A report from a special committee of Enron Corp.’s board concluded Saturday that executives intentionally manipulated profits, inflating them by almost $1 billion in the year before the company’s collapse through byzantine dealings with partnerships.
The 217-page report describes the failure of controls and ethics at almost every level of the Houston-based energy company. It was issued in advance of testimony in Congress this week by Enron’s top executives, and during criminal and regulatory investigations into what has emerged as one of the landmark business scandals.
As oversight broke down at Enron, the report states, a culture emerged of self-dealing and self-enrichment at the expense of shareholders. The report is also critical of Enron’s accounting firm, Andersen, and its lawyers, saying they signed off on flawed and improper decisions at every step.
What emerged at Enron, as described in the report, was a culture of deception, where every effort was made to manipulate the rules and disguise the truth.
When ownership of a particular partnership stake would have triggered legal requirements, the holdings were put in the name of a domestic partner of one executive; in another instance, suggestions were made for stakes to be owned in the name of one executive’s wife. Money was siphoned back and forth between multiple entities, disguising its true ownership and, in turn, providing false information about the financial state of Enron.
At bottom, the report makes clear, the company failed to properly follow the dictates of the federal securities laws, and its executives engaged in numerous acts to deceive investors, directors and, in some cases, each other.
Report rattles board
The report was reviewed Saturday by the full Enron board at a meeting at the New York City offices of Weil, Gotshal & Manges, the company’s bankruptcy lawyers.
As the tales of deception and manipulation unfolded, the directors responded with rising anger, said witnesses.
“The board was clearly very upset,” said Thomas Roberts, a partner with Weil, Gotshal.
According to the report, Enron entered into transactions with the partnerships controlled by the company’s former chief financial officer, Andrew Fastow, that served no economic purpose other than to manipulate reported profits. An independent third party would never have entered into such dealings, the committee concluded.
Among those cited in the report for failures were Kenneth Lay, Enron’s longtime chairman and chief executive, and Jeffrey Skilling, who was president and then chief executive before resigning abruptly in August.
Both men were condemned for setting up a system in which Fastow would work as chief financial officer of Enron and as general partner of the partnerships — putting him on both sides of each transaction — without ensuring that there was appropriate oversight.
Lay “bears significant responsibility for . . . Enron’s failure to implement sufficiently rigorous procedural controls to prevent the abuses that flowed from this inherent conflict of interest,” the report states.
Earl J. Silbert, a lawyer for Lay, did not return phone calls.
The report is far more damning of Skilling, saying he “certainly knew or should have known of the magnitude and the risks associated with these transactions.”
March 2000 warning
According to the report, Skilling was warned in March 2000 by Enron’s treasurer, Jeffrey McMahon, that there was reason for strong concern about the Fastow partnerships. “It appears Skilling did not take action,” the report states.
McMahon was named president of Enron last month.
The report states that the committee obtained information showing that Skilling participated in efforts to disguise Enron’s true performance and hid those efforts from the board.
A spokeswoman for Skilling said: “We believe the report bears out what Mr. Skilling has been saying for months. Mr. Skilling was not involved in any improprieties.”
C.E. Andrews, global managing partner at Andersen, said in a statement that “the report overlooks the fundamental problem: the fact that poor business decisions on the part of Enron executives and its board ultimately brought the company down.”
“This report fits Enron’s established pattern of the last several months of attempting to shift blame to others.”
The strongest criticism in the report is reserved for Fastow, who is described as having ultimately deceived the company and its directors as part of an effort to enrich himself.
The report was filed with the federal Bankruptcy Court in New York that is overseeing Enron’s bankruptcy case.
Gordon Andrew, a spokesman for Fastow, declined comment.
The committee, headed by William C. Powers Jr. of the University of Texas law school, was appointed in the wake of Enron’s disclosure of its dealing with the partnerships.
