Ask Why
The Enron Blog was created out of frustration with the casual consensus that Enron was corrupt, a viewpoint enhanced by portrayals of greed and avarice in the media and the Department of Justice. My experience with Enron simply did not comport with that characterization.
Enron executives are innocent. Their company was toppled by a run on the bank, exactly like we’ve seen with Bear Stearns, IndyMac, Lehman Brothers, and other companies. There was no fraud or conspiracy at Enron.
The Enron blog seeks to demonstrate what happened at Enron with analysis and commentary on all facets of Enron Corporation, including Enron Broadband Services, the Nigerian Barge deals (with Merrill Lynch), the NatWest Three, and Arthur Andersen. It also covers the prosecutions of the executives, and the members of the Enron Task Force.
Here’s How
I sometimes write for days or weeks or months on one subject or even one deal, and then switch to something else. Posts about Corporate are mixed in with posts about EBS and NatWest Three and Nigerian Barges, etc. In order to make things a little easier to find, I’ve created the Enron Index. There, you will see topics grouped together by subject. There are two exceptions. The first is documents which in general are located under the “Enron Documents” label. These can be from any aspect of Enron. The second exception is “Today In Enron History” which has its own section. These are an accounting of what happened on any given day. I’ve been doing Today In Enron History for three years, and sometimes duplicate posts (I never copypaste, but I might discuss an event again, or update with exhibits). Thus, you may check a certain date two or three times before you find what you’re looking for. One day I will get around to consolidating it all, but today is not that day.
In addition to serious analysis, I write silly posts occasionally, such as the Enron Fairytales, and Enron Executives As Children or even the Enron Fashion stuff. These are just diversions for me – and if you enjoy them, I am pleased. But they don’t take away from the seriousness with which I approach my subject.
My Policies
As you can see, I love well-rounded discussion, serious and silly, and there is no facet of Enron that I will not write about… except: I don’t entertain conspiracy theories. The most egregious conspiracy theory is that Ken Lay is alive. If you utter those words, I will not only delete your comment, I will ban you permanently and then put a hex on your house. And a pox. I just don’t like it. Such discussion is deeply offensive and I won’t tolerate it.
I also do not discuss the families of Enron executives. The only exception is public information. For instance, since Rebecca Carter was an employee at Enron Corporation, I might mention her as she directly relates to Enron Corporation (for instance, a memo signed by her.) However, I will not post updates about what she is doing now because she’s a private person. Under no circumstances will I ever post about the children of Enron executives. [Update: February 2011. I've made a single exception to this policy: the horrible, awful, tragic death of Jeff Skilling's beloved son. It is very public knowledge, covered widely in the media, and I felt that it would be appropriate to comment on the subject. I do not foresee there ever being another exception to this policy.]
I welcome reasoned discussion. You don’t have to agree with me but you must be polite. If you post inane blathering insults, your comments will probably get caught in my spam filter, where they will remain until I delete them.
Me
Lastly, I don’t like to talk about myself. I receive questions about why I’m working on the blog and my Enron book, and I just like to keep that stuff private. I want to focus only on the facts in evidence about Enron Corporation.
And the last bit of housekeeping: if you would like to reach me, I can be contacted at blog dot caraellison on gmail.
I think this Cara Ellison will be a force with whom to reckon; zesty and direct.
Yay!!!! I was the one asking about you on Right Wing News. Glad you’re still here! Thanks for the link.
I was really touched when I realized people actually missed my little blog. So thanks!
C
Glad you are back
Why did you shut down “Rightthinkinggirl”?
As I recall… at one time you were interested in doing something for Africa.. and I emailed you a possible contact. How did that work out?
OMG. I was wondering what happened to you and stumbled onto this blog randomly!
P.S. I knew this had to be RTG because of the “Sylvia Plath” category!
Ha! Yep, tis I. I’m glad you found me. I love your blog!
oh girlfriend. or shall I say she who will not be silenced! I can’t believe I’ve missed you so long.
Good to be here again.
Nice to know you did not fall off the face of the earth.
Hope life is treating you better than the last time we traded emails
RTG? Is that really you? I’ve missed you!! *cries w/ joy*
Great Work.
Just sent you an email – would love to have you as my guest on The Stupid Cancer Show. Details: http://StupidCancerShow.org.
Matthew Zachary
12-Year Young Adult Survivor
Founder, CEO
I’m Too Young For This! Cancer Foundation
http://stupidcancer.org
*TIME MAGAZINE BEST 50 WEBSITE 2007*
Cara,
I just found out that my site, Idea Sandbox, is included on your list of marketing sites.
With so many to choose from – and the smart sites you have chosen – it is an honor to be a part of that list.
Thank you!
Keep up the great work on your site!
Paul
I posted a link to Cara Ellison on my site, http://www.notoriouslyconservative.com, the link is posted here: http://www.notoriouslyconservative.com/1976/01/links.html. Anyway, I love your site, and would really appreciate a link back, if at all possible.
Keep up the good work,
Nick B
‘splain this to me, Lucy: “No fraud, no conspiracy at Enron”?? Didn’t the prosecution prove these beyond a reasonable doubt?
It’s a legitimate point but the way the prosecution arrived at that verdict is not even legal. The prosecutors denied access to witnesses, destroyed documents, suborned perjury, threatened witnesses, fabricated evidence, and denied Skilling and Lay their constitutional rights by keeping vital Brady evidence from them.
Secondly, the jury was given incorrect instructions by the judge (a fact that is widely admitted even among anti- Skilling people), and was made up of people who were not equipped to understand the complex nature of Enron’s business.
Third, the case should not have been tried in Houston. Over 1/4 of the citizens know someone or were directly effected in the collapse of Enron. There was no assumption of innocence and there was overwhelming anti-Skilling/Lay coverage in the media. A change of venue may not have stopped the rampant hatred but it would have removed the fact that many angry citizens in Houston were suffering from the collapse and eager to convict.
Fourth, voir dire was incomplete and rushed. The defense had no opportunity to flush out biased jurors. The prosecution was allowed to use jurors who openly admitted that they were inclined to convict – BEFORE THE TRIAL HAD EVEN BEGUN.
Also, Jeffrey Skilling and Ken Lay – and everyone else at Enron – were not corrupt officials. They did nothing wrong.
Cara,
I understand your technical legal process points. You don’t address guilt or innocence, however. No matter how much good these guys may have created in derivatives markets, no matter how much personal wealth they created or how many people they employed, if they deceived stockholders by lying on the balance sheet, they were guilty.
Now what do you really believe? And can you come up with 3hotwords to describe it? (lol)
Cara, I just found your blog for the first time. I am so happy that someone else out there sees the truth about Enron. Skilling’s conviction is a joke.
I think my opinion should be especially poignant amidst some of your followers because I am a fairly liberal person. But I am concerned with “the truth” above all else.
I have spent years reading everything from LJM2 documents to every email in the Enron system. I feel so strongly about Skilling’s bunk conviction that I purchased several related domain names to give my own thoughts, but have never published them. How strange it is that he took this fall, yet virtually every other conviction related to his situation has been overturned.
I’ve been planning to write Skilling with my support for at least 4 years, but I have yet to find the perfect words, and I know he is strong enough without my encouragement.
He was punished during the witch hunt for simply being honest, knowing full and well that if the legal system were legitimate, that he would be innocent. Instead, the media, public, judges and lawyers crucified him in a sea of diluted evidence and appeals to pity. I always found a comment he made during his post-conviction interview an incredible glimpse into Skilling’s mind when he says, “I’m a bit disappointed, but that’s the way the system works.”
Bob, give me a break. “If they deceived stockholders by lying on the balance sheet, they were guilty.” They who? Skilling personally? There is no way one person could’ve known about details of transactions this broad. If someone is generating money for the company, a CEO is going to be proud. It is the job of the internal and external accountants, auditors, shareholders, and board of directors to provide checks and balances, not a CEO. I’m afraid they’re a bit busy to do the jobs of hundreds of people.
Recently, Ken Lewis at BAC, with full knowledge and no disclosure, allowed ML to be purchased without so much as hinting to the fact that he knew ML was tanking during the fourth quarter and he kept his job and surely didn’t get jail time. ML (thanks to Stan O’Neal) and Lewis have destroyed more wealth and ruined more lives (of employees and shareholders) than Enron could ever imagine, yet Stan O’Neal is drinking Martinis at ALCOA and Lewis just has to play in the sandbox with a new chairman after recent developments. ML was firing masses of people every quarter and BAC, post merger, is expecting 35,000 (which I think is conservative – all of the media reported ML firing info has been conservative).
Imagine a CEO that says, “Hello everyone. Our stock is just awful – worthless.” Imagine what would happen to the stock. Skilling did what any CEO would do. He was a victim of the post-9/11 economic climate – a bubble that was on the way to bursting even before the added pressure of the World Trade Center debacle.
The Enron response is one of the most glaring displays of the idiocy and lack of any critical thinking skills this country displays.
I’m glad I’m not the only one that thinks this. Great job, Cara. I’ll definitely get your book.
Good lord!
Thank you! Thank you very much so for this comment.
First of all, I am open to debating libs as long as they’re polite – and you are, in spades, so we’re all good there. : )
But the gist of your comment is just wonderful. You’ve obviously done a lot of homework. Of course, I agree with every point.
But also, I think *all* of the Enron convictions are a joke – with the exception of Andy Fastow’s theft from Chewco, RADR and Southampton. I think everyone else – particularly the Natwest Three and the Broadband Three – are completely innocent.
I have found that our point of view is actually gaining traction. I pray that it prevails at the Supreme Court and both Scott Yeager and Jeff Skilling are vindicated.
I look forward to your comments!
Hey Cara –
I just found your site. I worked at Enron, and am thrilled to find someone else (or two others, apparently, with Skilling Liberal) who thinks that the majority of the company was legit. So many of the complaints I hear are out of context or based not on legality, but popular perception. Did we play hardball? Sure. Were we not always nice? Sure. But neither of those things are crimes.
Some of the money shuffling we did looks a bit disingenuous, but if it was done legally, I’m not sure why people think it was illegal.
Expecting Skilling, Lay, or any of the other head honchos to have their noses so deep into the books that they understood every detail of every transaction is ludicrous.
Incidentally, re: personal losses:
I lost stock option value. But no one promised they would go up; they were always options, so just paper losses. My gamble, my loss.
I lost my 401(k) matching. But that was “free money” the company did not have to give me. If I had been there long enough for it to vest, I would have moved it someplace else.
I did NOT lose any of my own 401(k) contributions, because I DIDN’T INVEST IN ENRON STOCK. People who blame Enron for their poor investment decisions need to take responsibility and move on.
Enron was a high-pressure culture where those who were able to deliver thrived. I miss it often.
Andy
Andy,
You rock. Thank you for your comment. I agree with everything you said. I personally *love* the hard, macho culture. We weren’t embroidering throw pillows and baking cookies in those skyscrapers, after all. I wish we had more companies these days with that culture.
I’m glad you found the blog. I look forward to your comments.
Cara, I saw Jeff portrayed in a somewhat decent light in this article today:
http://www.atimes.com/atimes/Global_Economy/KG23Dj02.html
I hoped you had an opportunity to see it.
Also, I’m glad that Andy replied; I always wonder why Skilling was crucified because… uh, people didn’t diversify? Surely their own greed and ignorance should be a part of the story. I hope all is well.
Thanks,
Shane
Also, here is the original link
http://www.prudentbear.com/index.php/component/content/article/33-BearLair/10252-was-enron-right
Thanks Shane. I didn’t see this until you brought it to my attention. I will check it out now.
Really? You adore Jeffrey Skilling? wow. I was completely entertained by your post about his lucky tie….until I realized you were actually serious about liking him. You really think he’s innocent? Mark to marketing isn’t shady at all?
Of course Mark To Market is not shady. It was approved by the SEC long ago for complex companies. Enron didn’t invent MTM, by the way.
Oh I adore Jeff Skilling. He’s wonderful. And innocent. Same as Rex Shelby, Scott Yeager, Joe Hirko and most of the other ones indicted in the case.
SaltedLightcom
Cara, Enron was the 7th largest corporation in America with over 60 billion in assets which went into bankruptcy in a matter of weeks. 20,000 people lost their jobs and medical insurance. Their average serverance pay was $4500. Employee’s lost 1.2 billion in retirement funds and retirees lost $2 billion in pension funds. After the illegal Vahalla swindle in 1985, Jeffrey Skilling was hired and invented PRC, where every year 10% of the employees had to be ‘fired’ by the other employees. Jeffrey Skilling produced a trader clic that was ruthless and later( no one saw this coming?!) unethical and criminal enough to bring a corporation of 60 billion to bankruptcy. MTM, rolling blackouts, creating false companies and borrowing money to prop up other failing companies, offshore accounts, phony accounting books, etc.
Read ‘Enron-The Smartest Guys in the Room’ and get back to me.
In a perfect world, corporate corruption should be the death penalty upon conviction, for it doesn’t just steal, it destroys so many people’s lives. It’s not a lone wolf or misguided, its a monster. Michael
Cara,
I just found your site and I have to say I love it. I am totally obsessed with the Enron fall and learning everything I can about it. I have watched the movie Smartest Guys In the Room” and currently reading Conspiracy of Fools. Do you have any other suggestions of books to read?
Thanks
Steve
Hi Steve,
Everything you read is going to be biased against Enron. After all, there’s no story in “everyone is innocent, this is a run on the bank.” I’m writing a book that aims to change that, however.
Thanks for your comment.
Hello
I was wondering, have you seen Lucy Prebble’s Play “Enron”, and what do you think of it? Worth a trip over to the UK, I reckon.
It’s a fantastic production, regardless of the story they’re telling.
J
@ the play
…
http://en.wordpress.com/tag/mitchell-b-langbert/
Dear Cara: Jonathan De Graff asked me to respond to a question you raised about my article “Managing Psychopathic Employees” for the Cornell Human Resource Review. Jeffrey Skilling did a number of things wrong and a number of wrong things. He was aware of the relationship that Andrew Fastow had to the special purpose entities (SPEs) and to Enron. That is, he was aware that his employee, Fastow, was both manager of the SPEs, which paid him compensation, AND chief financial officer of Enron which paid him bonuses WHILE claiming in financial statements that the SPEs were dealing with Enron at arm’s length.
Skilling passed a polygraph test question as to whether he believed that he had done anything wrong. He did not think so. When a lawyer for Enron asked him whether the fact that Fastow had received $35 million as a bonus from a single SPE, Skilling stated that he viewed the rightness or wrongness as a matter of risk. If the risk Fastow took was sufficient (a laughable claim because Fastow took zero risk, he was simply skimming money) the $35 million was a fair reward.
Skilling put the Enron failure into motion. His concept of mark to market accounting led to repeated business failures. Knowing that his approach to management was a failure, Skilling insisted that he was right and that it was only a matter of time for his approach to succeed. But he compensated his young MBA employees on the basis of the attractiveness of an idea or what the deal sounded like to him, not on results. Thus, virtually none of the deals succeeded.
Skilling scrupulously avoided taking responsibility for the SPEs’ compensating Fastow. In fact, his appointment of Fastow, someone completely inexperienced and incompetent in most of the aspects of what a CFO does, was itself reckless. The ongoing incompetence in Fastow’s department was so extreme that the firm ultimately collapsed because Fastow did not know how to implement a cash management system.
Skilling’s first responsibility as a CEO was to appoint ethical and competent managers. He deliberately avoided doing both. Whether or not he knew the insane details of the SPEs he was criminally remiss. However, it is not rocket science to know that borrowing money to buy failing assets from Enron using Enron stock as collateral is an absurd, pyramid scheme. Knowing that the firm needed to do this repeatedly in dozens of SPEs meant that Skillini was aware that the firm’s investments had almost all failed.
Moreover, there were repeated calls within Enron. A guy named Vince Kaminski, the smartest guy in the firm, repeatedly told more senior managers that the SPEs were bound to fail. Similar complaints were made by Jeff McMahon and others. An Arthur Anderson accountant who objected to the structures was removed from serving Enron at Enron’s demand. A stock analyst who questioned Enron was forced out of Merrill Lynch also at Enron’s demand.
While Fastow reported to Skilling he was going around Wall Street telling them that he would trade with Enron while he was CFO and would use his inside knowledge to harm Enron. Skilling had direct contacts with Wall Street. Yet, nothing was done to stop Fastow.
Hi Mitchell,
Thank you for your reply.
Jeffrey Skilling did a number of things wrong and a number of wrong things. He was aware of the relationship that Andrew Fastow had to the special purpose entities (SPEs) and to Enron.
No he wasn’t. And that is critical to every single count against him. Fastow said at trial that he didn’t tell Skilling. Skilling testified that he had no idea.
That is, he was aware that his employee, Fastow, was both manager of the SPEs, which paid him compensation, AND chief financial officer of Enron which paid him bonuses WHILE claiming in financial statements that the SPEs were dealing with Enron at arm’s length.
Actually that’s not illegal. What I think you’re talking about are the “secret side deals” which I referenced above.
Skilling passed a polygraph test question as to whether he believed that he had done anything wrong. He did not think so. When a lawyer for Enron asked him whether the fact that Fastow had received $35 million as a bonus from a single SPE, Skilling stated that he viewed the rightness or wrongness as a matter of risk. If the risk Fastow took was sufficient (a laughable claim because Fastow took zero risk, he was simply skimming money) the $35 million was a fair reward.
Again, you’re not really stating anything that Skilling did that was illegal. Show me in the indictment where it says Skilling said something on a polygraph.
Skilling put the Enron failure into motion. His concept of mark to market accounting led to repeated business failures.
He was *required* by the SEC to use mark to market. Incidentally, there’s nothing in the indictment that alleges he abused mark to market accounting.
Knowing that his approach to management was a failure, Skilling insisted that he was right and that it was only a matter of time for his approach to succeed.
That’s nuts because Enron *was* successful. It wasn’t like Enron was sinking month by month and he was pleading to give some scheme some time to work.
But he compensated his young MBA employees on the basis of the attractiveness of an idea or what the deal sounded like to him, not on results.
Again, that’s misleading. Of course results were important to Jeff. OF COURSE. And the bonus structure was not one-to-one with “results” – which would be every bit as ambiguous as giving bonuses based on a boss’s opinion of an employee’s work product. You’re reciting all these myths that really have nothing whatsoever to do with the Enron case.
Thus, virtually none of the deals succeeded.
Many of them did. And you’re connecting bonuses to the success of a deal – which really doesn’t make any sense. There’s no logical correlation there.
Skilling scrupulously avoided taking responsibility for the SPEs’ compensating Fastow.
He knew that the SPEs were compensating Fastow.
In fact, his appointment of Fastow, someone completely inexperienced and incompetent in most of the aspects of what a CFO does, was itself reckless.
I don’t disagree with that it was perhaps unwise, but at the time, Fastow had a glowing reputation.
The ongoing incompetence in Fastow’s department was so extreme that the firm ultimately collapsed because Fastow did not know how to implement a cash management system.
No, it collapsed because of a run on the bank.
Skilling’s first responsibility as a CEO was to appoint ethical and competent managers. He deliberately avoided doing both.
I’m sorry, that is just absurd. He deliberately avoided hiring competent people? Why would he do that? If his longevity was connected to scamming the company, wouldn’t it make sense for him to keep the goose laying golden eggs?
Whether or not he knew the insane details of the SPEs he was criminally remiss.
NOT if Fastow intentionally hid them from him.
However, it is not rocket science to know that borrowing money to buy failing assets from Enron using Enron stock as collateral is an absurd, pyramid scheme.
I am not sure of that. A company can do deals with its own stock; that certainly isn’t illegal.
Knowing that the firm needed to do this repeatedly in dozens of SPEs meant that Skillini was aware that the firm’s investments had almost all failed.
You’re drawing an illogical conclusion. Skilling believed – and was correct – that the company was in good financial health when he left in August. Nothing had failed when he left, and the extent of his knowledge in Fastow’s SPE is minimal.
Moreover, there were repeated calls within Enron. A guy named Vince Kaminski, the smartest guy in the firm, repeatedly told more senior managers that the SPEs were bound to fail.
Your judgement that he was the smartest guy notwithstanding, he was no doubt very seriously troubled by the SPEs as many people were. Cliff Baxter HATED them and would constantly complain to Jeff and to Ken Rice about them. That doesn’t mean they’re illegal or even wrong.
Similar complaints were made by Jeff McMahon and others.
Agreed. And I respect Jeff McMahon a great deal.
An Arthur Anderson accountant who objected to the structures was removed from serving Enron at Enron’s demand.
Delaney?
A stock analyst who questioned Enron was forced out of Merrill Lynch also at Enron’s demand.
OMG, that guy is a complete wack job. He told me that Ken Lay killed himself because he saw him do it. NO NO NO.
While Fastow reported to Skilling he was going around Wall Street telling them that he would trade with Enron while he was CFO and would use his inside knowledge to harm Enron. Skilling had direct contacts with Wall Street. Yet, nothing was done to stop Fastow.
You saw what happened when Fastow was discovered. Ken Lay fired him immediately.
How much are they paying you? Must be good money to be in the propaganda business.
Nothing at all.
It’s not propaganda. Everything I write is supported by facts. Please feel free to see the Enron Index for documents, videos, and internal documents.
Very interesting blog, I have a hard time agreeing with you that Enron did no wrong at all, because if they did some wrong than they deserved some convictions. Just because something is legal does not make it right. In Germany during the 40′s it was legal to kill a Jew, and people to this day still defend Hitler and can support him with “facts” that what he did was right and deserved no criticism. If what Enron did was 100% legal then maybe we need to look at the laws that allowed them to do that and change them. In my book if a law can allow for the destruction of lives its no good. No matter how you paint it, it is 100% unarguable fact that what happened at Enron destroyed thousands of lives, I dont know if that is worth the “macho” risky work environment.
Well give me an example of something that an Enron employee did that was wrong?
I think bringing up Hitler the way did, in order to criticize Enron, is what they call a straw man argument — not sure – but maybe someone could help me that.
It’s about as relevant as me defending Enron by saying “Well at least they weren’t putting Jews in the gas chamber…”
So, you are critical of Enron from breaking laws that don’t exist?
Freedom and capitalism doesn’t promise everyone a rose garden.
At least Enron didn’t put Jews in the gas chamber!
Thanks, David, I hadn’t used that one before.
Are you people high? The mountain of irrefutable, concrete evidence of criminal activity at Enron is so gargantuan that I don’t know where to begin. For starters, there are plenty of recorded conversations of Enron traders, as well as internal conference calls that clearly indicate a directed, facilitated, conscious raping of the California energy market, with conscious disregard for any consequences. Furthermore, Ken Lay and Jeff Skilling’s comportment over the last two years of Enron’s well deserved, self-induced, greed-catalyzed implosion prove they were well aware of the ongoing accounting shenanigans. Which brings us to the forensic accounting evidence, which is so robust and of such volume that the mind reels at the fact that not one Enron chump had the balls to stand on the side of the law and ethics. But let’s forget the law for a minute here. Let’s ignore the confessions and prison sentences, as you delusional whackjobs apparently do, and just talk about the ethics here for a minute. Let’s pretend that everything Enron did was within the letter of the law. Are you people so far gone, so far detached from the rest of humanity that you cannot see the ethical wrongs? I find it hard to believe anyone, anywhere, could support what this company did. They cost the U.S. hundreds of billions of dollars, thousands of jobs, and left untold suffering and misery in their wake. If that kind of damage is worth a few porsches in the garage and a private plane to you morons, all I can say is that it’s really too bad you’ll be hanging around subsisting off the rest of us for who knows how long. What I’d like to see is everyone associated with Enron, and their supporters be dropped off somewhere with nothing in tow and be required to live entirely by their own means. It would be a pleasure to watch. Anyone who could defend Enron is someone who doesn’t understand what life is about and how to go about living it. It’s pretty easy to follow one basic rule of not fucking up other people, but apparently you jackasses can’t even grasp that. You do realize it’s not that hard to get rich by doing it the right way, i.e. working your ass off. The only cost is effort, something I suspect you idiots have no concept of. That being said, this blog is clearly nothing more than a goofy, contrarian marketing ploy by someone who has no inside knowledge of the Enron criminal enterprise and has done less than minimal research on the whole matter. Regardless of the sincerity, no one should trumpet Enron’s actions, because there are plenty of people dumb enough to believe it. By perpetuating the legacy of a bunch of thieves and rapists, you place yourself among them. They should throw every single Enron executive from any department with a whiff accounting irregularities in a cold steel box, close the door, lock it, and walk away. Leave them in the cold, dark environment they were so gung-ho to foster for their “customers”. The fact that our tax dollars go to feed these assholes should make you all sick to your stomach. If you support them so much, please feel free to write to your congressman and tell him/her that you would like to take over my share of tax dollars going to pay for these lovely exec’s languishing in prison. Put your money where your dumbass mouth is.
Also, your “Enron Index” doesn’t contain any legitimate internal documents that were not put together by the defense teams for these people you purport to support. Your arguments are NOT fact-based, as in my review of your site you fail to once present actual factual information supporting your claims. All you do is claim to know what someone was thinking or disperse other similar, personal opinions. In other words, you clearly are one of the following:
1. mentally ill – I would say there is a good possibility that you have some sort of mental health issue and I would say there is a better than even chance you are currently medicated for said condition.
2. desperate for attention/work/money – and are writing a bunch of bullshit just to try and make a buck, which – hey, at least you’re doing SOMETHING, unlike millions of others, but really, you can’t find a way to make a buck that doesn’t support crime and immoral activity?
3. just a bad person – there are actually few truly bad people in the world, but perhaps you are one of them. If so, I just feel sad that the short amount of time you have on this planet will be spent reveling in the misery of others.
Oh, and Enron may not have put Jewish people in gas chambers, but they showed the same disregard for people’s health and did in fact indirectly cause the death of numerous people from their manipulation of the CA energy-market. And yes Carla, everyone knows CA is not without huge fault in the whole deal, but Enron created, exploited, and exacerbated the whole problem. Just because CA was stupid doesn’t make what Enron did okay. Can your reptilian brain understand that distinction?
The problem with comments like this is that it is ranting, not analysis. I provide analysis, tying opinions to documents, evidence, and testimony. This guy provided none of that. This guy has bought into what Kirkendall calls the “simplistic Enron morality tale” without skepticism. It is lack of skepticism that makes witch hunts possible. So fuck off, bitch.
I respectfully disagree. At the end of the day it comes down to personal responsibility and having a moral compass in one’s personal and professional life. These men lack those values; there is no justification for their practices however it plays out in the courts and in these blogs.
Why do you think they lack integrity? Because your opinion is that they’re guilty? And how do you know this? Because Loren Steffy told you so?
thanks
Oh my gosh, Bill! Thank you for saying hi.
I’ve found links to Fastow’s testimony, but is there a place on the web with the entire transcript of the Skilling/Lay trial? I’m particularly interested in Skilling’s testimony.
(I assume I can buy the transcript through PACER, but wouldn’t that be hundreds of dollars? These are public documents; they should be free or cost a trivial amount, rather than using an archaic “price per page” model.)
I don’t think they’re on the net. I might post some as time goes on. I was waiting until Jeff’s case is ultimately resolved before I do, however.
I have a question about sherron wastin: where did she admitted to Insider treading. When can i go to look at her words and see that she say i treading because this. She did a bad things(lying about enron and Mr. Skilling) but I believe that she through that she was doing right. You make it seem that she just “didn’t give a shit” about right and wrong, which in my optional give her too much credit. I see her as the same a kkker who believe the death of blacks is okay because that how they see the world. I feel sorry for her, pitty not compassion. I think you forgave andy ( who i think is so hot btw) for his greed or least said that you don’t think he would anything bad again , why can’t you forgive wastin for her cruel naive stupidity? She was apart of something just sad, how the media and government kill Enron, so she wrote a book. Bad form,yes. But, I believe Swatz just wanted an way into the story. Swatz is the writer of that book, waskins just supped funny stories and her oppinals. that book was like Desperate Housewives: funny but too over the top to be true. As you knew, I believe that while untrue, C.O.F is best/ most well-written book on Enron. If the godfather of Enron books. have not finish Smartest guys but, Kurk is a great writer, bad bisa journalist , a good writer.
Hope you have a good Esater
You people have no shame. It would seem that Cliff Baxter’s suicide would have you thinking differently about loop-holing your way through life. Beyond this obvious lack of moral integrity on your part, the testimony of insiders like
Sherron Watkins and Mike Muckleroy is incontrovertible. This was not a one-off subjective misstep; it was broad-spectrum corruption on many levels, with many people, over several years.
Do what you know is right: Honor the memory of Cliff Baxter and admit the truth, you’ll feel better.
Hi Mark,
Thanks for your comment; I always enjoy seeing the mentally handicapped try to live a full, rich life and you’re a living testament that great strides can be made in this area.
First, Mike Muckleroy was not at trial, he was not even at Enron for years.
Sherron Watkins is an admitted insider trader; does that in any way alter your viewpoint?
Seriously, those two douchebags are the best you can do? What about all the other evidence that there was no criminality at Enron, like Wade Collins, Jeff Skilling, Ken Lay? The Broadband defendants? The Nigerian Barge defendants? Or do they not fit your meme so you discount them?
I’m not sure why you’re focused on Cliff Baxter. I admire him a great deal; I know him only through his friends but he seemed like a wonderful man. And his widow posts here occasionally, which I believe is a testament to the fact that I have it right about Cliff.
Have an awesome day!
Cara, I have just run across your blog. As a former Enron employee I’m very interested. As the trial proceeded, the Chronicle had a newsgroup which I participated in with the name below. I was utterly convinced the prosecution didn’t prove criminal guilt either for and especially Lay, or Skilling. A couple of highlights.
Some of the accusations were bizarre. Dave Delaney testified that Skilling attended a meeting considering whether to merge the money losing EES power trading book with the wholesale book. How Skilling’s statement that “you guys decide” (or some such) as he left can be construed as an order to do it is beyond me. And in any case the consolidation made eminent sense: EES was then out of the power trading business, and wholesale was the entity to deal with the positions. Yes it hid losses in EES for a business activity they had abandoned, but this was a very strong business reason for the move, end of story.
Andy Fastow’s Global Galactic Agreement , cosigned with Causey, is suspicious on the face of it, a xerox copy which could not be dated, miraculously found when he needed it to bargain with prosecutors for mercy on real crimes. I buy the idea that Causey wouldn’t have signed it without Jeff’s knowledge. But he had plead guilty by the time of the Lay Skilling trial. If he had testified he had signed it at Jeff’s direction, it would have been huge. I believe his plea did not contain an agreement to testify, and he had (speculation) a longer sentence as a result. Why wouldn’t he have traded GGA testimony for a shorter sentence? The best answer I can come up with is that he didn’t have that true information to trade, and wouldn’t lie.
Hi Breaker, you’ve made some good comments. I’ll reply in more depth later this evening but wanted to say thanks for taking the time to comment.
You’ve made some great points quite succinctly so I will leave them at that. But you also said:
Andy Fastow’s Global Galactic Agreement , cosigned with Causey, is suspicious on the face of it, a xerox copy which could not be dated, miraculously found when he needed it to bargain with prosecutors for mercy on real crimes.
This is one of those things I just marvel at about the case; the DOJ which prides itself on being so smart and able to suss out these dastardly deeds accepts without question this coo-coo bananas document – supplied, as you say, exactly when it will benefit Andy Fastow the most. Not curious at all.
I buy the idea that Causey wouldn’t have signed it without Jeff’s knowledge.
Maybe, but I don’t know that I believe he signed it at all. I remain skeptical, particularly since the Defense during Skilling’s trial actually asked about Causey’s penmanship at one point and there was some confusion about whether Causey signed another document. I’m just thinking that Andy scribbled Causey’s name (because you need your friend’s backup on something like that).
But he had plead guilty by the time of the Lay Skilling trial. If he had testified he had signed it at Jeff’s direction, it would have been huge. I believe his plea did not contain an agreement to testify, and he had (speculation) a longer sentence as a result.
I suspect that one of the reasons he was given such a harsh sentence is because nobody expected everyone else to get such lower sentences. It was still the height of hysteria and probably five-eight years seemed just fine to him, if he thought everyone else was going to get 25-50 years. I’ll need to do a Game Theory post on this, I think.
Why wouldn’t he have traded GGA testimony for a shorter sentence? The best answer I can come up with is that he didn’t have that true information to trade, and wouldn’t lie.
That’s a very good guess. Every person I’ve ever talked to about Causey has said he is a stand-up guy, completely honest. I think like Joe Hirko and Rex Shelby, he wasn’t going to start stabbing his friends in the back to save his own butt.
All I know is, Skilling seems to be the last person around that is still in jail, and it is CRIMINAL. He didn’t break the law. Sorry. If you want to argue that he did something “wrong,” fine. But that is why we have laws. The job of a CEO, by law, is to put the shareholders first and make money within the confines of the law. That is what Enron did. Just because some goobers wanted a bigger bonus by dicking with the power switch out in California, or because Fastow needed 4.2 million to feel happy that year… it has nothing to do with Skilling. And I have been corresponding with some of his friends and I have to tell you, the death of his son was devastating. I read a very good post on a news site that likened their denial of Skilling going to his son’s funeral to To Catch a Predator; i.e., “When you make people feel sorry for the ‘bad guy,’ YOU ARE DOING IT WRONG…” Did they really think Skilling was going to jump on a G650 and fly to Burundi? That isn’t his style. It is a damn shame. All I know is that this BS has ruined his family and costs several lives and I am sick of it.
I don’t share your views about the innocence of Enron Executives.
While prosecutorial abuse may well have occurred in the Enron case, and I will give you that, though all I have read at present are allegations with no substantive proof, that doesn’t mean that no fraud occurred at Enron. From what I have researched thus far, it appears clear to me that fraud did occur which impacted Enron’s financial statements very materially, and that was the reason for “the run on the bank”. If that is not the case, please provide some evidence from CPAs or lawyers who claim Enron’s SPE transactions were not fraudulent, not just your own opinion. Back up the claim that no fraud occurred with authoritative evidence coming from someone experienced with the Enron investigation and such transactions.
“There was no fraud or conspiracy at Enron.” And you are obviously totally objective, sleeping with an Enron employee who refuses to directly answer the question of whether he committed fraud or not.
You can write all you want about injustice at Enron, but the truth is that when you get down and analyze each transaction, it’s obvious they were created to help inflate earnings and hide debt. BTW, the reason for the run on the bank was due to accounting impropriety. When the restatements of 1997 to 2001 were announced, the $1.01 billion charge to earnings in 3rd qtr. 2001, the write down of equity by $1.2 billion, the public realized the obvious. Someone is cooking the books. You can blame the collapse on a “run on the bank”, but when you go to the detail of why the run, then you find that there was fraud. I find your writing, as it relates to Enron’s innocence, total cow fodder, not based on facts but on your “feelings” and how you want it to be. You, and those who support you are in total denial, which is typical when someone doesn’t want to face the truth of their circumstances. Big surprise.
Hi Don.
I don’t share your views about the innocence of Enron Executives.
While prosecutorial abuse may well have occurred in the Enron case, and I will give you that,
Whoa. Do you not realize what a big deal that is?
though all I have read at present are allegations with no substantive proof,
I’m not sure what kind of proof you are looking for. Here are some examples that are “substantive proof”:
*Prosecutors used highly prejudicial “perp walks” to poison the jury pool.
*Prosecutors used highly prejudicial press conferences about the case to poison the jury pool.
*Prosecutors pushed for the trial to take place in Houston, where the energy company was headquartered and where thousands were still furious and reeling from lost jobs, lost retirement funds, and the feeling of disgrace.
*Voir Dire was incomplete.
*Prosecutors have used that god-forsaken “un-indicted co-conspirator’s” list to keep exculpatory witnesses silent.
*Prosecutors refused to grant immunity to those who could testify on Skilling’s and Lay’s behalf.
*Prosecutors threatened witnesses, warning them away from testifying on behalf of Jeff Skilling and Ken Lay.
*Prosecutors suppressed evidence (ie, the Fastow Notes).
*Prosecutors used plea bargains to manipulate innocent people into confessing to crimes they didn’t commit – and dragging down others with them.
*Prosecutors tried to have Skilling’s bond revoked for drinking too much one night.
*Prosecutors tried to have Skilling’s bond revoked when he said “Hi” to a prosecution witness he saw while on a walk in their neighborhood.
*Prosecutors encouraged Fastow to lie on the stand (substantiated by the Fastow Notes.)
*Prosecutors know the “personal reasons” Skilling left Enron, yet at trial they continued to press him to give another reason. They allowed the jury to believe he might have left because he feared Enron was a “house of cards” about to come crashing down.
*Prosecutors pointed out Skilling’s jury consultant during the trial. Of course they had their own jury consultants but it made Skilling appear rehearsed.
*Prosecutors asked Skilling about the Photofete investment at trial which he was not prepared for because it had nothing to do with the charges against him.
*Prosecutors implied Skilling used inside information and told his ex-wife and current wife to sell Enron stock (without prosecuting the wives for insider trading or any other crime).
*Prosecutors pushed for a broad interpretation of the “honest services” statutes and a willful blindness concept that essentially did away with the jury having to find criminal intent. (Dan Petrocelli even tried to point out at sentencing that there was no mens rea; that Jeff Skilling never set out to commit a crime. His argument fell on deaf ears.)
*Prosecutors successfully pushed for inadequate reliance and materiality instructions.
*Prosecution successfully pushed for no jury instruction of secret side deals.
*Prosecutors swore up and down that Andy Fastow was “locked” into a ten year sentence and thus had no reason to lie. In fact, his sentence was only six years.
*Jeff Skilling’s sentence of twenty-four years is unreasonable and punishes Skilling for the bankruptcy of Enron – which was not even an allegation the Task Force made, much less could sustain.
*Jeff Skilling’s sentence was enhanced for threatening a “financial institution”, which Enron was not.
*The District Court erred in assigning Skilling an enhancement for “obstruction of justice.”
*The NatWest Three were brought to the US under a treaty that had not even been ratified by its own government.
*The NatWest Three were deprived of witnesses and documents that could exculpate them.
*In the Broadband trial, defendants were deprived of massive amounts of discovery, including the software that the DOJ claimed did not exist.
It goes on and on and on.
that doesn’t mean that no fraud occurred at Enron.
Do you understand how evil the mindset is? That just because the prosecutors abused these people doesn’t mean they didn’t deserve it?
From what I have researched thus far, it appears clear to me that fraud did occur which impacted Enron’s financial statements very materially, and that was the reason for “the run on the bank”.
How did fraud occur?
If that is not the case, please provide some evidence from CPAs or lawyers who claim Enron’s SPE transactions were not fraudulent, not just your own opinion. Back up the claim that no fraud occurred with authoritative evidence coming from someone experienced with the Enron investigation and such transactions.
Here we go. Please read this post: http://caraellison.wordpress.com/2011/09/29/it-isnt-about-me/
“There was no fraud or conspiracy at Enron.” And you are obviously totally objective, sleeping with an Enron employee who refuses to directly answer the question of whether he committed fraud or not.
Excuse me? I have answered questions about Big thousands of times. He did not commit any kind of fraud. Nobody at Enron committed fraud. Nobody lied. Nobody did anything wrong. And for the record, I was blogging about Enron before I met any Enron executives.
You can write all you want about injustice at Enron, but the truth is that when you get down and analyze each transaction, it’s obvious they were created to help inflate earnings and hide debt.
That is not true. There was a business purpose for everything Enron did. Please point to a transaction that you believe was fraudulent.
BTW, the reason for the run on the bank was due to accounting impropriety. When the restatements of 1997 to 2001 were announced, the $1.01 billion charge to earnings in 3rd qtr. 2001, the write down of equity by $1.2 billion, the public realized the obvious. Someone is cooking the books.
Really? Bank of America had a $12 billion write-down in, I think, February of this year. Are they cooking the books? These things happen – it doesn’t mean there was fraud.
You can blame the collapse on a “run on the bank”, but when you go to the detail of why the run, then you find that there was fraud. I find your writing, as it relates to Enron’s innocence, total cow fodder, not based on facts but on your “feelings” and how you want it to be.
Um, no. You can say a lot about my blog, but that is not an allegation that will stand. Look around – look at the documents, videos, power points, etc. I’ve made certain to use facts in all my posts.
You, and those who support you are in total denial, which is typical when someone doesn’t want to face the truth of their circumstances. Big surprise.
Do not insult me. Do not get personal. Focus on Enron and explain why I am wrong, if you can.
Hey, Don. If you agree that prosecutorial abuse “may well have occurred”, then you’ve made the point that the Enron prosecutions are tainted. Instead of badmouthing people who are trying to bring that abuse to light, why not focus on researching the abuse! There are a number of prosecutorial misconduct motions in the Enron cases, at least a couple of which are accessible on Cara’s blog and other Websites.
“BTW, the reason for the run on the bank was due to accounting impropriety. When the restatements of 1997 to 2001 were announced, the $1.01 billion charge to earnings in 3rd qtr. 2001, the write down of equity by $1.2 billion, the public realized the obvious. Someone is cooking the books.
Really? Bank of America had a $12 billion write-down in, I think, February of this year. Are they cooking the books? These things happen – it doesn’t mean there was fraud.”
I would agree that a write-down in assets or revenue is not necessarily the result of fraud. I can provide much better examples than what you have provided. But, the write-downs of net income and shareholder equity and restatements of financial statements, based on Enron’s 8-K report filed on November 8, 2001, were the result of non-compliance with Generally Accepted Accounting Principles (GAAP). As a result, SEC laws were violated/breached. Certain SPE transactions, as a result of improperly not consolidating the SPEs with Enron, caused revenue and net income to be very materially overstated, Enron liabilities to be very materially understated, and caused equity to be materially overstated. Those are facts as stated in Enron’s 8-K report. Determining the motivation for such non-compliance with GAAP and SEC laws is another matter.which I will try to address in subsequent posts.
http://www.secinfo.com/dsvRu.4FcZk.d.htm#Dates
http://www.secinfo.com/dsvRu.4FcZk.htm
And I disagree with you that “these things happen”. Having worked for two small public companies and several private companies as an accountant and having had the experience of being audited by independent accounting firms and assisting in preparing work papers for the audits, my experience with this tells me that, generally, they only occur when you either have someone who is incompetent managing the accounting function or you have executives who are intentionally seeking to get around GAAP for personal, self interest reasons. The preponderance of the evidence in the Enron case leads me to believe that corp. accounting officers, with the approval and consent of their supervisors, were recording material transactions that violated GAAP and SEC laws in order to materially misrepresent Enron’s financial position, results of operations, and cash flow.
To address your comment about Bank of America. Can you provide me with a link of where I can find this write-down? All I have found thus far is a BofA credit card subsidiary which wrote down $20.3 Billion off it’s Goodwill and this was announced in Feb. 2011. This was a regulatory write-down, not a GAAP accounting or financial statement write-down. Neither the subsidiary nor BofA had to restate prior year’s or quarters 10Qs or 10Ks and this write-down did not impact BofA’s GAAP and SEC accounting or financial statements in any way. So, if this is what you were referring to, it’s not a good example to use to compare to Enron’s circumstances.
http://topnews.us/content/235305-203-billion-dollars-regulatory-charge-taken-bank-america-card-unit
Fred, my intent is not to badmouth anyone who has been mistreated unjustly. I have been mistreated unjustly by a defense lawyer in a law suit a few years ago during a deposition as an expert witness. But, I don’t necessarily characterize the mistreatment as prosecutorial or attorney abuse. It’s simply plaintiff and defense attorneys seeking to win for their side. But, threatening someone with an indictment if they don’t “tow the line” is another threshold of power totally.
The reason I am not focusing on the abuse is because everyone I have encountered thus far who claims such abuse is oddly in denial that anything improper occurred at Enron. I don’t find that reasonable, based on the evidence. so I am skeptical of the claims at this point and the motivation for such claims, for that reason.
Don, I see your point about people claiming there was no misconduct at Enron versus people focusing on the prosecutorial abuse. But they seem to be two entirely different issues for most of the people examining misconduct, I think. For example, I remember reading on one site (I think it was the ungagged site) in which the blog owner said that he is not trying to say that all defendants were innocent, just that convictions were not properly attained.
In my mind, the intersection between the two topics is this: We cannot say for a fact that there was criminal wrongdoing at Enron, in the legal sense, unless the Feds meet the burden of proof at trial without resorting to abuse. I’m reasonably convinced that the Feds’ Enron Task Force used abusive tactices — this taints the prosecutions in my mind. So I would like to see the misconduct more systematically examined. If there was wrongdoing at Enron, I want it exposed and punished, but not by misconduct on the part of the Feds.
By the way, there were clearly threats of indictment against potential defense witnesses. One of the defense witnesses in the Broadband trial testified on the stand that he had been threatened with indictment if he chose to “expose himself” by testifying in court. That alone is gross misconduct in my mind.
Yes, I keep hearing about the Broadband Services division concerning abuse. I am all for retrying or dismissing if misconduct is determined and it is material.
At the same time I have reviewed enough evidence, uncovered by the bankruptcy Examiner, Neal Batson, the Powers Enron appointed Special Committee, and my own understanding of what does and does not require an SPE being consolidated with a parent company in accordance with Financial Accounting Standard (FAS) 125 and 140, to form an opinion that fraud did in fact take place.
But, I have no clue if it went as far as the Broadband Execs. that had nothing to do with the accounting function.Maybe it didn’t, I don’t know at this point. Maybe the charges that don’t involve the SPEs aren’t valid. I honestly don’t know.
As I said, I have nothing against dropping charges against someone if material abuse occurred which impacted a person’s testimony to the point they didn’t tell the truth as they saw it, and that untruthful testimony resulted in convicting someone who was innocent. But, please don’t misinterpret what I’m saying.
I think the evidence for fraud speaks for itself. It’s that clear and obvious to me from evidence, and I don’t buy that Fastow, Causey, Kopper, Glisan and perhaps a few others are the only ones guilty of fraud or aiding and abetting fraud. The SPE transactions were very material to the books and accounting of Enron. So material, and so obviously recorded improperly that any competent CPA at Arthur Anderson would recognize them as improper, and so would Enron’s attorney’s, both in house and outside. What I just said has serious implications for Skilling and Lay. An auditor finding such impropriety would report it to appropriate Enron senior management, including Lay and Skilling. For that reason, it is inconceivable to me that the transactions did not have the approval and blessing of Skilling and Lay, whether they understood the transactions or not. I believe it took broad collusion to engineer getting these transactions passed the Board of Directors and whether Skilling and Lay understood why the transactions were improper or not, (Skilling claiming he wasn’t an accountant) it is my belief they understood it was more than aggressive accounting techniques and they understood the transactions would accomplish what they desired, to keep the house of cards propped up and keep the earnings, debt, and share price within target ranges, despite the fact that they understood that the original numbers reported materially misrepresented the actual financial condition of the company.
So, let’s examine the conduct of the prosecution, and if necessary, let’s retry those believed to have been involved in cooking the books and let the others go. Hell, let’s have the trial in North Dakota or wherever it’s believed would be more fair for Skilling to get a fair trial. I don’t give a damn about the honest services charge. Throw it out so it doesn’t detract from the real crimes. I believe the evidence itself would re-convict Lay, Skilling, Fastow, Causey, Glisan, the top A. Anderson auditors, and in house attorneys.
So, in that sense, maybe I agree with the person you spoke of on ungagged.net. But, what I am seeing and hearing from that website is different. Dr. Bill Anderson makes the statement that if Enron execs had been tried 30 years ago that no criminal prosecution would have occurred. I do not, for the life of me, know how a person can make such a statement without being totally incompetent in understanding when an entity should be consolidated with its parent and when it should not be, when revenues should be recognized on the books of the parent and when debt should be as well, regarding SPEs. If you are competent enough to understand that, then you have to recognize that most of the SPE transactions were recorded in violation of GAAP and SEC laws, and not due to incompetence or not understanding what you were doing.
I haven’t finished the first report of the Enron bankruptcy examiner yet, almost half way through and looked at parts of the 2nd, 3rd, and 4th. After finding out you have a law degree, I do have more respect for what you are saying about prosecutorial misconduct. But, I don’t understand where you are coming from as it relates to the impropriety of the accounting and the legal issues involved with it, so hopefully I can learn something. Also, if I take up too much of your blog space, just let me know and I’ll stop.
From my experience in accounting, plus my knowledge of it which I don’t consider to be that extensive, I”m not certified, I simply find it unthinkable that such huge, material errors in accounting could have resulted from Enron CPAs and that Andersen CPAs did not find it either. This wasn’t for just one year, but since 1997 going forward until Enron filed for bankruptcy. It is honestly unfathomable to me that such material impropriety could have occurred by accident, due to incompetence.
I worked directly under the controller of a small public oil/gas drilling company a long time ago. It was my first accounting job coming out of the military, having a BBA with a major in accounting. The guy I worked for was extremely intelligent, as was the accountant who managed the computer operations. (Not aware it was called the IT dept. back then) The V.P. of finance was a very smart guy too. I just can’t imagine those guys could have missed and recorded improperly what the Enron accountants did. And I can’t imagine that Arthur Andersen, our auditors, could have missed it either.
For the most part, Enron, an Enron subsidiary, or an Enron employee created the Special Purpose Entities (SPEs) and maintained control of these entities as long as they existed. That comes out of the Examiner’s reports. There’s absolutely nothing improper with this. However, as long as Enron or its subsidiaries or employees maintain control of the SPEs, then accounting standards (which existed in 1997) require the consolidation of the SPEs with Enron. It also appears from the Examiner’s reports that from a legal standpoint the facts surrounding the SPE transactions would require the transactions do be recharacterized from an asset sale to a loan. If that is the case, then from a legal standpoint the SPEs should have been consolidated with Enron.
The characterization of an asset sale from Enron or one of its subsidiaries to an SPE would require the SPE to not be consolidated with Enron. The sale proceeds less the book value of the asset and fees associated with the sale would be recorded as revenue on Enron’s books. IF the SPE borrowed money to finance the purchase, the loan or liability would remain on the SPE’s books and not reflected on Enron’s books.
But, if the transactions were not actually asset sales, but loans, then from both a legal standpoint and an accounting standpoint the SPE would have to be consolidated with Enron. No revenue would be recognized from the transaction and the SPE loan to finance the asset transfer would become debt of Enron and reflected on its consolidated balance sheet.
So, which is it, an asset sale or simply an asset transfer from Parent or subsidiary to subsidiary? On what basis would you use to make the determination?
Don, first I need to tell you that for some stupid reason your comments keep getting trapped in my spam filter. So I hope I’ve caught all of them. In any case, I just dug out these last two and will try to answer them.
I simply find it unthinkable that such huge, material errors in accounting could have resulted from Enron CPAs and that Andersen CPAs did not find it either. This wasn’t for just one year, but since 1997 going forward until Enron filed for bankruptcy. It is honestly unfathomable to me that such material impropriety could have occurred by accident, due to incompetence.
Well, you have to admit, it is a weird little issue at stake. That 3% rule has all kinds of penumbra that could cause trouble. And keep in mind every year going forward, nobody went back to 1997 to revisit the issue. It is shocking that one could distill the big “gotcha” down to one thing – Chewco was accounted for incorrectly.
I find it unfathomable that the people at Enron, AA, and V&E would all risk their professional reputations and careers for this one deal. That to me is much more crazy than this little quirk being overlooked. It isn’t as if it were obvious. The question is not clearcut: is the money from a related party if it came from the domestic partner of an administrator? Legally, it was very fuzzy. I think to this day the argument can be made that until gays are allowed to marry, it’s legal. When they can marry, it’ll become illegal. But that’s what the rules say right now – gays are not spouses. In the eyes of the law, that money came from a totally unrelated party.
I worked directly under the controller of a small public oil/gas drilling company a long time ago. It was my first accounting job coming out of the military, having a BBA with a major in accounting. The guy I worked for was extremely intelligent, as was the accountant who managed the computer operations. (Not aware it was called the IT dept. back then) The V.P. of finance was a very smart guy too. I just can’t imagine those guys could have missed and recorded improperly what the Enron accountants did. And I can’t imagine that Arthur Andersen, our auditors, could have missed it either.
I can for the simple reason that it is much easier to understand a simple mistake than a conspiracy. Why would AA sign off on a deal that was bad? Enron was one of their clients – not the only one. And Enron also gave work to E&Y and PWC and other firms which tells me Enron had nothing to hide. I firmly believe that AA would not have compromised its integrity or professional reputation in order to turn a blind eye to Enron. What possible motive would they have? I believe it was just something that was overlooked.
So, which is it, an asset sale or simply an asset transfer from Parent or subsidiary to subsidiary? On what basis would you use to make the determination?
Which transaction are you talking about?
In response to why would a CPA, auditor, and/or attorney risk their professional careers to aid Enron with inflating revenues, cash flow, and hiding debt off their books, I can think of several reasons. I’ve witnessed people in business compromise ethical values from what I would guess would be either thinking that what they are involved with is not material,or they reason the consequences won’t be that great if caught, or their ethical values weren’t that important to begin with and the ends justify the means, as long as they don’t get caught. Some people just seem to be power hungry, IMO. The unethical, the outlaws, and/or power hungry aren’t limited to just law enforcement.
I think three of the main motivations are the human weaknesses of greed, a lust for power, and a need to control your environment. All stem from being selfish. I am guilty of the last one more than I like to admit, but not to the point of doing something illegal in a business setting. But, maybe to the point of not giving someone the benefit of the doubt as it relates to a difference of opinion. We’re all flawed to some degree.
As for the other large accounting firms, the banks, etc., there are good guys and outlaws, IMO. Why do we have laws period? IMO, it’s to keep in check human frailties, some of which I mentioned above, and offer justice (some anyway) to those harmed by them.
I’m seeing what the bankruptcy examiner, Neal Batson alleges. I’ll take one transaction, because it’s the only one I have some inkling of seeing the big picture on at this point. That was what i couldn’t see the first 3 or 4 years in doing accounting, the big picture, how all the components of the accounting function fit together from an overall perspective.
I think it’s one of the transactions labeled an “FAS 140″ (Statement of Financial Accounting Standards 140) transaction, and it may be referred to as the “McGarret A” transaction. It involves the Hawaii II Trust, a special purpose entity (SPE), I assume, the McGarret I LLC (SPE), Enron Energy Services (EES), Enron, The New Power Company Inc. (TNPC), the Canadian Imperial Bank of Commerce (CIBC) banking syndicate, and a CIBC affiliate.
I don’t have documents showing the Articles of Organization for the LLC or the Trust documents stating the reasons for Enron forming these SPES.
As I understand it, EES, a wholly owned Enron subsidiary, formed TNPC in November of 1999, at which time EES received 200,000 common shares of TNPC. On Jan. 6, 2000, EES contributed residential customer electricity and natural contracts as assets to TNPC and enters into certain agreements with TNPC in exchange for 14.8 million TNPC common shares, and stock warrants (rights) to purchase 45 million common shares of TNPC for $.05/share. common shares and 45 million stock warrants (rights to purchase TNPC common shares). Other unrelated investors make an investment also, but the details aren’t important for this particular transaction.
The examiner’s 1st report states that the electric and nat. gas business contributed never earned a profit and that the last full year of reported operations of TNPC, 1999, before its initial IPO in Oct., 2000, it reported a $25 million loss on $7.8 million of revenues. So, it doesn’t sound like these businesses were profitable at this point in time.
On Mar. 31, 2000, EES sold a portion of its TNPC stock warrants, 6.776 million, to McGarret I LLC in exchange for $20 million in cash and a Class A interest in McGarret I LLC. (The Class A interest had full voting control over McGarret I, but was only entitled to .1 percent of the residual cash flows of the entity.) To finance the purchase of the TNPC warrants, McGarret I raised $20 million by issuing a Class B interest to an SPE called Hawaii II Trust in exchange for $20 million. (The Class B interest had no voting rights, but had a distribution right of 99.9 percent of the residual cash flows from the assets (TNPC warrants) held by McGarret I.
The Hawaii II Trust in turn raised the $20 million through a $18.023 million loan from a banking syndicate led by CIBC (CIBC and party) and by the sale of an equity certificate to a CIBC affiliate for $1.976 million. The Examiner indicates that CIBC and party did not require any of the McGarret I Class B interest as collateral for the loan.
To complete the structure, Enron entered into a Total Return Swap (TRS) with Hawaii II Trust. On the TRS, Enron agreed to pay the principal and interest due to CIBC and party on the loans to the Hawaii II Trust in exchange for Hawaii II paying to Enron the residual cash flows from the McGarret I Class B interest. For a diagram of the structure of these transactions and alleged reasons for it, please see the link below.
http://books.google.com/books?id=IhQtXhsjZpYC&pg=PT313&lpg=PT313&dq=Enron+Mcgarrett+I+LLC&source=bl&ots=VHfQu7wLxB&sig=nI46sQ1n6OLdPOnrQWoSZ50btJQ&hl=en&ei=lsDjToaWGee3sQL1-eXqBQ&sa=X&oi=book_result&ct=result&resnum=5&ved=0CDwQ6AEwBA#v=onepage&q=Enron%20Mcgarrett%20I%20LLC&f=false
Mr. Batson, the Examiner, makes several observations about the overall structure of the transactions. It is alleged that Enron, not Hawaii II Trust, is the primary debtor, liable to pay the loan back to CIBC and party. As a result, the cash flows coming from the transferred asset (Hawaii II’s right to the residual cash flows from the McGarret I Class B interest, i.e. the TNPC stock warrants) is inconsequential. The performance of the transferred asset, the TNPC stock warrants, is of no importance to the creditors, CIBC and party since it is Enron’s credit backing up the transaction that matters, and why, he reasons, the loan to Hawaii II Trust was made without requiring the McGarret I Class B interest as collateral. Because Enron is paying the loan and its subsidiary, EES, maintains complete voting interest control over McGarret I LLC, thus maintaining control over the transferred asset (TNPC stock warrants), and Enron is receiving the residual cash flows from the McGarret I Class B interest, the risk and rewards of ownership of the transferred asset (TNPC stock warrants) remains with Enron, not McGarret I LLC.
This also means that the CIBC affiliate’s investment is not at risk, thereby negating the SPE non-consolidation requirement that the third party owner investment in the SPE must be substantive (at least 3% of total assets).
As a result, it is reasonable for me to conclude that an asset sale has not been made by Enron to McGarret I LLC, but rather Enron has received a Loan through the SPEs from the lenders. This would mean that the SPEs should be consolidated with Enron, no revenue from an asset sale should have been recorded on the books of Enron, based upon SFAS 125, cash flows resulted from financing activities, not operating or investing, and the $18.023 loan should be reflected as debt on Enron’s balance sheet.
The Examiner states that most of the SPE transactions are similarly structured for the purpose of materially misrepresenting Enron’s financial position and results of operations in order to meet earnings expectations and keep the stock price up. That is my best explanation at present for the structure of these transactions and most of the other SPE transactions.
Don,
I just don’t know how valuable the Batson report is on determining whether or not there was fraud at Enron. To the extent that the Feds thought they had anything on SPEs, it was litigated at trial, largely without much success by the Feds.
It seems impossible to get people off “generic” Enron, the company, and onto the individual defendants. Enron never went to trial. The Feds chose not to tangle with Enron, but instead went after private individuals. Saying that there was fraud at Enron is a nice game to play, but that is not the issue. The issue is whether any individual was properly prosecuted (meaning, without misconduct by the Feds) for wrongdoing. People seem unable to engage on that level, but insist on staying at a hypothetical level.
“I just don’t know how valuable the Batson report is on determining whether or not there was fraud at Enron. To the extent that the Feds thought they had anything on SPEs, it was litigated at trial, largely without much success by the Feds.”
It sounds like you are saying that if there really was impropriety in the transactions, it should have been discovered during the trial. In other words, the trial findings are always fair and just and bring out the truth. If that were the case, if truth always was the end result of a trial, we wouldn’t be debating back and forth, and countless innocent people wouldn’t still be behind bars.
If the Examiner’s description of the transactions are truthful, then most of them are clearly illegal and violate GAAP, IMO. In addition, the number of them and their significance to Enron’s financials would, IMO, mean that someone is intentionally “cooking the books” because a competent Enron CPA would understand how and why they violate both GAAP and the law.
I respect your opinion that you don’t believe any fraud occurred. From my accounting knowledge, I don’t find that a reasonable conclusion for myself.
I have already stated that I am about being fair to those who were considered suspects or convicted. I oppose prosecutorial misconduct. However, I believed that someone was cooking the books before doing extensive research on Enron. After researching and looking at the structure of the SPE transaction I described in a previous post, plus three more transactions thus far, assuming the Examiner’s evidence is valid for them and the other transactions, I am absolutely convinced someone was intentionally cooking the books. How high that goes is another matter that would have to be arrived at. I have my doubts Fastow and subordinates are the only ones involved, but are merely scapegoats for some. These transactions, parts of them anyway, were allegedly discussed with the Finance committee, the Board of Directors, Andersen auditors, lawyers, and the SEC. I believe the Total Return Swap must have not been discussed with the SEC or Anderson auditors or they were in on the collusion. They appear so blatantly illegal and pervasive, it is beyond my comprehension that Lay and Skilling would not know about them and their potential consequences.
I realize some or most, perhaps, are not going to be convinced by what is presented on a blog like this. All I can say is that I have not found anyone in my limited research to take an alleged improper SPE transaction as a whole and explain how it does not blatantly violate GAAP and the law. I have looked and looked for a trial transcript, but have not been able to find much at all. Whether such analysis was covered in the trial I don’t know.
It sounds like you are saying that if there really was impropriety in the transactions, it should have been discovered during the trial.
We are getting into a very meta discussion here, which I do not mind at all. The question is: if there was fraud and nobody was around to testify to it, did it happen? Very zen.
In other words, the trial findings are always fair and just and bring out the truth. If that were the case, if truth always was the end result of a trial, we wouldn’t be debating back and forth, and countless innocent people wouldn’t still be behind bars.
Oh I agree very much that truth is often the first casualty of the justice system.
If the Examiner’s description of the transactions are truthful, then most of them are clearly illegal and violate GAAP, IMO.
I still don’t know for sure that they do. It is not an issue that was ever fully resolved for me. The loan-that-might-not-be-a-loan to Barclay’s, the fact that in the eyes of federal and state law, Chewco did not accept any funds from related parties… that to me is still very grey.
In addition, the number of them and their significance to Enron’s financials would, IMO, mean that someone is intentionally “cooking the books” because a competent Enron CPA would understand how and why they violate both GAAP and the law.
I disagree. Why would AA sign off on deliberately cooked books? Why would V&E? Assume Enron is guilty as sin. Why would those two companies jeopardize themselves for Enron?
I respect your opinion that you don’t believe any fraud occurred. From my accounting knowledge, I don’t find that a reasonable conclusion for myself.
I have already stated that I am about being fair to those who were considered suspects or convicted. I oppose prosecutorial misconduct. However, I believed that someone was cooking the books before doing extensive research on Enron. After researching and looking at the structure of the SPE transaction I described in a previous post, plus three more transactions thus far, assuming the Examiner’s evidence is valid for them and the other transactions, I am absolutely convinced someone was intentionally cooking the books.
Well, who was cooking the books and how? Are you saying this person was just turning a blind eye to the implications of GAAP?
How high that goes is another matter that would have to be arrived at. I have my doubts Fastow and subordinates are the only ones involved, but are merely scapegoats for some. These transactions, parts of them anyway, were allegedly discussed with the Finance committee, the Board of Directors, Andersen auditors, lawyers, and the SEC. I believe the Total Return Swap must have not been discussed with the SEC or Anderson auditors or they were in on the collusion.
I want to be sure I understand you. Did you just say that the SEC might have been in on a conspiracy with Enron?
They appear so blatantly illegal and pervasive, it is beyond my comprehension that Lay and Skilling would not know about them and their potential consequences.
Well, it actually makes more sense to me that they would be in the dark. Why would whoever is cooking the books tell the bosses? Jeff Skilling was never accused of benefiting from any of the transactions at Enron. So what possible reason could he or Lay or anyone else have to be in on it?
I realize some or most, perhaps, are not going to be convinced by what is presented on a blog like this. All I can say is that I have not found anyone in my limited research to take an alleged improper SPE transaction as a whole and explain how it does not blatantly violate GAAP and the law.
I doubt I will be convinced but you’ve been very respectful and thoughtful so I don’t mind arguing about it.
“I want to be sure I understand you. Did you just say that the SEC might have been in on a conspiracy with Enron?”
I said that either the Total Return Swap part of the transaction must have not been disclosed to the SEC, or the SEC was in on the collusion, because of what appears to me to be clear violations of GAAP, and I would assume SEC laws as well. So I am basically thinking that part of the transaction must have not been disclosed with the SEC.
From Deloitte & Touche’s website, here are normal characteristics of an SPE transaction: “Typically, an SPE is created for one purpose, usually with little or no other activity and usually benefiting only one company. Often, an SPE is used to raise debt more efficiently or to manage a company’s balance sheet Examples of transactions that may involve SPEs include:
financing arrangements; leasing arrangements; and sale/transfer of assets to an SPE that issues debt obligations or equity supported by the transferred assets. Specifically as it relates to financing arrangements, an SPE would serve as a vehicle whereby an entity, the sponsor, sells assets in exchange for cash or other assets. The funding for the SPE’s purchase would come primarily from the SPE issuing debt or equity to third-party lenders or investors collateralized by the financial assets.”
http://www.iasplus.com/dttpubs/spedt.pdf
One of the major differences between a typical Enron transaction and the transactions described, specifically referring to the FAS 140 transactions referred to by the Examiner, is that in the case of Enron the 3rd party lender to the SPE generally did not require the asset sold to the SPE to be restricted from sale or put up as security for the transaction. Also, there is no mention in the article above of the sold asset or the risks and rewards of the sold asset making a round trip through SPEs back to the seller to be once again under its control and possession. I believe such attributes of the Enron transactions .violate GAAP and are unlawful, but I can’t speak to the legal aspect that well. I’m not experienced in the legal aspect. I simply recognize what i believe to be the underlying economic reality of such attributes, that they are not legitimate sales but loans.
In order for an SPE to be independent from an accounting standpoint in 1997 through 2001 and not consolidated with its sponser, Enron, four characteristics had to be met:
“1. A third-party owner independent of the sponsor has a sufficient equity
investment in the SPE;
2. The independent third-party owner investment is substantive (that is, the third party owns at least 3 percent of the SPE’s total debt and equity or total assets);
3. The independent third-party owner has a controlling financial interest in the SPE (that is, the owner holds more than 50 percent of the voting interest of the SPE);
and
4. The independent third-party owner possesses the substantive risks and rewards of its investment in the SPE (that is, the owner’s investment and potential return are “at risk” and not guaranteed by the transferring organization).”
Requirement 3 was definitely not met, IMO, in the McGarret I LLC transaction where 6.776 million TNPC stock warrants were contributed by EES to McGarret I LLC in exhange for $20 million, a .1% interest in the McGarret I Class B Interest, and voting membership control over McGarret I LLC. The alleged 3rd party owner, Hawaii II Trust, did not own more than 50 percent of the voting interest in McGarret I LLC. I am not aware it had any voting interest in McGarret I LLC whatsoever, but received 99.9% interest in the McGarret I Class B interest (a right to 99.9% of the residual cash flows from the purportedly sold asset, the 6.776 million TNPC stock warrants held by McGarret I LLC.). Also, I am not convinced that Hawaii II Trust was an independent SPE or 3rd party, since its loan obligation to CIBC and party was not collateralized by its asset, 99.9% of the McGarett I Class B Interest, not was it restricted in anyway I am aware of by CIBC and party. It appears to me that CIBC and party was relying on the credit worthiness of Enron, rather than Hawaii II Trust. Therefore, in that case, Item 1 would not be met either.
The Deloitte & Touche article also states: “Non-consolidation is not appropriate by the sponsor when the independent owner makes only a nominal investment, the activities of the SPE are virtually all performed on the sponsor’s behalf, or the risks and rewards of the assets of the SPE rest directly or indirectly with the sponsor.”
As explained above, the risks and rewards of the McGarret I LLC assets, the 6.776 million TNPC stock warrants, remain with Enron, not McGarret I. Also, the risk and rewards of Hawaii II’s asset, 99.9% of the McGarret I Class B Interest were sold to Enron in exchange for Enron making the loan payments to Hawaii and meeting the obligations of the Hawaii II equity investor, the CIBC affiliate. So, the risks and rewards of Hawaii II’s asset remain with Enron also, IMO. So, this is also a reason that both McGarret I LLC and Hawaii II Trust should have been consolidated with the sponsor, Enron, and why the $20 million of gain on sale should not have been recognized on Enron’s financials and the $18 million in debt from CIBC and party should have been reported by Enron.
In the second qtr, 2000, Enron marked to market the value of the TNPC stock warrants sold to McGarrett I LLC over the obligations due on the CIBC and party loan and the liabilities due to Hawaii II’s equity partner, a CIBC affiliate, and recorded the increase in value of $52 million as revenue on Enron’s financials. Consolidation of McGarret I and Hawaii II with Enron would have eliminated this “phantom” revenue.
“If the Examiner’s description of the transactions are truthful, then most of them are clearly illegal and violate GAAP, IMO.”
I still don’t know for sure that they do. It is not an issue that was ever fully resolved for me. The loan-that-might-not-be-a-loan to Barclay’s, the fact that in the eyes of federal and state law, Chewco did not accept any funds from related parties… that to me is still very grey.
I am not familiar with Chewco, nor am I a lawyer or understand that well what the legal arguments are for or against recharacterizing an asset sale as a loan. But, what the Examiner argues makes sense to me from a legal standpoint. But, IMO, from an accounting standpoint, what I have researched thus far violates GAAP
I don’t see the need for the complexity of the transactions. Enron or a subsidiary can sell an asset to an adequately capitalized SPE and the SPE can obtain a loan from an independent 3rd party lender through the collaterization of the asset sold and obtain 3rd party equity investors who control the entity. If the SPE is adequately capitalized and can generate sufficient cash flow, then it can make the debt payments, not Enron, and it can be truly independent, under at least 51% 3rd party voting membership control, thereby justifying recognition of revenue on the sale by Enron and not consolidating the SPE or recognizing its debt on Enron’s financials. No Total Return Swaps.
I find all the bells and whistles and complexity of the transactions as a cover for shinanigins and cooking the books. Not necessary, unless your purpose for the SPEs is illegitimate.
“I have already stated that I am about being fair to those who were considered suspects or convicted. I oppose prosecutorial misconduct. However, I believed that someone was cooking the books before doing extensive research on Enron. After researching and looking at the structure of the SPE transaction I described in a previous post, plus three more transactions thus far, assuming the Examiner’s evidence is valid for them and the other transactions, I am absolutely convinced someone was intentionally cooking the books.”
Well, who was cooking the books and how? Are you saying this person was just turning a blind eye to the implications of GAAP?
I’ve already explained in detail how I see the books were cooked. By using SPEs which were not truly independent of Enron to create “phantom” revenue and hide debt off of its books and record very badly needed cash flow from investing or operations rather than through financing activities. Yes, turning a blind eye, probably to meet the intense pressure that a Corp. like Enron faced to make quarterly earnings estimates, cash flow projections, and debt ratios to keep its credit rating. Public Corps. manage earnings, almost all if not all of them. I have a book on Financial Statement Analysis. It teaches how to recognize some earnings management techniques so to get better, more objective financial statement numbers. Some companies have pushed the envelope too far to manage earnings. I see Enron, MCI Worldcom Tyco Intl., Sunbeam, Global Crossing, Qwest Communications, etc. as doing things improper to meet earnings expectations. The list could go on and on.
I have an SEC text, giving a short history of the capital markets. From the 1300s on, fraud and deceipt have been major problems at times, causing upheavals in the markets. The dot.com era was imploding about the time that Enron did. I remember hearing dot.coms on CNBC say that GAAP was out of date, that other measures of success were more important. I don’t recall those measures now, but the point is that GAAP is still around and those companies are either bankrupt or had to change their ways and generate legitimate income and assets using GAAP.
I don’t mean to be offensive, but I honestly see Enron’s extensive use of SPEs, the manner in which they used them, to cook the books, create non-existent revenue, ad hide debt to keep the charade going as long as they could. A recession was instrumental in exposing the improprieties, IMO. The change to mark to market for not only the natural gas trading, but applying it to other areas of revenue was unjustified, IMO. The gap between recognition of revenue (which had not been earned, a GAAP basic principle) and when cash flow actually began to be received was a major flaw of the model and not a good way under GAAP to recognize revenue. Conservatism in recognition of revenue, another basic GAAP principle was thrown out the window, IMO. Just not a sound model to operate a business on.
“In addition, the number of them and their significance to Enron’s financials would, IMO, mean that someone is intentionally “cooking the books” because a competent Enron CPA would understand how and why they violate both GAAP and the law.”
I disagree. Why would AA sign off on deliberately cooked books? Why would V&E? Assume Enron is guilty as sin. Why would those two companies jeopardize themselves for Enron?
I don’t have a resource in front of me, but in the 80s sometime auditing firms began to discover they could make more money in consulting, versus auditing. They began to advise companies on how to get around the accounting standards, and it hasn’t stopped yet, IMO. Money is the bottom line. Auditing firms don’t want to lose their business, especially not one as lucrative as Enron was, IMO.
I’ve personally experienced the lawyers and CPAs employed by a major international bank prostitute themselves for their employer and for money.
Concerning the Braveheart project, all of it appears to be hopes and dreams and nothing substantive about it except that Blockbuster did sign a 20 year contract with Enron. But, Blockbuster had not obtained the rights to broadcast the movies, and the rest appears to be nothing but projections of what Enron and Blockbuster believed they could achieve. Noteworthy to put in the company’s quarterly and annual reports, definitely, but not quantifiable enough to recognize as revenue.
I don’t see how mark to market accounting could legitimately be justified in this situation. Revenue has not been “earned”, a fundamental accounting principle. All the necessary ingredients to record revenue are not even close to being in place. I think Enron got on a mark to market and fair value accounting addiction, unjustified in some situations, particularly this one. I doubt they obtained permission from the SEC to apply fair value accounting to this. I assume they just did it to meet earnings estimates.
From your Project Braveheart article:
“Furthermore, don’t take my word for it. Take Ken Rice’s! On the stand, Rice said something to the effect that whatever happened with Braveheart was utterly insignificant to Enron and Enron’s financials. It was below the level of notice in the overall scheme of things.”
True, the unearned, projected in the future, yet to materialize earnings from Braveheart, nevertheless recorded as revenue on Enron’s financial statements, $53 million in the 4th qtr of 2000 and $58 million in 1st qtr. 2001, are “immaterial” to the total revenues for those periods. However, the accounting principle of “Materialty” looks not only at a segment of a business, but also considers the business as a whole. This illegitimate recognition of revenue was going on company wide at Enron, it wasn’t isolated to the EBS segment of the company. Looking at all illegitimately booked (phantom or fictitious) revenue for the year 2000,as a whole, including Braveheart, those revenues added together, according to the Examiner, account for 96% of Enron’s total revenues for 2000 (all but $42 million). (See Examiner’s 2nd report, pages 46 – 49.) So, you have to look at the aggregate impact of all seemingly immaterial items to assess what their overall impact together is going to have before you write something off as immaterial.
https://webspace.utexas.edu/westbro/www/Batson%20InterimReport2ofExaminer.pdf
How Arthur Andersen could have gone along with this is beyond my comprehension. I know that Andersen Professional Standards Group opposed it, as they did other SPE transactions as well, but Enron audit manager David Duncan approved it. Sanity and common sense left the building. I believe Duncan was under significant stress from Enron.
IMO, the expenditures (not necessarily expense) being incurred for project Braveheart and the revenues would have been better measured using the Percentage-Of-Completion method or accounting for the expenditures as R&D, one or the other. I don’t see how mark to market would apply to the Braveheart situation. Using either of these methods, the Braveheart project would be part of the Enron narrative in its financial reports, but revenue would not be recognized until all the requisite components were in place to recognize it in accord with GAAP.
http://www.nysscpa.org/cpajournal/2001/0300/dept/d035001.htm
@Bettendorf: The interesting thing about the Braveheart deal is that the problems you seem to have with it are largely not the issues that were litigated at the EBS trial. That the technical aspects of VOD worked at EBS was convincingly confirmed by defense witnesses and documents at trial. Therefore, what the Feds tried to do at trial is accuse Kevin Howard and Michael Krautz of making a “verbal side deal” with nCube (the set-top box vendor) in spite of explicit wording in the contract that voided any verbal understandings.
In my opinion, relying on anything other than the trial transcripts and trial exhibits to try to make a case about Enron doesn’t get you anywhere. There were more than 50 million documents in the Enron cases, and unless you explore the defendants’ side of the topic, the odds that you can really figure out what was going on (and whether criminal activity was involved) are essentially zero.
“In my opinion, relying on anything other than the trial transcripts and trial exhibits to try to make a case about Enron doesn’t get you anywhere. There were more than 50 million documents in the Enron cases, and unless you explore the defendants’ side of the topic, the odds that you can really figure out what was going on (and whether criminal activity was involved) are essentially zero.”
I would love to get my hands on arguments the defense made to defend Enron’s use of the SPEs and the transactions involved with them. But I have looked and looked for the trial transcript or large portions of them, but can not find any. The entire transcript is $700. That dog doesn’t hunt for me. Furthermore, why someone doesn’t provide a link for me to the transcripts is beyond me. I’ve heard, “it’s in my Enron index” or something to that effect. How about a few links to large portions of the transcript for heaven’s sake.
This is what I think. From what I have researched thus far, unless the transactions with the SPEs were structured differently than how the Examiner says they were structured, I am convinced, with no doubt whatsoever, that a number of people in the accounting/finance department knew that what they were doing was improper from an accounting standpoint, in violation of GAAP, and illegal from an SEC standpoint. That clearly indicates fraud with intent to harm. You don’t record so many transactions in violation of GAAP and the SEC and call it a “mistake” or incompetence. Provided the transactions are structured as the Examiner claims, I don’t need a trial transcript to determine that because I am competent, as an accountant, to know what is and is not in accord with GAAP as it relates to the transactions I have researched. Oh, and if you ask me, “How did the transactions violate GAAP or the SEC”, I will refer you to one transaction I have already gone into detail to explain. If you don’t understand what I have explained, please ask questions. I understand it thoroughly, so hopefully I can bring you to the point of at least understanding on what basis I am making conclusions on. To me you guys are just not “getting it” as to how they violate GAAP and, therefore, SEC laws.
As it relates to the Braveheart project, it sounds like the government tried to make a case that the technology was not fully developed, as Enron stated that it was. That honestly is of no concern to me. As I have stated, Arthur Andersen’s Professional Standards Group objected to the recording of income by Enron concerning the Braveheart project. That is the issue to me, whether it was proper to record income from this project. After all, Enron’s imploding was based on a lack of trust and confidence in Enron’s financial statements by the public Not whether EBS’s technology was fully developed. Why the government focused on the state of the technology I have no clue.
For revenue to be recorded from a transaction, it must be “earned”. I provided a link to GAAP as a reference for that statement, it’s not just my opinion. This is also in agreement with the SEC and its laws. I can provide a link if you like to that. Obviously, the signed contact had some economic worth, assuming both parties followed through with the agreement. But contracts are signed on a daily basis, such as a long-term contract for Boeing to build X number of planes for Southwest Airlines. But no revenue is “earned” and recognized on the income statement until it’s earned. So, until Enron performs services under the contract that entitles them to revenue, any cash or compensation received from the contract would be “unearned” revenue, not to be recognized on the income statement until it is earned. Because no revenue has been recognized from the contract, any compensation received from the sale of an interest in the contract would have no recognizable economic value either, from an accounting standpoint, meaning such compensation would be “unearned” as well, and not recognized on the income statement until performance under the contract begins to occur. The performance part of the agreement never came to fruition, so no revenue should have ever been recognized, period.
Maybe it’s not fair for me to ask for opposing views to try and counter what I have presented as far as the transactions violating GAAP because you aren’t educated in accounting. But, unless you understand the accounting side of it, I don’t understand how you can come to a credible conclusion about what really happened inside Enron as it relates to the impropriety of the transactions. Even what the defense accountants present as an opposing view in regards to the transactions would be helpful for me. At present I am locked into what I know from the Examiner’s report, the Special Enron Committee’s report, articles by “The CPA Journal”, and articles by a few other CPAs, and my own knowledge of GAAP. Come on guys throw something at me from an accounting standpoint, just a link to something would be fine, no explanation needed. Just show me something from the defense’s point of view. I’m an accountant, give me reasoning from the defense’s point of view from an accounting standpoint.
I;m done here. Why transcripts ot the trial are not readily accessible on the internet, I don’t know. I have legalbitstream and have used it to refer to cases involving accounting issues, but still can not find the Enron case.
Whether the issues I have brought up were litigated at trial or not, I have presented what appears to me to be factual evidence from the Examiner’s report and no one, I repeat no one, has countered it. I have presented Authoritative accounting sources to back up my conclusion that the SPEs I have researched were not truly independent of Enron and, therefore, should have been consolidated with Enron. Revenues should not have been recognized and debt should have been included on Enron’s books
Whether this evidence was used in the trial and whether any counter to the Examiner’s report was presented I don’t know. I have no access to trial transcripts of any substance that addresses the Examiner’s findings. I honestly can’t conceive of a counter to the Examiner’s findings and none has been presented here. I don’t find calling such evidence “hypothetical” or insignificant, because it wasn’t litigated, as a satisfactory counter to what appears to me as objective transactional evidence of fraud. In my view, a competent accountant, certified or not, is going to recognize the violations of GAAP.
One thing you can do is head over to the Houston’s Clear Thinkers Blog and check out the Enron archives. As I recall, that blog’s owner posted week-by-week reports on the Lay/Skilling trial. There is even an analytical post on the issues at trial, icluding the accounting/financial issues.
The problem you risk from depending on sources such as the Examiner’s Report and the Special Committee Report is that they are one-sided documents, essentially spin documents. Those people were essentially tasked to find evidence that would back up existing theories, so you tend to see very little contradictory information in their reports. The other problem with those sources is that they tend to be incredibly weak on evidence against individuals (as opposed to general accounting issues).
The DOJ chose not to indict Enron, the corporation, but instead went after private indiduals. So the issue of fraud at Enron was never actually litigated in the general sense. The trials are interesting because the DOJ had to prove criminal wrongdoing by actual individuals, and they mostly failed if you look at all the Enron-related litigation.
I agree that trial transcripts and trial exhibits should be more readily available on the Web. It seems like the government should be required to post those as public documents on the Web. In the absence of those documents, the debates about fraud at Enron are pretty meaningless because people rely on such incomplete documentation.
I’m not finding anything in regards to analysis of the accounting transactions on the Clear Thinkers Blog. When I say analysis, I mean explaining the transaction from the defense’s point of view, WITH SUPPORTING AUTHORITATIVE ACCOUNTING/SEC PRONOUNCEMENTS to back up their argument. All I have read at the Clear Thinkers Blog is that a number of accountants and lawyers inside and outside of Enron approved the transactions as legitimate. The underlying assumption appears to be that CPAs and attorneys ALWAYS act ethically and within the law. That doesn’t wash for me, for reasons which I will explain in the rest of this post.
I have enough accounting experience to have witnessed professional people and business owners behaving unethically, and in a few cases, outside the boundaries of the law. At the first public company I worked for there were attempts to “smooth” quarterly earnings with ever increasing quarterly earnings per share through the hiding of some revenue in reserve accounts, such as depreciation. In later quarters, if actual earnings didn’t meet earnings expectations, that revenue was pulled out of the reserve account and included in the current quarter’s earnings. The amounts, as far as I know, were not material. Still, the principle is unethical. (Pardon me, Jim, I still think you are a great accountant.) But earnings management is pervasive in the public company world. And executives in some companies cross the line and actually break the law in a very significant manner with such manipulation. Because earnings management has been a common practice for so long, an experienced executive or group of executives can avoid detection oftentimes inspite of the fact he has acted unethically or illegally. The size of the problem of earnings management and the pressure to meet quarterly earnings estimates can be observed in the larger scheme of things based upon the numerous alleged financial frauds around the time of Enron and the financial crises of 2008, plus the fact that the total number of restatements of public company financial statements has exploded in recent years, from 92 in 1997 to 225 in 2001 (Enron being one of them), 513 in 2003, 627 in 2004, doubling to 1255 in 2005, and 1420 in 2006. ( See link)
http://www.tscpa.com/journal/articles/fin_statmt_restatmt.pdf
Best case, the restatements, and how they are reported to the public and SEC, in general are less than totally transparent, providing full disclosure, IMO. It appears that the restatements, in general, were due to a company seeking to manipulate the accounting in order to make it appear it was doing better than it actually was. In some cases the auditors were involved in this deceipt. The main reason for such manipulation, IMO, is to manage earnings and meet periodic earnings estimates. CPAs and PhDs write books on financial statement analysis, covering earnings management throughout the texts.
Quote: “To some degree, the rise in restatements also may signal a culture shift among corporate managers, directors, and auditors. It has been more than eight years since then– SEC Chairman Arthur Levitt delivered his landmark “Numbers Game” speech, where he warned that the proliferation of earnings-management gimmicks had eroded the quality of corporate earnings and, thus, the quality of financial reporting. “Management may be giving way to manipulation; integrity may be losing out to illusion,” he said, calling upon corporate managers and Wall Street analysts “to embrace nothing less than a cultural change.” Today it appears at least some of the financial community has begun making that change, albeit belatedly.”
http://www.nysscpa.org/cpajournal/2006/1206/infocus/p12.htm
Therefore, to state that a number of accountants and lawyers approved the Enron transactions, or that the transactions were not successfully litigated at trial means little to me without a detailed explanation of the transactions, with supporting accounting principles and pronouncements. .Possessing that information, I may or may not agree with the trial results. But, to assume that a company operates within legal boundaries because its employees say it does, when there appears to be significant, objective transactional evidence to the contrary is simply unreasonable to me.
So, after reading some of the Houston Clear Thinkers Blog and another article (link below), it is reasonable to see their point of view, which I would tend to agree with, in regards to law enforcement over reaching and being too powerful in some instances. However, at the same time, I believe the corporate culture in the U.S. has changed dramatically over the last 30 years. The outlaws have become much more sophisticated with their dirty deeds. While SPEs existed as far back as the 1970s, the abuse and manipulation of them appears not to have started on a large scale until recent years. (See link below) Again, it seems there has been a corporate culture shift, as stated above. That may be one motivation for the government’s over reaching – public pressure to seek to curb the manipulation and abuses of accounting standards by public companies. I’m not saying it is justified, but it may be an explanation of the “why” of the over reaching.
http://www.cato.org/pubs/policy_report/v32n1/cpr32n1-3.html
http://www.nysscpa.org/cpajournal/2004/704/essentials/p30.htm
There is a distrust on your part of the prosecution’s arguments, based on perceived or real abuses. Likewise, there is a distrust on my part of the defense’s side based on what appear to me to be real abuses of accounting standards by Enron, other public companies, and what I have personally witnessed from my work experience in both public and private business. Both positions are reasonable, IMO.
“Enron executives are innocent. Their company was toppled by a run on the bank, exactly like we’ve seen with Bear Stearns, IndyMac, Lehman Brothers, and other companies. There was no fraud or conspiracy at Enron.”
To me the evidence is mounting that Lay, Skilling, Causey, Fastow, and others were intentionally misrepresenting the financial condition of Enron in a very material way. I do see it as fraud. Here’s my case thus far:
(1) Reference your blog about the M2M potential to cheat, coming from an Enron exec or employee. Intentional Material Misrepresentation of the actual Fair Market Value of assets (inflating them) and recording of phantom (illegitimate) revenue violates SEC regulations. Generally, it causes a company’s stock to be overpriced and misleads investors and creditors about the true financial condition of the entity. Knowledge of this deception would deflate the stock price severely due to loss of trust.
(2) Failure of the Board of Directors and senior executive officers to abide by the Enron Code of Ethics which specifically disallowed a conflict of interest through an Exec. also being involved with managing and having a personal investment in an SPE (related party transaction). In hindsight, it was a very dumb decision to circumvent the code of Ethics through a board resolution. They were also advised by David Duncan on a number of occasions that their very aggressive accounting could be interpreted by an outside party as illegal. Granted, he never made such procedures a material factor in deciding whether to issue an unqualified opinion on the company’s financial statements. However, he did warn them on a number of occasions and Arthur Andersen’s HQ held a meeting to discuss whether to keep Enron as a client as a result of such aggressive procedures. Why they didn’t seek a 2nd opinion from another accounting firm is beyond me and why the Board didn’t make it an issue is also.
(3) Failure to provide full disclosure of Related Party Transactions. SEC Regulation S-K, section 229.404 “Transactions with related persons” requires the disclosure of specific information which Enron did not disclose in its SEC filings until its 3rd Qtr of 2001 10-Q when it had to report it was going to restate prior years financials and the first 2 quarters of 2001, record a $1 Billion loss as a result, and write down its Equity by $1.2 Billion. At that point the company got the idea it needed to be more transparent. (But, it still didn’t completely as will be explained later.) Such disclosure would have drawn attention to the extent of use of SPEs by Enron and would have caused analysts to question the propriety of such use, even though Enron’s Board, Senior Management, and Auditors apparently never did. See link for the requirements.
http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=20c66c74f60c4bb8392bcf9ad6fccea3&rgn=div5&view=text&node=17:2.0.1.1.11&idno=17#17:2.0.1.1.11.5.31.4
(4) Related Party Transactions with SPEs occurring at the end of an accounting period. I believe this was due to more than just coincidence. It aided them to meet quarterly earnings and cash flow projections.
(5) Energy Traders were running amuck, manipulating California’s electricity market causing prices for electricity to skyrocket. Skilling makes a joke about it comparing it to the Titanic.
(6) On October 14, 2001, on the eve of Enron releasing its 3rd Quarter, 2001 Earnings Press Release, David Duncan spoke to Richard Causey about the Press Release. It characterized the $1 Billion loss it was to report as “non-recurring charges”. The items involved are generally included with normal operating earnings in GAAP statements. His concern was that such characterization would mislead investors and the public about the true nature of the losses. He states that Causey “acknowledged” his advice. Enron ignored Duncan’s advice and reported the loss as “non-recurring” anyway. See memo below and Enron Press Release.
The fact that Enron ignored this advice and stated it had recurring earnings for the quarter when, in fact, there was a loss and no earnings at all for the quarter, recurring or otherwise, coupled with the fact that the Press Release did not mention the $1.2 Billion write down of Stockholder Equity and no Balance Sheet, or Statement of Cash Flows was provided with the Income Statement with the release, leads me to believe that Enron was engaging in what it viewed as damage control. This is misleading and deceptive. Ken Lay was the person to explain the Press Release. The Press Release Headline was “Enron Reports Recurring Third Quarter Earnings of $ .43 per diluted share“. There is no excuse for this, NONE. My view of Mr. Lay and Mr. Skilling has plummeted as a result. And the markets reaction to finding out later that there had been a write-down of Equity, plus seeing how Enron characterized a loss as recurring earnings I think validated their suspicions about Enron. The stock price began to plummet.
http://cdm15017.contentdm.oclc.org/cdm4/document.php?CISOROOT=/p15017coll21&CISOPTR=4553&REC=12
http://www.washingtonpost.com/wp-srv/business/daily/transcripts/enronrelease_101601.html
This combined with the complex financial structured transactions which in most cases have no economic substance, in my view, leads me to believe that there was fraud going on at Enron and the evidence is beginning to mount that top Senior Executives were leading it. I’ve barely touched the surface of what’s known.
Tack on two more items to the above.
(7) Enron’s 8-K Report filed 4-22-2002 states that “under the direction of current management, certain information contained in the Company’s accounting records and reports was reviewed. Based on such review, current management of the Company believes that the last reported financial information contained in the Company’s Form 10-Q filed with the SEC on November 19, 2001 should not be relied upon.”
They go on to say, “In addition, the balance, a material portion of such
estimated amount, would relate to valuations of several assets the historical carrying value of which current management believes may have been overstated due to possible accounting errors or irregularities.”
So, the reliability of Enron’s 3rd Quarter, 2001 Financials are in serious doubt. This states that it appears that Enron, with the concurrence of Arthur Andersen, materially overstated the values of some of its assets, even after the reporting of a $1 Billion loss in the 3rd Qtr, 2001, and a $1.2 Billion write-down of Equity. Ken Lay made the unfortunate mistake of saying that there would be no more shoes to drop. See page 2 in link below.
http://www.secinfo.com/dRx61.391.d.htm#1stPage
(8) On June 26, 2002, Edmund Jenkins, Chairman of the Financial Accounting Standards Board (FASB), makes a statement before a Federal Government Subcommittee. Some of this statement is about Enron and he makes it clear, fraud or no fraud, that Enron clearly violated GAAP and SEC Regulations. One quote he takes from the Arthur Anderson trial:
“Finally, in connection with the federal government’s recently completed trial of Andersen in Houston, Texas, partners from Andersen’s professional standards group testified that “seriously flawed accounting methods and misleading documentation [was] prepared by the Enron team to justify the accounting.”30 They also testified that the Enron audit team
“disregarded and misrepresented” the professional standards group’s advice about the appropriate accounting required.31 ” I assume he concurs with such statement since he’s quoted it. See Pages 25, 26 of link.
http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175818776144&blobheader=application%2Fpdf
Nothing wrong with Enron’s Financials? Very reputable people think otherwise, including Enron Execs.
@ Fred: “The problem you risk from depending on sources such as the Examiner’s Report and the Special Committee Report is that they are one-sided documents, essentially spin documents. Those people were essentially tasked to find evidence that would back up existing theories, so you tend to see very little contradictory information in their reports. The other problem with those sources is that they tend to be incredibly weak on evidence against individuals (as opposed to general accounting issues).
The Special Committee Report is a “spin” document? Would you please provide your reasoning on that? Two of the three members were existing Enron Board Members. The other party, Powers, was chosen by the Board Members How do you get “spin” from that? No theories existed at the time the special committee was appointed, in 2001, as far as I know. What “existing theories”?
Accounting transactions from Enron’s records are objective evidence. While you can draw different subjective conclusions about them, they themselves are objective evidence of what actually occurred. So, if impropriety is found in them, then you know that someone in the accounting department was up to something. So, accounting impropriety leads to evidence against individuals. The transactions didn’t jump off the bookshelf and record themselves. An individual did. Based on who managed the SPEs and who as in charge of the SPEs on Enron’s side, it’s not difficult to arrive at who you believe was responsible. Therefore, your statement that evidence against individuals was weak doesn’t make sense to me.
If the Defense wants me to believe them, in regards to the accounting transactions, they need to present their side of it, including backing up the purpose for them with authoritative accounting pronouncements from FASB and the SEC. Trial transcripts are non available as far as I can determine. You can say, “Enron did nothing wrong”, but that statement has to be accompanied with an explanation of the SPE transactions with authoritative FASB or SEC guidance backing it up.Mr. Skilling can state there was a legitimate purpose for the transactions, but what is needed is to explain how they are legitimate. It doesn’t appear that way to me. I’m not about screwing innocent people. I’d like to know the truth. From what I’ve reviewed it looks to me like there was definitely impropriety in recording the transactions. Whether that can be tied to Skilling is another matter.
In regards to prosecutorial abuse, I get that. In regards to Enron being totally innocent, I don’t. It appears to be a mixed bag to me.
Doing a little reading on Chewco L.P. and JEDI now. Chewco was a sham from the getgo, having no 3rd party equity whatsoever in it at the time it was formed in Nov. 1997. The supposed “equity” that came shortly later came from Barclays ($11.4 Million) with a smidgeon of equity coming from Kopper ($115,000 in G.P. and $10,000 in its L.P.) This is not equity, this is a loan, and it was recorded as such by Barclays. Chewco never had any significant equity interest in it. Here’s the way a loan is recorded:
Debit………..Cash…..$11,400,000
Credit……….Notes Payable, Barclays…..$11,400,000
In form you can call it what you want, but in substance, IT’S A LOAN. In addition, the bridge loan of $350 Million to Chewco was guaranteed by Enron, as was the subordinated loan of $250 Million. While Kopper may not legally be considered a related party, he was an Enron employee under the supervision of Fastow. That’s not what I would call a disinterested independent 3rd party, nor an arms-length transaction.
While Powers, in the Special Committe Report, states that the $6.6 Million “reserve” required by Barclays as securitization for the$11.4 Million “equity” loan made to Chewco nullifies the 3% Equity requirement of Chewco, there are other signs that Chewco was clearly a subsidiary of Enron. IMO, it never had any significant equtiy investment, the Barclays loan of $11.4 Million not counting towards it at all. (See recording of transaction above). I don’t view Kopper as an independent 3rd party controlling the SPE, Chewco. Fastow did not inform the Board, at the time Chewco was approved, that Kopper would be the general manager/partner. Lay claims he wasn’t aware either and the Enron Code of Ethics required Kopper to be approved by the Chairman and CEO, who was Lay at the time. The fact that Enron guaranteed the $350MM and $250MM loans to Chewco is a clear indication the LLC was not independent, but dependent upon Enron. Because the loans were guaranteed by Enron, Member Equity was not at risk. Enron bore the risk of Chewco LLC turned to L.P. Such guarantees should have been included on Enron’s financials and in its footnotes.
Because JEDI was 50% owned by Enron, and 50% owned by Chewco, after Calpers was bought out, JEDI was also a subsidiary of Enron, since Chewco’s loans were guarnteed by Enron, Chewco had no significant 3rd party equity, and the managers of both entities were Fastow, an Enron exec. and Kopper, and Enron employee. As ARB No. 51 states, Consoidated statements are more meaningful than separate statemtents for a parent and a subsidiary. I view Fastow as simply an unsrupulous executive who appears to have no respect for law or ethics, just his own selfish interests. He certainly didn’t understand the purpose of accounting principles. Neither did Skilling, in my view.
Fastow was an idiot, an unethical idiot who knew nothing about accounting principles. Vinson and Elkins, as well as Arthur Andersen, objected to some aspects of the structure, but Fastow and Kopper ignored them. They are total idiots, cowboys, choosing to do things their way. They deserved a lot more jail time. Any money they still possess that came from Enron should be turned over to the shareholders and employees. They stole the money, plain and simple.
Now, you can call the Special Committee’s Report “spin” if you choose to, but the truth is that these transactions are objective evidence. There are written source documents backing them up, as well as the recorded accounting transactions themselves. To call such objective evidence “spin” tells me a person has no clue what they are talking about.
http://www.nysscpa.org/enron/report.htm
@ Fred: “@Bettendorf: The interesting thing about the Braveheart deal is that the problems you seem to have with it are largely not the issues that were litigated at the EBS trial. That the technical aspects of VOD worked at EBS was convincingly confirmed by defense witnesses and documents at trial. Therefore, what the Feds tried to do at trial is accuse Kevin Howard and Michael Krautz of making a “verbal side deal” with nCube (the set-top box vendor) in spite of explicit wording in the contract that voided any verbal understandings.
In my opinion, relying on anything other than the trial transcripts and trial exhibits to try to make a case about Enron doesn’t get you anywhere. There were more than 50 million documents in the Enron cases, and unless you explore the defendants’ side of the topic, the odds that you can really figure out what was going on (and whether criminal activity was involved) are essentially zero.”
Fred, Enron recorded revenue from the Project based on “Hypothetical Future Value” (HPV), not based on basis accounting principles. The fact that the VOD technology worked is irrelevant with recording revenues from the Project. It doesn’t matter whether a “side deal” can be proven or not. You miss my point. Generally Accepted Account Principles require that the earnings process be essentially complete in order to recognize revenue. Accounting revenues are “earned” from sales of services or products, ,not “hyped” from the fact that a technology, such as VOD, works. Such anticipation of making money from such proven technology is just that, “anticipation” meaning not yet realized and, therefore, not to be recognized on the books as revenue.
The reason Mark to Market accounting was established and seen as a better measure of value than historical cost is because some financial assets on the books of businesses, such as investments in debt and equity securities, were worth considerably more or less at current value, based on current market prices, than their historical cost. There were established markets for such instruments with reliable, verifiable prices for such instruments. That’s not the case with Enron’s VOD technology. It was in the test stage. Enron and Blockbuster still had to develop a market for the service and, most importantly, SELL IT AND MAKE A PROFIT FROM IT (excess of revenues, based on real historical transactions, over expenses).
There was no basis for Enron to use Mark to Market or Fair Value Accounting on this project. The fact that this may not have been litigated at trial is beside the point. It is the truth.
I don’t need an explantion from the defense to recognize “HPV” which is not based on GAAP, but on “future” projections of earnings potential which is yet to be realized. Such concepts have no place in recording revenues in accord with GAAP.
I find your arguments against what I am saying to be insulting and basless. Provide a valid argument for recording revenue from the Braveheart Project, based on GAAP, and not on bias towards the Defense’s arguments.
Contrary to what some people would like to believe in this space age of ever new technologies and concepts, to record Revenues on a company’s books, the company must still do it the OLD FASHION WAY. They have to EARN IT. It must comply with accounting principles, not with Hypothetical Future Value (HFV).
@bettendorf: I admire your effort at examining Enron finances. But, again, I think you need to go a bit further in bringing the issues to the actual defendants indicted by the government. The “spin” is that the documents you are relying on are simply a subset of the roughly 80 million documents in the Enron cases. The financial issues you are focused on were largely litigated, without success by the prosecution, at trial. Now, you could speculate that the prosecutors did a poor job at trial (although they had years to prepare their cases), or, just perhaps, the people who went to trial were not the ones guilty of the accounting issues.
From a legal sense, their is no crime unless an actual person committed it (and did so with intent). So the burden of the prosecutors at trial is to link an alleged accounting issue (or other wrongdoing) to the defendant. That is what the government failed to do. If you are convinced that there was accounting misconduct at Enron, then I would think you would be outraged that the government could not even manage to indict the people who committed it, but instead went after people who played no role in it.
@Fred. I’m going to simply respect that you and Cara and others share a very different opinion of this. My apologies for anything that may have seemed insulting. I have reviewed the McGarret transactions that dealt with the Hawaii II Trust, Project Braveheart, and Chewco, in addition to reading numerous news stories, accounting articles, and bits and pieces of the trial transcript, plus a little from the Houston Clear Thinkers Blog. I will continue to research. I simply see widespread accounting monkey business from the transactions themselves, based on my background, knowledge of GAAP, and work experience and I believe that from the evidence it is reasonable to believe Lay and Skilling were aware and approved of such monkey business.
I used to think it was unfair that the entire Andersen firm went down with the ship, but from what I see in this case and what I continue to see in corporate America, maybe a few more firms need to implode as well. There will be more Enrons in the future, IMO.
@betterndorf: By the way, I am not “arguing” against your analysis — I am not an accountant. I am simply encouraging you to go the next step and discover what the defendants had to say about the issues that you raise. Nothing you point out is a new accusation — it is all old news. The government even brought accounting experts to testify at the trials. In the case of the Enron Broadband trial, the accounting expert’s “findings” were torn apart by the defense because there were lots of documents countering the government’s accusations. Of the five defendants at the Enron Broadband trial, four were determined to have zero connection to any alleged accounting issues, and the fifth defendant, after three trials, eventually negotiated a plea deal to a single count of a minor bookkeeping irregularity, having nothing to do with any of the original accusations — the offense was considered so minor that he received only some probation time.
I am less familiar with the other Enron trials, but the motions and transcripts I have seen show a similar pattern. So, while I am not hostile to your analyses, they just strike me as somewhat academic because they are so removed from the actual litigation at trial — they may be interesting exercises, but they are removed from the actual events in which real defendants had to defend themselves at actual trials. “Proving” a point on a blog is not the same as proving at a trial that an actual person is guilty of a crime.
I am much more interested in the actual conduct of the Enron Task Force prosecutors. Based on what I have learned, I think it is highly likely that some innocent people were falsely prosecuted by the government. If there was accounting misconduct at Enron, as you believe, then this makes the conduct of the prosecutors even more deplorable — it means that they wasted massive amounts of taxpayer money hounding the wrong people.
“In the case of the Enron Broadband trial, the accounting expert’s “findings” were torn apart by the defense because there were lots of documents countering the government’s accusations. Of the five defendants at the Enron Broadband trial, four were determined to have zero connection to any alleged accounting issues, and the fifth defendant, after three trials, eventually negotiated a plea deal to a single count of a minor bookkeeping irregularity, having nothing to do with any of the original accusations — the offense was considered so minor that he received only some probation time.”
That’s very convenient since I have no access to the trial transcripts without paying $700. As far as relying upon the trial’s findings as being valid, it’s strange to me that you find this trial’s findings as valid, despite prosecutorial abuse, but you don’t the Skilling one. Seems like a dichotomy of thought to me.
The accounting texts today, FASB, and respected CPA societies teach Enron as a case in unethical and illegal abuses of accounting for earnings management, a lesson in corporate greed, and unjust self enrichment. I guess they aren’t “experts” either in your view. As a result of Enron, major reforms were made to accounting and auditing standards,as well as self-government being taken away from the public accounting industry, such self-government having been in existence since public accounting was established. This is clear objective evidence that impropriety occurred at Enron, no matter the EBS trial results. So much for “blowing away” anyone, sir.
From the final liquidation of Enron assets, it appears that Enron’s valuation of them was highly over valued, despite the fact that such assets naturally lose some of their value in bankruptcy. Enron’s own 4-22-02 8-K says so.
“I am much more interested in the actual conduct of the Enron Task Force prosecutors. Based on what I have learned, I think it is highly likely that some innocent people were falsely prosecuted by the government.”
Based on the ETF’s conduct, it appears that such purportedly inappropriate behavior has become a basis for arguing that no impropriety occurred. That was one of the defense’s arguments at Skilling’s trial also, I believe. As a result, that legitimate, solid evidence is being invalidated by some. That’s going from one extreme to another.
Minor bookkeeping irregularity. Interesting. Irregularity is code for “fraud”. It appears to me that Howard pled guilty to falsifying the year 2000 SEC 10-K by drumming up $53 million of illegitimate revenues for EBS. Enron’s First Qtr, 2001 10-Q also reported revenue of $58 million from the same transaction, It appears the prosecution went lightly on Mr. Howard, not charging him with falsifying the 1st Qtr, 2001 as well. I don’t view reporting $53 million of fraudulent revenue as “minor” by any means, though it’s not nearly as significant as the overall Enron fraud. I think the COO of EBS was probably guilty as well. but it does appear the prosecution had a problem making anything stick. But, as we all know one doesn’t necessarily receive his/her just due in the legal process. I am disappointed in the prosecution in making plea deals because the sentences for the deals were not nearly severe enough, IMO.
http://www.justice.gov/opa/pr/2009/June/09-crm-535.html
Someone correct me if I’m wrong, but I believe the reason that requiring a minimum 3rd party independent equity of at least 3% of assets of an SPE “being at risk” as one of the requirements for not consolidating an SPE with its sponsor is to establish a floor on what is deemed reasonable capitalization so that an SPE function, in general, independently from the sponsor, paying its own bills, including any debt issued or loans received, and functioning generally independently of its sponsor, including the 3rd party controlling the entity, not the sponsor. Enron guaranteeing the entity’s loans, by itself, makes the 3rd party’s equity investment “riskless”, and thereby fails to meet the 3% minimum, requiring consolidation.
If that is true, I don’t view Hawaii II 125-0 as an SPE independent from EBS (Enron), since I don’t believe there would be any way for it to pay off the debts it incurred as a result of the structured transactions and I don’t believe it was controlled by CIBC, but rather by Enron. If I am wrong I would love someone to show me some documents to straighten me out, since the defense “blew away” the prosecutions allegations and mine are nothing new. Please prove me wrong. I challenge anyone to do so.
@bettendorf: You seem angry about something, but I cannot determine exactly what or why? Look, I am not trying to persuade you toward any particular point of view — if you are satisfied with where you are at in your thinking about Enron, I am fine with that. I like that you have, at least, made the effort to look at some documents. I am simply encouraging you to continue the study!
My only point to you is to encourage you to look at defense material to round out your study. Perhaps seeing how the defendants actually defended themselves would have no impact on your opinion. For me, it made a huge difference. If you cannot get your hands on the trial transcripts, there are various defense motions available on Cara’s blog and at the Houston’s Clear Thinkers blog. For example, both the Broadband prosecutorial misconduct motion and the Skilling prosecutorial miscoduct motion on available online.
@bettendorf: By the way, I have no idea what you mean by this:
“As far as relying upon the trial’s findings as being valid, it’s strange to me that you find this trial’s findings as valid, despite prosecutorial abuse, but you don’t the Skilling one. Seems like a dichotomy of thought to me.”
Prosecutorial misconduct always benefits the prosecutors. If the defendants overcome the misconduct, as they did in the Broadband trial, or do not overcome the misconduct, as they did in the Skilling trial, the misconduct is always unjust and harmful. For example, without the misconduct, there would have been no Broadband prosecutions, no Broadband trial, and no years of suffering by Broadband defendants and their families. Even the acquitted Broadband defendants lost their life savings — the government does not reimburse defendants who beat them at trial.
@Fred. I don’t follow the logic that no Broadband Execs would have been prosecuted without the misconduct. It simply doesn’t compute to me. As I see it, there was no justification for recording the revenue that Enron did for the EBS Blockbuster contract as a financial asset. EBS Execs would have had to have had a hand in that. It’s just common sense, conviction or not.
What I don’t understand is the overlooking and dismissing of the evidence. Evidence which the entire public accounting profession, FASB, and the SEC consider legitimate and as a result has introduced new accounting/auditing standards As stated before, Enron is taught in accounting textbooks as a classic example of corporate greed and corruption. In my 2007 copyright Intermediate Accounting Text, there are 22 references to Enron, some with several paragraphs of detail.
For no impropriety to have occurred at Enron, and EBS, as claimed by the defense, it’s very strange that the accounting profession doesn’t see it that way.
I am forgetting the defense’s side of it. If they really want people to understand their side, they can post material so it is easily accessed. At the moment, I haven’t been able to find anything of substance in their favor, on Cara’s site, the HCTB, or anywhere else. It leads me to think, honestly, that they have no substantive defense.
To clarify my last paragraph. It’s not that I’m not interested in knowing the defense’s side. I simply can’t find it on the internet. IF they want the common person to understand their side, it’s their responsibility to make their side easily accessible, not mine. I have not found that to be the case. You would think if they were so anxious for the public to know their side this information would be available, but it ‘s not.
There is an abundance of evidence on the net which favors the prosecution, but none from the defense, except unsubstantiated claims of no wrongdoing. Why is that?
@bettendorf: I overlook nor dismiss no evidence — that is precisely my point to you. I simply point out that both parties get to present evidence, and looking at only one side of the issue can mislead you. So far the accounting evidence you have presented seems to only indicate that the DOJ had reason to launch an investigation of civil wrongdoing by Enron, the company. To understand whether that evidence could actually withstand the burden of proof at trial when applied against an actual person, one must examine the defense. It is really that straightforward.
I don’t think anyone, certainly not the actual defendants, are trying to persuade you to “understand their side.” That is a motivation that is up to you and your own curiosity and sense of fairness. All this blog and others can do is share with you the impressions of people who did go the extra step of digging into a broader set of evidence than what you have studied so far.
On this point I think we do agree: The government should be required to post the full transcripts of all trials online so that they are readily accessible to the public. Because the DOJ claims to represent the public, the public should have easy access to the records of how the Feds are doing their jobs and how much it is costing the taxpayers.
Bettendorf, I have provided tons of documents, videos, and defense exhibits available at the Enron Index. As far as I know, it is the only place on the net where so many defense documents are available. I don’t know if it is the defendant’s responsibility to make their sides available, but I’ve taken up that mantle myself.
The reason there is so much out there that favors the prosecution is because the prosecution was allowed to write the narrative. Furthermore after the trials, none of the defendants decided to put up their entire cases online. Some have given me some of their documents, but by and large, the defendants really just want to get on with their lives.
If there is something specific you’re looking for, let me know and I will see if I can get it for you.
Betterndorf & Cara: I suspect that the acquitted defendants have not even considered putting their cases online — by definition, they have been exonerated.
For people who negotiated deals with the Feds, the Feds put gag clauses in the agreements. It will take time and courage for these people to speak out. For the two people with convictions, they have even more stringent legal limitations on what they can make public.
As if this was not bad enough, even defense attorneys encourage ex-defendants not to speak out because there generally is no value to them in doing so. Plus, in the Broadband trial (and maybe others), the judge even put the jurors themselves under a gag order!
But time will likely change some of these limitations as well as the willingness of people to challenge or ignore the limitiations. In the meantime, the trial transcripts themselves provide plenty of evidence for people willing to dig into them.
“The problem you risk from depending on sources such as the Examiner’s Report and the Special Committee Report is that they are one-sided documents, essentially spin documents. Those people were essentially tasked to find evidence that would back up existing theories, so you tend to see very little contradictory information in their reports.”
I’m currently reading the Enron conference call of 11/14/2001. Mr. Lay states that he asked for the Special Committee to be formed to investigate the related party transactions. So, I honestly don’t view the Powers Committee as being pro or con Enron, but simply established to investigate the transactions, report the findings, and develop recommendations for actions that should be taken in the aftermath. While I find creditability in the Examiner’s reports, he is monetarily working for the creditors to recover funds to reimburse them, so the potential exists for bias to be present in his findings.
I clearly understand that there are always 2 sides to a story, and admittedly I started out with the assumption of wrong doing at Enron. I ain’t perfect for sure. But my research validates that assumption.
“So far the accounting evidence you have presented seems to only indicate that the DOJ had reason to launch an investigation of civil wrongdoing by Enron, the company. ”
I think I would agree with that initial approach. However, I believe it would have ultimately resulted in a criminal fraud investigation of specific individuals. The prosecution may have reasoned that the Examiner’s Report, the Powers Report, and the congressional investigations were sufficient to establish criminal fraudulent activity and wanted to save public monies, so they immediately went to a criminal investigation of specific individuals, based on evidence. Just thinking out loud. IT does seem a crime to charge me $700 for the entire trial transcript. Our funds paid for it all. Now we’re being charged again to view it.
Cara, I’ll look further, but I have yet to find one transaction explained in detail showing how it complies with GAAP guidance and/or SEC regs. What happened at trial is what counts, legally, and that is past. I can understand just wanting to put it behind you. But, there is a broad perception that monkey business went on at Enron and absent the defense presenting their side in a media which can be widely accessed by the public, such as the internet, easy to find by typing in search words, that perception will persist. And with such perception, the public desire to listen to allegations of misconduct may be weak. That’s really all I’m saying.
Thanks for letting me post on your blog. I do appreciate it.
“In the meantime, the trial transcripts themselves provide plenty of evidence for people willing to dig into them.”
More than willing,but they are largely unavailable on the net. Bits and pieces here and there, but nothing more than 2000 words in a segment, just a couple of pages of testimony at the most from one source. And the sources are few. I haven’t come across anything that addresses the transactions in detail. Only claims that they had been approved by the auditors, or a defense expert witness testifying that they were in compliance with standards, or that everything material was disclosed.
Only a lighter side, If I believed everything I was told, by just trusting someone’s word for it without seeing the proof myself, based upon evidence, I would have long ago believed that Larry King actually did interview George Washington, sitting in his boat on the Potomac, for the then ever popular Colonial National Newspaper (CNN).
)
In regards to the Powers Committee Report, the Chairman of Enron’s Audit Committee, Robert Jaedicke, stated this in testimony before a congressional subcommittee investigation of Enron:
“Much of the focus of the hearings this week has been on the Report of the Special Investigative Committee, which was formed by Enron’s Board of Directors to examine Related Party transactions entered into by Enron Corp. The Committee’s investigation was both a thorough and impartial investigation into the transactions in question.”
http://caraellison.wordpress.com/2011/04/24/robert-jaedicke-congressional-testimony/
Note: “thorough and impartial” Again, I don’t get the idea that the report is “spin”. Some of the conclusions of the Committee are disagreed with by Mr. Jaedicke, but the substance, the evidence, the accounting transactions and their structure are not questioned, IMO. That’s exactly what i stated in previous posts. You can’t “spin” the evidence itself, the accounting transactions, though reasonable people may arrive at different subjective conclusions about the objective evidence.
That is why I find the Examiner’s report credible also. However, It’s my understanding based on one newspaper article only, that at trial some of the Examiner’s findings were discredited, but I don’t know how or where. I haven’t been able to obtain trial transcripts which pertain to the detailed discussion of the transactions presented by the Examiner. It’s also my understanding that the Examiner did not allow the Defense access to his reports prior to the trial.
I may have a biased opinion of what happened at Enron, but it is based upon the accounting profession’s findings concerning Enron’s accounting, based upon the transactions themselves. I know of no other more authoritative source to rely upon than the AICPA and FASB. They wrote the rules and understand the intent behind them. But, my bias is tempered by what i have researched. Because the accounting professions’ judgement is that impropriety occurred, I believe there is substantial evidence to support that, and that is what i am finding in what I have researched. The defense’s side of this would be helpful in researching, but it’s widely unavailable. Nothing I can do about that. So, my research is primarily aimed at the accounting transactions, their structure, their purpose, their substance (not just the form), who was involved with them, and who knew about them and when. From there a person should be able to draw some conclusions about who was guilty, if anyone, of impropriety and how.
Mr. Jaedicke goes on to state, “It is clear now that substantial and critical information was in many instances concealed from the Board—and in others was affirmatively misrepresented to us—by both company management and its outside advisers. This lack of full disclosure severely undermined the Board’s effectiveness and oversight ability. No Board can properly execute its duties or make informed decisions without it.”
It’s information like this, coming from Enron itself, which leads me to believe all the accounting impropriety wasn’t just “mistakes”, but there was intent to deceive and misrepresent. There were some apparent legitimate mistakes, The $1.2 billion write-down of equity now appears as though it may have simply been a mistake. I would not have believed that before researching. But, Mr. jaedicke’s statements I do not view as “spin”.
He says, “It is also apparent that Management’s lack of candor was not limited simply to the non-disclosure of conflicting interests. According to the Report, many Enron employees believed that particular transactions with the LJM entities were unfair to Enron, were an improper effort to manipulate the company’s financials, or were not properly being disclosed in Enron’s proxy statements and financial disclosures. These are serious issues, and the Board was entitled to have them brought to its attention. These officers and employees may have made their objections known to other management, but that does not excuse their failure to bring these problems to or to notify properly the Board so that it could address them. This marked disregard for the Company’s best interests—and for the Board’s directives—is deeply disturbing.”
Note the “many Enron employees” believed. Wish such widespread knowledge something improper is going on, how does that escape Mr. Lay and Mr. Skilling?
Mr. Jaedicke states, “Those presenting this transaction in 1997 had to know this was untrue, and they had an obligation under Enron’s Code of Conduct to disclose Mr. Kopper’s involvement to the Board. According to the Special Committee Report, they did not. Had they done so, I am confident that we would have taken appropriate steps to avoid what ultimately happened. ”
This is speaking of Chewco. From what I have read, there appears to me to have been too much trust placed in Arthur Andersen and the lawyers to “always do the right thing” and in Enron employees to do the right thing. Even now, some people believe Skilling to be innocent, based on his explanations at trial and character witnesses. I am very skeptical. The evidence doesn’t support innocence to me.
“Enron’s Chief Accounting Officer, Mr. Fastow’s equal in the corporate structure, was to review and approve any transactions.
Enron’s Chief Risk Officer, also Mr. Fastow’s equal in the corporate structure, was to review and approve any transactions.
Jeff Skilling, President and Chief Operating Officer, and Mr. Fastow’s superior, also was to review and approve any transactions.”
I think I read recently where someone on this blog had stated that Skilling wasn’t given responsibility for approving LJM transactions, but this states otherwise, and I have read somewhere else where Skilling was to approve the transactions. If he didn’t know what was going on, he should have known.
“Mr. Skilling was to review Mr. Fastow’s economic interest in Enron and LJM.”
Didn’t happen. To me there was way to much looking the other way, which can imply a passive or outright approval of the impropriety.
The assumption that any SPE transaction, Enron or another company, is an “arms length” transaction just doesn’t fly with me. Even if it passes the accounting standards, I remain skeptical of the reason for its creation. That’s just my makeup. I am naturally skeptical of SPE transactions. When I went through college and started my employment as an accounting I was unaware of such entities and they were not presented in the accounting texts. Such entities are highly susceptible to abuse and manipulation, IMO.
“The Board relied on Enron’s accounting staff, external auditors and legal counsel to ensure the accuracy of Enron’s disclosures in its proxy and financial statements. Unfortunately, it is now clear that our reliance—while reasonable and expected—was misplaced.”
That’s pretty damning.
Arthur Andersen had an internal meeting in Feb., 2001 to discuss Enron’s transactions and their propriety and whether to retain Enron as a client. Inspite of unqualified opinions on Enron’s financial statements, it’s clear they were having second thoughts about what was going on at Enron. I see it as “rubber stamping” Enron’s accounting rather than fulfilling their role as a fiduciary to the Enron shareholders and the public. Best case, they are guilty of gross negligence and subject to class action lawsuit. That alone could have destroyed them as a firm. And Enron wasn’t their only failure of auditor responsibility. There a number of companies where they failed in their duties as auditors, prior and post Enron.
The overturning of the AA conviction in no way exhonorates them in my view. Inspite of Sarbanes-Oxley, and public accounting reforms, II view public accounting in the U.S. by the largest firms as being on life support. The monkey business continues to this day.
I don’t think its possible to come to a conclusion as to guilt or degree of guilt about Jeff Skillings. That’s one of the very frustrating things about the trial: the prosecution didn’t have to prove its case to get a guilty verdict.
Cindy Olsen on Enron Ungaged says that Rick Causey denies signing the Global Galactic agreement which formed the “factual” basis for Fastow’s damning testimony. If Fastow lied about that and fabricated the docuement (a xerox copy “found” many months after the prosecution started their investigation of Fastow, then what?
Fastow was unquestionably up for criminal liability and had only Jeff to trade.
Bruce: I agree with you. In fact, when I read the Skilling trial transcript, it struck me that the government did not even come close to meeting its burden of proof. At first it struck me as shocking that the the DOJ won a conviction based on such poor (or, at least, poorly presented) evidence. Then I remembered what one of the jurors said after the trial (this is probably not exact, but close):
“After seeing the evidence, I was inclined to acquit Lay and Skilling. But then I thought about all the people who lost money when Enron collapsed, so I voted to convict.”
So there, in stark terms, was a juror who did not do her job. And I suspect that she was not alone. Clearly, the fact that people lost money when a company went bankrupt does not automatically mean that the executives of that company are guilty of criminal misconduct!
One of my favorite juror quotes was after the trial when someone asked her why she wanted to serve on the jury she replied, “I just wanted to see why they did it.”
Not *whether* they did it. But why.
American justice in action.
In response to Cara and Fred stating that the accounting transactions were not successfully litigated at trial: were they in fact a major priority or scrutiny at trial? This is from Causey’s sentencing hearing:
Page 11, “Had we gone to trial, we would have fought the GAAP issue on the land, on the sea, in the air, I think we would still be in court, still trying the case.”
You would have lost and I think it was a major error on the part of the prosecution not to have indicted Causey. Collapse the underpinnings of the corporate structure by convicting the lower echelon executives, then you stand a better chance of getting the ones at the top, provided they are guilty.
Page 11, 12, “And then we sort of get to the trial itself. And obviously the court tried it, so it knows in the government’s case in chief, there wasn’t much accounting evidence. I think that was to the government’s advantage. ”
Not much accounting evidence introduced is what I infer from this. Shocking.
Page 12, “And to be sure, there was no intention of taking the Fifth, and I believe the Defense, based upon all the obvious signs and common sense, would have liked evidence before the jury that in the main, the accounting at Enron was consistent with GAAP based upon what was known at the time by the chief accounting officer.”
Accounting was consistent with GAAP……..Cow patties
Page 22, “In addition, Your Honor, just with respect to the comment about the accounting at Enron, just that this is probably a statement of the obvious, but obviously the government takes a quite different view about whether or not the accounting at Enron was appropriate and whether or not it complied with GAAP in all respects.
THE COURT: You can’t dispute the fact that eliminating that from the case simplified the government’s burden at trial.”
So, the accounting transactions were not significantly litigated at trial, is what I infer from this. That is the very heart of the fraud. (Not saying Skiling is guilty) So, without that and tying that to Lay and Skilling, what basis do you have to convict either one? Holy Crap, Batman!!
http://caraellison.files.wordpress.com/2010/01/transcript-of-causey-sentencing.pdf
The transactions were so complex, and accounting standards so complex to someone not educated in accounting or with such experience, how do you prosecute such a case with a jury selected from common, ordinary citizens without such expertise? Have there ever been cases where the jury was made up of only individuals with qualifications to make competent judgments about such issues?
When cases are complex, as in most of the Enron trials, the complexity can play for or against the defendants depending on the bias of the jurors. Theoretically, there should always be reasonable doubt in the minds of a juror if the prosecutors cannot even educate them on the subject matter. But that is generally not what happens at trial.
In the Enron trials, studies showed that something like 85% of the jury pool believed that Enron executives were guilty without hearing any evidence at all. Therefore, the burden of proof at the Enron trials effectively shifted from the prosecutors to the defendants. If you read the transcripts, you will see that the prosecutors constantly harped on how wealthy the defendants were, as if that were sufficient evidence of criminal wrongdoing. And studies actually show that such an approach is extremely effective in white collar criminal trials where the jurors often don’t understand the evidence.
“Cindy Olsen on Enron Ungaged says that Rick Causey denies signing the Global Galactic agreement which formed the “factual” basis for Fastow’s damning testimony.”
I still don’t know about Skilling as far as guilt. But, in regards to Causey, he stated he wasn’t aware that SFAS No. 57 required dollar amounts to be included in the footnotes of material Related Party Transactions. See link below, Pages FAS57-2 & 3. This is a CPA and he didn’t know? That is not believable. It takes a minute to look it up. Do I look like I got “stupid” stamped on my forehead? So, whether Causey’s statement is believable is in question, IMO.
I regard some of Skilling’s testimony similarly. Like, the LJM transactions amounts were a molehill. From June of 1998 to May of 1999, the LJM SPEs contributed $229.5 million to earnings (20% of net income) and $2.08 billion in cash flows. That is very material and is definitely is not a molehill.
http://cdm15017.contentdm.oclc.org/cdm4/document.php?CISOROOT=/p15017coll21&CISOPTR=4254&REC=8
http://cdm15017.contentdm.oclc.org/cdm4/document.php?CISOROOT=/p15017coll21&CISOPTR=918&REC=5
Mr. Skilling states he was not aware that he was responsible for reviewing and approving the DASH approval sheets for SPE transactions. Yet the Oct. 6, 2000 Finance Committee Minutes paint a different picture, showing Mr. Skilling was one of three individuals who was to review the transactions. A meeting at which he was present when Fastow stated this.
http://cdm15017.contentdm.oclc.org/cdm4/document.php?CISOROOT=/p15017coll21&CISOPTR=4096&REC=15
The SPE structures themselves, with Fastow as the general partner of both LJM1 and LJM2, do not meet the then current accounting standards for non-consolidation of the SPEs. An independent 3rd party must contribute a minimum of 3% of assets as equity and such party must control the SPE. Mr. Fastow, by defintion, is a Related Party. Related Party’s are not independent third parties. And Arthur Andersen, the lawyers, and Enron accountants didn’t understand this? Do I look like I have “stupid” stamped on my forehead? Get a clue guys, it’s not nearly as complicated as it looks
I can’t comment on whether SFAS 57 is well known to all CPA’s, but why would Causey lie about signing the GGA? Such a lie would have had to hurt him per his plea agreement. I’m not just taking him at his word, but focusing on the incentives involved. His testimony to the effect Jeff told him to sign it would have been devastating and I can’t imagine he couldn’t have sold it for a break.
I can’t answer your question, Bruce. What I am trying to do is to show that Causey is not an honest guy, either, IMO. So who can you believe if you are seeking people who are not lying? That’s my point.
“I can’t comment on whether SFAS 57 is well known to all CPA’s”
Well, I can. SFAS 57, as well as SEC Reg 229-section 404, would be very familiar with ANY CHIEF ACCOUNTING OFFICER of a public company of any size. I’ve worked for two of them. Let me explain:
Fastow is the “senior officer of Enron” under Footnote 16, Related Party Transactions, of Enron’s 2000 10-K SEC Filing. So, Causey is well aware of this, and managing the preparation of Enron’s SEC Filings. So, he knows he has to provide information on “Related Party Transactions”. I hope as Chief Accounting Officer that you understand Causey is responsible for the preparation of those filings? So, if he is responsible for it, and he’s not aware of the Related Party Transaction reporting requirements, don’t you think it would be prudent to check them out before completing the Report?
SFAS No. 57 “Related Party Disclosures” was issued March, 1982, and is effective for fiscal years ending after June 15, 1982. It was around a long time before Enron began using SPEs with the general manager being the CFO of Enron (related parties). It’s easy to research, just type in FASB and the link pops up for you, I do it all the time to research standards. Furthermore, the public accounting companies I worked for had their own copies of FASB standards in the accounting department. So, it’s readily accessible. Standard 57 is short and sweet and to the point. It would take about one minute for me to research from a text or from the net. Also, any Intermediate Accounting Text presents the same information in a chapter called “Full Disclosure”. It’s chapter 24 of my Intermediate Text. I hope that satisfies whether the standard is well known to CPAs. It is. A considerable amount of work performed by public companies involves looking up standards if we didn’t know what they were or weren’t sure what they were.
http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820908231&blobheader=application%2Fpdf
So, Causey making the statement that he didn’t aware of the reporting requirements for Related Party Transactions is simply not credible.
Note, on page 2 and 3 of the Standard it says:
“The disclosures shall include:
a. The nature of the relationship(s) involved
b. A description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements
c. The dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period
d. Amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement
e. The information required by paragraph 49 of
FASB Statement No. 109, Accounting for Income
Taxes”
See item c.? Dollar amounts of transactions. See item b. “A description of the transactions………and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements. See item d. “Amounts due from or to related parties”.
Enron simply did not provide anything close to full disclosure for the related party transactions in any year. If you like I can be specific to what they did not disclose, one of those being the amounts of transactions, both debit and credit, another being they did not disclose the amounts due to the SPE or to Fastow, the related parties. Enron did not provide complete information of the transactions when describing them, but obfuscated the information, and they did not disclose information necessary so that the average investor could gain an understanding of the effects of the transactions on the financial statements.
Most professionals, if not all of them, are going to conclude such monkey business is an intentional effort to deceive and misrepresent material items of the financial affairs of Enron.
Why would Arthur Andersen allow such nonsense, or the lawyers, who supposedly reviewed this as well? They were well aware of what the requirements were.
From Footnote 16, “Related Party Transactions”, of Enron’s 2000 10-K:
“Management believes that the terms of the transactions with the Related Party were reasonable compared to those which could have been negotiated with unrelated third parties.”
Refer to SFAS No. 57, page FAS57-3, No. 3 :
“3. Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, freemarket dealings may not exist. Representations about
transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations
can be substantiated.”
Enron could not substantiate their statement above. How do you justify paying Fastow $30 million in fees, etc. Kopper $10 million, and a few other Enron employees making a million or two on very small investments in comparison to the compensation? Enron would not allow such massive compensation to be paid to a third party. I don’t have the exact numbers, but some of the transactions involved returns to LJM in the thousands of percent. No company would offer a third party such returns.
http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820908231&blobheader=application%2Fpdf
Sorry, the SEC reg is S-K sec 229-404
The one of the items put out by the SEC for guidance for consolidation or non-consolidation of an SPE from 1990 forward was Topic No. D-14, “Transactions Involving Special Purpose Entities”. A portion of it states:
“Generally, the SEC staff believes that for nonconsolidation and sales recognition by the sponsor or transferor to be appropriate, the majority owner (or owners) of the SPE must be an independent third party
who has made a substantive capital investment in the SPE, has control of the SPE, and has substantive risks and rewards of ownership of the assets of the SPE (including residuals).”
Most of the SPEs, as far as I know, were controlled by Fastow. As CFO of Enron, he is by definition not an independent third party. Those SPEs controlled by him do not qualify for non-consolidation, as stated above. Also, some of the SPEs did not possess the substantive risks and rewards of ownership of the purportedly assets sold to it.
Another section of Topic D-14 states:
“Conversely, the SEC staff believes that nonconsolidation and sales recognition are not appropriate by the sponsor or transferor when the majority owner of the SPE makes only a nominal capital investment, the activities of the SPE are virtually all on the sponsor’s or transferor’s behalf, and the substantive risks and rewards of the assets or the debt of the SPE rest directly or indirectly with the sponsor or transferor.”
In some of the SPEs, the Raptors specifically, their activities were basically all on the sponsor’s (Enron) behalf to manage the profit and loss volatility of Enron’s investments, per the Finance committee’s minutes, May 1, 2000. As stated above, non-consolidation is not allowed when the SPE activities are virtually all on the sponsor’s behalf. See page 4 of link below.
Some of the third party investments, Chewco for example, failed the “substantive equity investment” requirement. Chewco’s debt, borrowed from Barclay’s, was guaranteed by Enron, making Enron contingently liable for the SPE debt, which violates the standards for non-consolidation, also.
http://cdm15017.contentdm.oclc.org/cdm4/document.php?CISOROOT=/p15017coll21&CISOPTR=4254&REC=8
There is a lot more I haven’t researched, but I’m sure it will be more of the same, as the Powers Report states. If Causey and Arthur Andersen couldn’t figure these things out, they should never have been in their positions of authority. That implies they did know, as I believe they did.
Also, why I question Causey’s credibility, as well as Fastow’s.
I didn’t provide specific page references in links above. sorry.
“I regard some of Skilling’s testimony similarly. Like, the LJM transactions amounts were a molehill. From June of 1998 to May of 1999, the LJM SPEs contributed $229.5 million to earnings (20% of net income) and $2.08 billion in cash flows. That is very material and is definitely is not a molehill.”
See page 8 of link below.
http://cdm15017.contentdm.oclc.org/cdm4/document.php?CISOROOT=/p15017coll21&CISOPTR=4254&REC=8
Note on page 10 of link above in hand writing it states, “does not transfer economic risk, but transfers P&L volatility”, referring to the Raptor Project. They understood that Enron still retained the economic risk of loss on the hedged assets. It was not a true economic hedge, but only an accounting gimmick to keep from reporting losses on Enron’s income statement. See “The Role of the Board of Directors in Enron’s Collapse”, pages 45, 46 in link below.
http://www.google.com/search?q=role+of+enron+board+of+directors&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a
The Report in link above states on page 47, “The Board approved Raptor I, as well as the other Raptor transactions, despite the fact that the Raptor “hedges” did not transfer risk to a third party. It did so apparently because, as explained in the presentation on Raptor I, the purpose of the Raptor “hedge” was not to “transfer economic risk” but to transfer “P&L volatility.” In other words, the sole purpose of the Raptor transaction was to protect Enron’s income statement from losses by allowing Enron to claim on its financial statements that its losses were offset, dollar for dollar, by the Raptor “hedge.” It was a paper hedge designed to achieve favorable financial statement results, not a substantive hedge that was intended
actually to transfer Enron’s risk of loss to an unrelated party.”
Do you understand the only reason for the Raptors was to “achieve favorable financial statement results” and not to actually hedge Enron assets against economic loss. No risk of loss was transferred to an unrelated party. In other words, THE PURPOSE OF THE SPEs WAS TO “MANIPULATE” AND “MISREPRESENT” THE FINANCIALS STATEMENTS. Do you get that?
If the person writing the note understands that economic risk is not transferred from Enron, because that is mentioned at the meeting, how does that escape Skilling, Lay, and Arthur Andersen, and the Board of Directors?
One characteristic of some of Enron’s fraud, including Lay and Skilling statements, is becoming clear and that is “Lying by Omission”. A good example of Lay is the 3rd Qtr, 2001 Earnings Press Release. A host of analysts and media, including newspapers, had no clue there was to be a $1.2 billion write-down of equity which involved 55 million shares of Enron stock related to the Raptor SPEs. Also, the $1 billion loss is characterized as “non-recurring” but Duncan warned them on the eve of the release not to charcterize the loss in such a manner, since it could in fact happen again with other SPEs, and the gains resulting from the same transactions had been reported in operating earnings in prior periods as “recurring earnings”.
Another example are the omissions in Enron’s footnotes of the guarantees of debt that Enron issued to third parties to guarantee SPE debt, such as Chewco’s $240 million loan from Barclays, JEDIs pledge of $132 million to Chewco, Enron’s pledge to pay the Hawaii II Trust loans, etc., etc., etc, infinitum. Such disclosures of guarantees of another entity’s debt are required by SFAS No. 5 “Accounting for Contingencies”. See Paragraph 12.
http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175823287525&blobheader=application%2Fpdf
In addition, in the Raptor entities, the decline in value of hedged Enron assets required the future issuance, from Enron, of more stock to cover the losses. Because these hedges were not true economic hedges and Enron was ultimately at risk for the losses which it eventually had to write off in the 3rd Qtr of 2001, when they began to occur they should have been estimated as a current liability and reported on Enron’s books as liabilities, per SFAS No. 5, paragraphs 8, 9, and 10.
Other examples of this type of deceit are seen in Skillng’s statements that he was not responsible for reviewing and approving the LJM transactions when the Finance committee minutes show otherwise, or that he relied upon the accountants and lawyers for the validity of the structured finance transactions, when numerous Enron employees came to him personally to express their concern over the transactions, or that there was no guarantee that LJM would not suffer losses, when LJM in fact suffered no losses in any transactions even though the assets sold to it lost value but were repurchased for more than what they had been sold for, or that the Raptors were an “incubator” for Enron stock to increase in value when they were simply an accounting hedge to manipulate numbers and the Finance committee minutes clearly state that, or that Enron was not responsible for the California energy price spikes, yet there are recorded tapes of traders significantly influencing the supply and the prices. A board member asked to see documents on how much Fastow was getting paid for running the SPEs, twice. It was never provided. What else will I find with more research? Inspite of the prosecutorial abuse, the evidence is mounting there is clear evidence of cover up, and denial of obvious evidence to the contrary.
There is a host of omissions or denials which are not credible, and I’ve only scratched the surface of researching this. There is a clear pattern of deceit in my view, which includes Lay and Skilling.
No need to be abusive. I get that and have written about it before. However, the question of the letter of the accounting rules and the business reality being in conflict comes up all the time. Rules per consolidation of related entities should IMO be entirely related to risk. If the business risk of a related entity is totally non recourse to the parent, then keeping debt and the like off the books is, IMO, entirely appropriate and in fact better represents economic reality than consolidation.
Since Causey didn’t testify, where do you get his statement and what is the context?
Jeff apparently ducked signing the sheets related to the SPE’s that were required, at least according to testimony (by a fellow who’d name escapes me). That is my biggest concern regarding him. However, the very fact there was a procedure in place suggests that what was being done was “proper” in some accounting sense regardless of the economic reality.
“Since Causey didn’t testify, where do you get his statement and what is the context?”
I’ll try and find it. Not sure I bookmarked it but will try and find it. I read it while researching a couple of days ago.
However, do you not see that the very essence of why FASB requires disclosure of the Related Party Transactions is violated with the disclosures that Enron made in its SEC Filings? Can you explain to me, from Enron’s footnotes, the essence of the transactions, and how they impact the financial statements? I think a reasonable person reading them would conclude, as the committees investigating and the accounting authorities have, that they obfuscate, rather than help explain how the transactions impact Enron financially. It appears on the surface the only purpose of Enron’s wording was to muddy the water, not make it clearer. That’s what I conclude, and it’s what the accounting profession has concluded about them. Why would a CPA like Causey be part of such monkey business?
“Rules per consolidation of related entities should IMO be entirely related to risk. If the business risk of a related entity is totally non recourse to the parent, then keeping debt and the like off the books is, IMO, entirely appropriate and in fact better represents economic reality than consolidation.”
First, rules of consolidation or not up to your or my opinion but what FASB and the SEC has established, so I’m not understanding where you are coming from in the first sentence. If everyone has a different opinion and we didn’t have a central source to set the rules, accounting would be a huge mess. As I presented, Fastow being the general manager of LJM, which under tax regs assumes the GP has the controlling interest in the management of the entity, appears to me to violate one of the non-consolidation requirements, per Topic No. D-14, that being that an independent third party (which Fastow is not) must control the SPE. That seems very basic to me. I don’t understand how Andersen or a CPA could misunderstand that.
In regards to business risk of a related entity being non recourse to the parent, as it relates to Enron and the SPEs, can you provide an example of what you are talking about? I’m not seeing that in regards to the SPEs. I don’t see much of anything defenseable as it relates to the structuring of the SPE transactions, by the form or substance. So, present an example, let’s dance.
“However, the question of the letter of the accounting rules and the business reality being in conflict comes up all the time.”
Then show me how the transactions meet the “letter” of the rules. I don’t see it.
What I find abusive are the damn arguments, with no evidence backing them up, that the accounting transactions are legitimate. Please provide some evidence with the claims, not in generalities, but specific examples.
“However, the very fact there was a procedure in place suggests that what was being done was “proper” in some accounting sense regardless of the economic reality.”
This assumes: (1) that those reviewing a transaction have all the facts about the transaction, (2) that collusion is not possible, and (3) that the internal controls are ALWAYS adhered to, and (4) internal controls ALWAYS prevent impropriety.
First argument is, if it was “proper” as you state, then why the restatements of 4 years of financial statements?
It appears some material facts may have been withheld from those reviewing the transactions, including Andersen (example Chewco). Had those facts been known, Andersen probably would not have approved the transaction. In the absence of collusion and going along with Fastow, Causey and Buy may not have either I can’t really say.
But the bottom line is, internal controls do not always catch impropriety. Your statement assumes that the internal controls put in place were being followed and adhered to, number one, and that those in the review process were honest..In regards to the adherence to the controls, that is not the finding of Jordan Mintz in Global Finance. He specifically sent memos to Causey, Buy, and Skilling recommending that the internal controls put in place be followed. The Powers report, and congressional investigations also found that established internal controls were not being followed. Too much trust was placed in Fastow, unjustifiably in hind sight.
I don’t find such generalized statements helpful (credible) in determining whether a transaction meets the “letter” or spirit of an accounting standard, and whether it is “proper”. You have to take one transaction at a time and compare it to the accounting standards. For the most part, they fail. Why Causey, other internal accountants, and Andersen didn’t catch it remains a good question. Part of the answer for some of the transactions seems to be that all the information about the transaction was not made known to those reviewing it. In others, it appears Causey, Buy, and Andersen were complicit with the monkey business, even though they may not have instigated it. Below are Mintz’s memos to Skilling, Causey, and Buy concerning adhering to internal controls established. The last one is Mintz asking for a 3rd party review and opinion of Enron SPE disclosures in past proxy and SEC filings and how to address Fastow’s departure from the partnerships in current publicly required documents.
http://energycommerce.house.gov/107/hearings/02072002Hearing485/tab15.pdf
http://energycommerce.house.gov/107/hearings/02072002Hearing485/tab13a.pdf
http://energycommerce.house.gov/107/hearings/02072002Hearing485/tab14.pdf
“Since Causey didn’t testify, where do you get his statement and what is the context?”
He made it before the Enron Board’s Special Committee (Powers Committee) “Enron Executive Vice President and Chief Accounting Officer Rick Causey told the commission preparing the Powers Report that he did not recall why the disclosures omitted dollar amounts; he thought that SFAS 57 did not require disclosure of the amounts of related-party notes”
In link below, it’s under “Were disclosures about the nature of the related-party transactions adequate (SFAS 57)? ” Close to the end of the article. It pertains to the Raptors transactions in 2000.
http://www.nysscpa.org/cpajournal/2003/0403/features/f042403.htm
In regards to internal controls being in place being a sign that senior management was “in good faith” seeking to abide by accounting standards and/or SEC regs., the entire process appears very flawed to me.
First, senior management and the Board waved the Enron Code of Ethics/Conduct, allowing an Enron executive officer, Fastow, to manage the LJM Partnerships. Because Fastow enriched himself with money through the partnerships, had a personal interest in them, the entire idea of an Enron employee managing the partnerships was very flawed. There are allegations Fastow bullied, pressured, coerced other employees to sign off on what he wanted with the transactions and used inside knowledge of Enron assets to the advantage of the partnerships and to the detriment of Enron.
Second, the internal controls established don’t appear to have been followed. It appears to me that Causey and Buy were complicit with Fastow in the transactions (deals). Mintz’s memo and attempts to ratchet up the internal controls with no apparent interest from Causey, Buy, or
Skilling is a good example. Lack of full disclosure and what appears to be a deliberate attempt to muddy or obfuscate information in the footnotes of the public financials is another.
Chewco, from the get go, was not adequately capitalized, and never was. The very idea of the Raptors was not to be an effective economic hedge, but an accounting gimmick to allow Enron not to show losses, from Enron assets losing value, on its income statement. There appears to be no other reason for the Raptors. The SPEs established were largely funded with a maximum (rather than minimum) of 3% equity and then 97% funded with debt. What you generally see with business entities is a 50/50 funding with equity and debt. IMO, the SPEs were thinly capitalized, and thus not capable of truly being independent of the sponsor.
You may try and argue that equity equal to 3% of assets is all that the Accounting standards required, but I would disagree with that. The 3% of assets equity requirement is a MINIMUM standard. This was something that companies developed as a standard, not FASB. In some cases a substantive equity investment may require a higher percentage. For example, a transaction where the 3% requirement is met, but 97% of the remaining assets of the entity are funded with debt. That is not a structure that appears can be independent and function on its own, therefore, it is not substantive. What bank would make such a loan to an entity without a guarantee from a credit worthy company? And with a guarantee of the SPEs debt (97% of assets) from another, credit worthy company, how can you say the SPEs equity is at risk? How so? Therefore, such a guarantee of the debt requires consolidation, per EITF Topic D-14.
Instead of generating legitimate revenue through the delivery of products/services and raising capital through the normal means of debt and equity in order to grow, it appears to me that Enron chose illegitimate means to distort and misrepresent its financials with accounting transactions which never met the FASB standards. And even if they did meet the letter of the standards, if the transactions materially distorted the overall financial picture, basic accounting principles of Relevance, Reliability, and Conservatism require that adjustments be made so that that picture is not materially distorted. It doesn’t take a genius to know this, duhhhh. Why do I even have to explain it?
I don’t understand the seeking to justify Enron’s accounting practices. I just don’t get it. Accounting principles are not just about meeting the letter of the standard to achieve favorable results for the entity. An accountant’s responsibility is to look at the overall big picture, the overall financial picture of the company. Are there any material respects of that picture which do not represent the true financial picture/health of that entity, which cause the picture to be distorted? If so, then the accounting must be adjusted so that the overall picture is truly representative and undistorted. It appears to me that Enron’s purpose was to distort the overall picture, but try and meet the letter of the standards. That’s not what accounting is about. Causey and the other accountants and Andersen understood that.
Despite the length of your replies they are not really on point.
One question is whether Rick Causey is credible in his denial (assuming Cindy has it right) that he signed the smoking gun GGA. I find this credible because its against interest given his guilty plea. You find him not credible because he was apparently wrong about an accounting rule.
The question is not whether serious crimes were committed: Fastow plead guilty to clear crimes. The question is how complicit, if at all, others like Causey and Skillings were in these crimes. Fastow says they were. I don’t think his credibility compares to Causey’s.
The question of serious crimes seems very important to me. It seems Fastow is being made a scapegoat, justified or not. An understanding of the impropriety can help determine who may have been involved, in addition to Fastow.
After getting into researching, there’s really too much information for one person to cover it effectively, IMO. I just came across a government hearing where Skilling gives a plausible explanation for not being responsible for reviewing the LJM transactions. I haven’t come across anything that really ties him down to the monkey business, or Lay.
In regards to Causey, it simply doesn’t add up to me that he could have been unaware of very questionable accounting. While the footnote disclosures are part of it, including failing to fully disclose the Enron guarantees of SPE debt, there is a lot more it appears to me that Causey should have realized was improper, as well as Andersen.
For example, the Raptors and their structure has me befuddled as to why he would have signed off on that (and Andersen as well). First of all, and this is something I wasn’t aware of as it pertains to a hedging transaction, in most cases a company can’t recognize gains from the increase in value of its stock. Apparently Watkins knew it. Besides that, the Finance Committee Minutes, showing one of the risks being a decline in Enron stock price, identifies this is not an effective hedge. The fact that Enron made itself liable for losses of the SPE reveals that most of the economic risk of loss to the SPE was not born by its equity holders, but Enron, which brings into question if the transaction violates non-consolidation requirements. The risks and rewards of the SPEs assets, Enron’s stock or contract to stock, rested with Enron. Any upside increase in the stock price beyond the promised return to LJM2 (30% plus fees) Enron was to receive (see page 10 in link below, 4th and 5th stipulations). Enron bore all, or almost all, the risk of a decrease in the value of its stock that the SPE held. So, based on Topic No. D-14, Enron bearing the risks and rewards of the SPE assets violates the non-consolidation rules. Why wouldn’t a CPA understand that, Causey or Andersen?
From Topic D-14:
“the SEC staff believes that nonconsolidation and sales recognition are not appropriate by the sponsor or transferor when………… the substantive risks and rewards of the assets or the debt of the SPE rest directly or indirectly with the sponsor or transferor.”
http://cdm15017.contentdm.oclc.org/cdm4/document.php?CISOROOT=/p15017coll21&CISOPTR=4254&REC=8
Another example is the Chewco capitalization. It was only capitalized with some $11.6 million of equity, but it was going to purchase CalPERS interest for $383 million, so the funding had to come from somewhere, which was two loans, one from Barclays and one from JEDI. How could Causey and Andersen not understand this? Chewco was thinly capitalized, though arguably you could say it had the required 3% equity not counting the collateral required. But some $350 million in loans was being made to Chewco, $240 million of that guaranteed by Enron and $132 million coming from Enron’s interest in JEDI. As stated above, if the risks and rewards of the debt of the SPE rests with the sponsor you have to consolidate. Did Causey not know Enron was guaranteeing Barclays loan?
Things don’t add up to me as it pertains to Causey. I don’t know about the agreement you are speaking of. I’m not saying he was lying in regards to it. I’m simply saying I question his overall credibility based on what I see with the accounting. I remain skeptical of Skilling, but that doesn’t warrant conviction.
My biggest disappointment per the trial was that the prosecution was able to get a conviction without really proving guilt. Even if Skillings gets a retrial I think we won’t get one: they’ll settle for time served.
Perhaps you’re familiar with the Vince Kaminsky comment on the Fastow SPE’s the the effect they’re so stupid only Andy Fastow could have thought of them.
Yes I remember reading that. But how could the accountants not have seen it? That’s much of what baffles me. . And that’s what makes me think they did see it and were complicit, as it appears the lenders were, also. Which would lead me to suspect that Skilling and Lay understood the “game” as well, though there’s no conclusive evidence I’ve seen to support that. It’s all logical deduction or inference.
I’m reminded of the analysis (I believe that Kirkendall talked about this on his blog) of a university professor who poured through all the Enron documents after the indictments but before trials. He found that there was no conclusive evidence to link anybody at Enron to criminal wrongdoing. But instead of concluding that people were innocent because there was no evidence to the contrary, he concluded that the executives at Enron were so diabolically clever that they committed crimes without leaving any conclusive evidence!
@Fred “he concluded that the executives at Enron were so diabolically clever that they committed crimes without leaving any conclusive evidence!
Fred, your unsubstantiated claims don’t merit a response. As far as I can determine, Mr Kirkendall “is not an accountant” like Mr. Skilling Therefore, his views on the propriety or impropriety of the transactions has little merit
@bettendorf: I was not aware I was making any claims? You were the person making deductions in spite of your conclusion that there was not conclusive evidence to support them. That reasoning is fine from a personal standpoint, but it is not the way the legal system works. Also, as I read Kirkendall, his analysis is less about the merit of the transactions themselves, but rather about the merit (or lack of merit) of the government’s presentation of the transactions at trial. As you as pointed out yourself, concluding that an accounting transaction was improper is quite different than proving that Jeff Skilling is guilty of a criminal count based on that transaction.
I’ve recently watched the documentary on Enron, and after all the information presented i find it hard to believe the executives are innocent. Could you elaborate why and how they are innocent?
Hi Emma. If the “documentary” you are talking about is “The Smartest Guys in the Room”, I believe that topic is covered in this blog in several places, inlcuding here: http://caraellison.wordpress.com/2009/04/03/everything-wrong-with-the-smartest-guys-in-the-room-expanded-edition/.
One thing to remember is that the creators of that film didn’t even make an attempt to be objective. So it is essentially a propaganda piece, not a “documentary” in the traditional sense. If you browse through the posts in this blog and others, you will find lots more information than you see in that film.
Thank you so much for speaking truths of Enron, after much analysis of Enron (documents, congressional testimony, speaking with consultants for Enron and having had known many Enron Executives personally,) I can say that Enron was a great company. That failed as Skilling put it from a “classic run on the bank.” As a society we are quick to blame those in powerful positions for unfortunate events, and quick to believe almost anything the opoite of the masses known as Television streams into our brains. While yes those in powerful positions may be enriched financially they have payed a different price which can never be compensated with material goods. If it weren’t for these individuals like Skilling, our world would be a much grimmer place. So why should these people be punished for their hard work. I was raised in Sugar Land, Texas and was a neighbor to Cliff Baxter and attended school with his children, it was absolutely horrible to see what they endured as a result of their families association with Enron. Another of one my friend’s Father’s, a man who was a director in EES, lost everything, his spectacular home, his job, and his pride. The scandal knew no bounds those who worked tirelessly going so far as to neglect their families, had nothing to show for their work to change the world. Yet a short seller, and an Enron accountant Sherron Watkins is labeled a hero? But this is the reality. I hope the perceptions of Enron change with time, and blogs such as this one gain more attention. But until then as Enya says “who can say where the road goes, only time.”