Enron Corp.’s former top two executives as well as former directors, accountants and inside and outside attorneys are in “a circle of responsibility for Enron’s financial demise” whether or not they are legally culpable, the bankruptcy court-appointed examiner concluded.
In his fourth and final report made public Monday, Neal Batson said sufficient evidence exists to prove former Enron chairman Kenneth Lay and former chief executive Jeffrey Skilling failed to adequately oversee Enron’s use of financing methods to hide debt and inflate profits, which ultimately led to the energy company’s collapse.
The 1,134-page report said “they failed to respond appropriately to the existence of ’red flags’ indicating that certain senior officers” were misusing such transactions to distribute inaccurate financial statements.
The report, which culminates a 19-month investigation that has cost more than $85 million, also said Lay and Skilling neglected to sufficiently examine deals that involved partnerships once run by former Enron finance chief Andrew Fastow, who faces 98 charges of money laundering, fraud, insider trading and other counts. Fastow has pleaded innocent and is slated for trial in April next year.
Neither Lay nor Skilling has been charged with any crimes, and both have consistently maintained they were unaware of any financial skullduggery.
Lay resigned about seven weeks after Enron went bankrupt in December 2001. Skilling resigned abruptly more than three months before the company failed, citing personal reasons.
Batson said the company could seek to force Lay and Skilling to repay millions of dollars in loans and spread that cash among creditors because the loans weren’t approved by the entire board.
From May 1999 through October 2001, Lay borrowed $94 million from Enron and repaid it with company stock, the report said. In May 1999 Skilling repaid $2 million in loans with stock. Only the board’s compensation committee allowed both to repay loans with stock, the report said.
“I am highly encouraged,” said Michael Ramsey, one of Lay’s attorneys. “There is no allegation of crime, no claim of intentional wrongdoing, and no assertion of fraud on the part of Ken Lay. After a nearly $100 million investigation, the bankruptcy examiner suggests only negligence, which we strongly deny.”
Skilling’s attorney, Bruce Hiler didn’t immediately return a call for comment. Enron spokesman Eric Thode declined to comment on Batson’s report.
Batson said Enron’s culture drove officers to manipulate finances to pump up the stock price and ensure fat bonuses for meeting earnings targets — but they had plenty of help.
Outside accountants at Arthur Andersen LLP — convicted last year of obstruction of justice for destroying Enron-related documents — helped design accounting techniques to beautify Enron’s books and failed to closely examine some deals, the report said.
Former Andersen accountants told Batson’s investigators Enron often hid crucial facts that would have prompted the firm to block some deals, such as secret side agreements to buy back assets ostensibly “sold” to third parties.
“This is a clear-cut, simple case of Enron executives deceiving Andersen auditors at every turn,” said Andersen spokesman Patrick Dorton.
Outside attorneys at Vinson & Elkins and others approved questionable deals that Enron used to book earnings or hide debt. Vinson & Elkins also allowed the company to avoid disclosing Fastow’s interest in partnerships that did deals with Enron. Fastow pocketed more than $45 million from those ventures.
Harry Reasoner, a spokesman for Vinson & Elkins, called Batson’s report a “mishmash of facts” and said the firm can demonstrate that it met its professional obligations. Regarding Fastow’s partnership interest, he said the firm advised that Enron could make an argument to keep it under wraps but Vinson & Elkins said it should be disclosed. “The decision not to disclose was Enron’s itself,” he said.
Batson said in-house attorneys were ignorant, failed to voice concerns or in the case of one, Kristina Mordaunt, invested more than $5,800 in a Fastow deal for a quick profit of $1 million.
In addition, banks reaped millions in fees by participating in shady deals even when they knew the accounting was suspect.
In a 1999 e-mail to a colleague, a Credit Suisse First Boston banker said, “running a pipeline business can’t take much time — Enron seems to spend all its available man hours on various, convoluted financing schemes.”
The report also noted Enron’s former directors failed as the ultimate check and balance for officer misconduct, though Batson said “circumstances involving complex matters and obfuscation by officers” left them at a disadvantage.
But some rational voices made their way to the top, the report said. Steven Kean, Enron’s former chief of staff, said in an e-mail sent to Lay three days after Skilling’s resignation that Enron should focus on doing business rather than managing financial statements:
“Instead of tying ourselves in a knot about managing earnings or writedowns or avoiding an asset sale because it’s on the books for more than the market, we should just make the rational economic decision,” the e-mail said.