kathy Lynn and Anne Yaeger Patel.
"At or around the time they were benefiting from LJM1, these employees were all involved in one or more transactions between Enron and LJM2. Glisan and Mordaunt were involved on Enron's side," the report states. While every violation of office Code of Conduct should be taken seriously, "these violations are particularly troubling," the report states.
In a partnership called Southampton Place, L.P., Fastow invested $25,000 as the director of the Fastow Family Foundation. Kopper invested $25,000 as a member of Big Doe, LLC. Mordaunt and Glisan invested $5,800 apiece. Lynn, Yaeger Patel and an LJM2 employee named Michael Hinds invested a total of $70,000.
From this deal, Fastow made $4.5 million. Glisan and Mordaunt told the investigating committee that "in return for their small investments, they each received approximately $1 million within a matter of one or two months, an extraordinary return. Mordaunt told us that she got no explanation from Kopper for the size of this return."
For their part of the deal, Lynn, Yaeger Patel and Hinds scored "at least in the hundreds of thousands of dollars."
At the time, Fastow and others involved in the deals wanted to avoid disclosing their compensation -- an arrangement apparently signed off on by Enron's in-house attorneys, its lawyers at Vinson & Elkins, and senior management. For the 2000 statements, Jordan Mintz, then the general counsel of Enron Global Finance, found a loophole in regulatory language that justified not disclosing Fastow's compensation from the partnerships. Mintz wrote that the "decision not to disclose in this instance was a close call; arguably, the more conservative approach would have been to disclose." That Fastow worked to keep his compensation from the LJM partnerships from being disclosed, "should have raised red flags for Senior Management, as well as for Enron's outside auditors and lawyers," the report stated. "Unfortunately, it apparently did not."
For subsequent disclosure statements, Mintz suggested to Fastow that he would have to disclose. As Salon first reported, in May 2001, Mintz secretly hired an outside law firm -- Fried, Frank, Harris, Shriver & Jacobson -- to examine Enron's relationship with the partnerships. A June 2001 memo from Fried Frank around that time raised questions concerning Fastow's disclosures. "[W]e would consider supplementing the prior disclosures, where it is possible to do so," Fried Frank wrote, "especially on such points as the purpose of the specific transactions entered into and the 'bottom-line' financial impact on the Company and the LJM partners."
In July, Fastow sold his shares in the partnerships to Kopper. On Aug. 14, Skilling resigned. On Oct. 24, Fastow was placed on leave. In November, Glisan and Mordaunt were fired.
At least one of these individuals expressed regret to the committee for her decision to get involved in this mess. "Mordaunt says that Kopper assured her that LJM1 was not doing any new business with Enron," the report states, so therefore she didn't think anything was wrong with investing in the partnership.. The report also noted that Mordaunt "suggested, with the benefit of hindsight, that this judgment was wrong and that she did not consider the issue carefully enough at the time." When news of the partnerships came out in Oct. 2001, "Mordaunt voluntarily disclosed the fact of her investment to Enron."
Glisan told the review board that he asked the law firm Kirkland & Ellis, which LJM1 had retained as outside counsel, if his investment would be viewed as a related-party transaction with Enron, which was not allowed. Glisan, the report states, "was told that it would not."
Auditor Arthur Andersen's role was also criticized by the report. Though some auditors were concerned about these partnerships, the report states, "there is no evidence that Andersen raised concerns about LJM" with company executives.
Company executives, inlcuding former chief executive Skilling, pleaded ignorance of chicanery throughout the investigation. "Skilling said he was aware that Kopper had a managerial role in Chewco, but not that Kopper had a financial interest," one footnote states, skeptically adding that while Skilling says he remembered disclosing this to the board of directors, "we found no other evidence that he did."
Also, while "Skilling said he would keep Lay apprised of major issues" having to do with the partnerships, he apparently never did. Lay "bears significant responsibility for those flawed decisions, as well as for Enron's failure to implement sufficiently rigorous procedural controls to prevent the abuses that flowed from this inherent conflict of interest," the committee concludes.
Lay was supposed to testify Monday morning before the Senate Commerce Committee's consumer affairs subcommittee, chaired by Sen. Byron Dorgan, D-N.D. But Lay withdrew Sunday on the advice of his lawyer, who complained of the "prosecutorial" tone of the hearings. Monday afternoon, a House Financial Services subcommittee on capital markets hearing will feature University of Texas's Powers, the law school dean who headed this internal Enron investigation, as well as Harvey Pitt, the chairman of the Securities and Exchange Commission.
Washington's Enron-a-rama will continue Tuesday morning, when the House Energy and Commerce committee hears from Powers. On Thursday, the House Energy and Commerce Committee is scheduled to hear the testimony of Enron attorney Mintz. Other hearings will be held throughout the week, including one by the Senate Governmental Affairs Committee, one by the Senate Judiciary Committee, and one by the Senate Health, Education, Labor, and Pensions Committee.