ENRON continues...

...1/17/02: (continued) Andersen's work for ENRON has ensnared it in a massive controversy over the accounting profession that led U.S. Securities and Exchange Commission Chairman Harvey Pitt to propose tougher regulatory oversight.

Andersen's lead partner on the ENRON account in Houston, David Duncan, was fired this week after the Big Five accounting firm confirmed he had ordered the destruction of Enron-related documents after the SEC requested the auditor's files as part of its investigation into ENRON. The Justice Department has also launched a criminal investigation.

The firm says Duncan ordered the destruction of the documents, but his attorney says his client did no wrong and was simply following instructions.

Andersen on Thursday confirmed that senior Andersen executives knew of crucial issues surrounding ENRON's debt-laden off-balance sheet partnerships last February. The company confirmed the existence of a Feb. 6 memo recounting the meeting, which it described as an annual review at which the auditor decides whether to keep its clients.

The memo specifically mentions related-party transactions with LJM, one of two partnerships then controlled by Chief Financial Officer Andrew Fastow. Fastow earned $30 million working for the partnerships while maintaining his job as ENRON's top money man. He was ousted after disclosures that the partnerships led to $1.2 billion reduction in shareholder equity.

On Wednesday, congressional investigators revealed that Andersen was warned of trouble at ENRON last summer by an internal whistle-blower. In a conversation with an unidentified Andersen partner, ENRON executive Sherron Watkins raised concerns about accounting problems with the off-balance-sheet partnerships.

Andersen said it was assured by ENRON in August that and outside law firm, Vinson & Elkins, had been hired to investigate Watkins' concerns.

ENRON said it has started looking for a new external auditor.

...1/18/02: With the Enron collapse wiping out at least $1 billion from the retirement funds of teachers, firefighters and other public employees, states are joining a class-action lawsuit to win back some money from the once-giant energy trading company.

Several other states are examining their ties to accounting firm Arthur Andersen, or weighing legal action against it. Florida has already filed subpoenas for a potential civil lawsuit.
We owe it to these public servants to get back as much of their money as we possibly can, Ohio Attorney General Betty Montgomery said. The retirement plans invested in Enron stock, once the darling of Wall Street before the company acknowledged it overstated profits and then went bankrupt.

The retirement of individual public employees - and the funds' financial stability - are not in danger, according to the directors of retirement funds in several states. Losses in each state accounted for just a fraction of a percent of each retirement fund's value.

Attorneys general in Georgia, Ohio and Washington state have asked a federal court in Texas to make them the lead plaintiffs in existing investors' securities fraud litigation. Others seeking to lead the class-action suit include agencies overseeing pension funds in Florida and New York City, and the university pension fund in California.

The U.S. District Court in Houston has yet to decide who will lead the suit; briefs are to be filed next week, according to Russ Willard, a spokesman for Georgia Attorney General Thurbert Baker.

Dozens of attorneys general have been discussing Houston-based Enron Corp. and state retirement funds in conference calls over the last month, according to officials in several attorneys general offices.

An Enron spokesman in Houston did not immediately return a call seeking comment on Friday.
The money lost varies widely - $300 million in Florida retirement funds, $127 million in Georgia, $35 million in Arizona and $50 million in New Mexico.

Rhode Island lost only $4.7 million, after wisely - or luckily - selling all its Enron stock in early August, said Treasurer Paul J. Tavares, the chairman of the state's retirement system.

The lost money, like the $103 million gone in Washington state, needs to be seen in perspective, said James Parker, director of Washington's investment board, where the fund totals $54 billion.

''When the stock market each day goes up and down a half-percent, the change is of the same magnitude,'' he said. ''When the market goes down, OK. But when it happens this way, you want to get it back.''

Like Congress, officials in Texas, Florida and Connecticut are beginning investigations into Andersen's role in the downfall of Enron.

Florida Attorney General Bob Butterworth has already issued civil investigative subpoenas to Andersen and Enron.

The Texas Board of Public Accountancy has initiated an investigation into whether the firm violated state auditing standards.

Connecticut Attorney General Richard Blumenthal is seeking a similar investigation, calling recent allegations against the firm strikingly and surprisingly similar' to a probe into a 1990 real estate investment scam.

In Connecticut, the accountancy board's investigation could lead to the suspension or revocation of the firm's permit to practice in the state.

An Andersen spokesman at the firm's Chicago headquarters did not immediately return a call on Friday. The company said Thursday it retained Enron as a client, despite warnings of problems, because it appeared that we had the appropriate people and processes in place to serve Enron and manage our engagement risks.

...1/20/02: 80-90% of businesses use 401(K) accounts or the stock to fund retirement funds...Lay encouraged employees to buy more stock at an incredible bargain, and that ENRON was fundamentally sound, even though one month earlier Lay had been informed about problems with the company...one worker who had contributed $500,000, now has only $4000!...

...To former Enron (ENE ) CEO Jeffrey K. Skilling, there were two kinds of people in the world: those who got it and those who didn't. "It" was Enron's complex strategy for minting rich profits and returns from a trading and risk-management business built essentially on assets owned by others. Vertically integrated behemoths like ExxonMobil Corp. (XOM ), whose balance sheet was rich with oil reserves, gas stations, and other assets, were dinosaurs to a contemptuous Skilling. "In the old days, people worked for the assets," Skilling mused in an interview last January. "We've turned it around--what we've said is the assets work for the people."

But who looks like Tyrannosaurus Rex now? As Enron Corp. struggles to salvage something from the nation's largest bankruptcy case, filed on Dec. 2, it's clear that the real Enron was a far cry from the nimble "asset light" market maker that Skilling proclaimed. And the financial maneuvering and off-balance-sheet partnerships that he and ex-Chief Financial Officer Andrew S. Fastow perfected to remove everything from telecom fiber to water companies from Enron's debt-heavy balance sheet helped spark the company's implosion. "Jeff's theory was assets were bad, intellectual capital was good," says one former senior executive. Employees readily embraced the rhetoric, the executive says, but they "didn't understand how it was funded."

Neither did many others. Bankers, stock analysts, auditors, and Enron's own board failed to comprehend the risks in this heavily leveraged trading giant. Enron's bankruptcy filings show $13.1 billion in debt for the parent company and an additional $18.1 billion for affiliates. But that doesn't include at least $20 billion more estimated to exist off the balance sheet. Kenneth L. Lay, 59, who had nurtured Skilling, 48, as his successor, sparked the first wave of panic when he revealed in an Oct. 16 conference call with analysts that deals involving partnerships run by his CFO would knock $1.2 billion off shareholder equity. Lay, who had been out of day-to-day management for years, was never able to clearly explain how the partnerships worked or why anyone shouldn't assume the worst--that they were set up to hide Enron's problems, inflate earnings, and personally benefit the executives who managed some of them.

That uncertainty ultimately scuttled Enron's best hope for a rescue: its deal to be acquired by its smaller but healthier rival, Dynegy Inc. (DYN ) Now Enron is frantically seeking a rock-solid banking partner to help maintain some shred of its once-mighty trading empire. Already, 4,000 Enron workers in Houston have lost their jobs. And hundreds of creditors, from banks to telecoms to construction companies, are trying to recover part of the billions they're owed.
From the beginning, Lay had a vision for Enron that went far beyond that of a traditional energy company. When Lay formed Enron from the merger of two pipeline companies in 1985, he understood that deregulation of the business would offer vast new opportunities. To exploit them, he turned to Skilling, then a McKinsey & Co. consultant. Skilling was the chief nuts-and-bolts-operator from 1997 until his departure last summer, and the architect of an increasingly byzantine financial structure. After he abruptly quit in August, citing personal reasons, and his right-hand financier Fastow was ousted Oct. 24, there was no one left to explain it.

Much of the blame for Enron's collapse has focused on the partnerships, but the seeds of its destruction were planted well before the October surprises. According to former insiders and other sources close to Enron, it was already on shaky financial ground from a slew of bad investments, including overseas projects ranging from a water business in England to a power distributor in Brazil. "You make enough billion-dollar mistakes, and they add up," says one source close to Enron's top executives. In June, Standard & Poor's analysts put the company on notice that its underperforming international assets were of growing concern. But S&P, which like BusinessWeek is a unit of The McGraw-Hill companies, ultimately reaffirmed the credit ratings, based on Enron's apparent willingness to sell assets and take other steps.

Behind all the analyses of Enron was the assumption that the core energy business was thriving. It was still growing rapidly, but margins were inevitably coming down as the market matured. "Once that growth slowed, any weakness would start becoming more apparent," says Standard & Poor's Corp. director Todd A. Shipman. "They were not the best at watching their cost." Indeed, the tight risk controls that seemed to work well in the trading business apparently didn't apply to other parts of the company.

Skilling's answer to growing competition in energy trading was to push Enron's innovative techniques into new arenas, everything from broadband to metals, steel, and even advertising time and space. Skilling knew he had to find a way to finance his big growth plans and manage the international problems without killing the company's critical investment-grade credit rating. Without a clever solution, trading partners would flee, or the cost of doing deals would become insurmountable.