House of Cards

Enron's collapse may have been engineered from the top, but low-level employees played parts, too

Enron began employing off-balance-sheet partnerships, which are widely used by U.S. corporations, in the early 1990s to hedge its investments in emerging markets. Often they proved to be good business decisions. Miller recalls that in August 2000, Enron Wholesale Services did a deal with one of several partnerships Enron named after a creature from Jurassic Park called a raptor. The year before, Enron had put $5 million in Active Power, an alternative energy company in Austin. The day the company went public, Enron's investment was worth $60 million. Miller's group hedged the gain by transferring the shares to Raptor during the 180-day "lockdown period," when they can't be sold on the market.

"It was a good deal," Miller recalls. "We were able to sell the shares and make a cash profit of $25 million on a $5 million investment."

That explains why Miller, who was instrumental in organizing the Severed Enron Employees Coalition and eventually wrote the group's charter, says the depiction of the horrendous Raptor losses in the Powers committee report "surprised me a little."

Margaret Ceconi suspects Enron was bankrupt for two years before its December collapse.
Deron Neblett
Margaret Ceconi suspects Enron was bankrupt for two years before its December collapse.
Diana Peters had to take the first job offered to her after Enron's collapse. "I want somebody to go to jail," she says.
Troy Fields
Diana Peters had to take the first job offered to her after Enron's collapse. "I want somebody to go to jail," she says.

As detailed by the committee report, the Raptor partnerships were spun off from Enron's dealings with perhaps the best-known of its off-balance-sheet schemes, LJM--so named for the initials of Fastow's wife and two children. Raptors I through IV had the greatest impact on Enron's financial statements, the committee report said, allowing the company to conceal $1 billion in losses on poorly performing assets it couldn't dump. The Raptors' fatal flaw was that they were capitalized not with outside equity but with Enron stock.

For example, LJM1 and its related Raptors received Enron stock to hedge investments in an Internet service provider, Rhythms NetConnections, and the expansion of a fiber-optic cable network. As long as the tech companies did well, the phony hedge was harmless. As long as Enron's share price held its own, the hedge served a useful purpose. While the details are infinitely more complex, the upshot is that both Enron's tech investments and its share price tanked. The company's management complicated matters by restructuring the deals in early 2001 without seeking approval from the board of directors. Nonetheless, the tech companies continued to decline in value, as did Enron's stock.

Meanwhile, after folding Enron International in 1998, Skilling effectively shut down Enron Global Markets group last summer, telling employees that the company wanted to dump its traditional asset base in favor of its trading operations. A former executive with the Global Markets group says that, as far as he could tell, Enron Global Markets was making money for the company, booking almost $80 million in earnings in 2000.

Still, he remembers one incident that makes him wonder how much of that profit was real. Just before Christmas that year, his boss called and said he "needed" another $20 million in the fourth quarter. Because the group marked the value of its assets to market, the executive went back and examined the group's holdings for a plant or a small energy concern that might have been undervalued. When he reported the bad news, his boss told him to look again.

"We had already marked everything that we could based on our accounting policies, which basically stated that you couldn't mark it up to a higher level unless a third party was willing to come in and pay that much," he says. "We did have two companies that were in the early stages of another financing round, and they had term sheets that suggested a higher price could be had at some point. We had no deals yet, but I said, 'I suppose if we took a very aggressive stance, we could say that based on these term sheets, [the financing] is going to happen.' I effectively took $20 million of accounting profits out of 2001 and brought it back into 2000.

"That was the kind of thing that was happening all the time," he continues. "The attitude was: 'The most realistic assessment of the future was whatever made my bonus bigger at year-end. I'm not going to be here in five years anyway when it all comes crashing down, so who cares?'"

The former executive says that however misleading the transaction appeared, it was approved by Arthur Andersen and Enron's chief accounting officer, Richard Causey. Rick Buy, head of Enron's Risk Assessment Group, which signs off on the final valuation of assets for marked-to-market accounting purposes, found nothing objectionable about it either, he recalls.

"It was effectively being forced on us that it was top down, that the accountants were telling us, 'This is the way we want to account for this deal; this is what we're going to do here,'" he says. "It all seemed very strange in certain cases. But, my God, we had all these controls in place and everyone has signed off on it, it must be OK."

It wasn't OK, though, and neither were many similar transactions between Enron and its off-balance-sheet partnerships. According to the Powers committee, while Enron's board of directors relied on Causey and Buy to protect the company's interests, neither "had the necessary time, or spent the necessary time" to scrutinize the transactions closely.

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