|
CORPORATE FALLOUT: FROM ENRON TO WORLDCOM 6/28/02
Consumer and investor confidence have been relentlessly tested in recent months with headlines of scandal-ridden corporate offices and boardrooms. Bush administration officials are calling for tougher sanctions for corporate failures as investigators uncover a near continuous stream of financial irregularities and fraudulent transactions. The list of revealed corporate wrongdoings increases daily. One BusinessWeek Magazine article begins, "Lying, Cheating, Arrogance. The public’s worst fears about the ethics of much of Corporate America are proving to be justified." As Edward Ziober, 60, a Rite Aid stockholder lamented, "We don't need al-Qaida to ruin this country. We've got our own corporate executives doing that." Harvey Pitt, chairman of the Securities and Exchange Commission, is now recommending criminal prosecution of executives who falsely certify corporate finances. "We think that's the right step," says Treasury Secretary Paul O’Neill. O’Neill proposes the law should include measures for the government to be able to freeze assets "so that while these things are being litigated, the money doesn't run away and can be redistributed to the employees and shareholders." In the ongoing "energy crisis," internal Enron memos, recently made public, have revealed that what everyone suspected about the so-called crisis is indeed true. Enron and other energy giants did manipulate the California de-regulated energy market to, as BusinessWeek Magazine puts it, "profit from cheating an entire state." Today, California’s electric bills are 67% higher than in 2000, the result of Governor Davis’ having to sign a long-term $40 billion contract to solve the supposed shortage in 2001. Davis, among others, had long believed that traders were at the root of California’s problems, and now documents from Enron’s Portland, Oregon, office go into revealing detail about how this was accomplished. The two December 2001 memos from Portland law firm Stoel Rives, part of a fact-finding mission requested by Enron’s own internal legal counsel, describe tactics Enron used to manipulate the energy market. One strategy was to create the impression of an imbalance of electricity supply and demand, then profit from the correction. The other described in the memos was to "get paid for moving energy to relieve congestion without actually moving any energy or relieving any congestion." Enron gave its trading plans trendy monikers, some borrowed from Hollywood, to identify them among participating traders. "Death Star" was when Enron scheduled power it didn’t need, just to collect the fees, overbooking power to create the illusion of congestion. "Get Shorty" and "Fat Boy" were the names given Enron’s scheme to sell supplemental power at a high price, then buying it back at a lower price. "Megawatt Laundering," also called the "Ricochet" strategy, was when California capped the price of in-state power, energy companies would export electricity out of state, then sell it back to California again at an inflated price. California’s regulations prohibited these trades, called "gaming," with laws that required the energy companies to keep power on standby. But in the midst of the crisis, with seven different trading markets going all at once, the California Independent System Operator found them nearly impossible to keep track of. Stoel Rives’ memos disclose, "It is clear that Enron’s intent under this strategy is solely to arbitrage the spread (between the daily and real-time market) and not to serve load or meet contractual obligations." "Our concern here," the memos continue, "is that by knowingly increasing congestion costs, Enron is effectively increasing the costs to all participants." Other trade maneuvers have surfaced. A "Daisy Chain Swap" is when companies form a temporary cartel with other traders to inflate prices. "Round-Tripping" is when one energy trader sells electricity to another, and the second firm simultaneously sells it back to the first at the same price. This shows an artificial boost in business and makes the traders all seem more successful than they really are. Examination of 2000 and 2001 energy transactions show that many of the top US traders engaged in these schemes. Among these are Reliant, Dynegy, Enron, Aquila, CMS Energy, Xcel Energy, EnCana Corp., Merchant Energy Group and the El Paso Corporation. Over the last 3 years 10% of Reliant’s business was done this way and in 2001 an astonishing 80% of CMS Energy’s revenues were due to "round-tripping". It is not strictly illegal, but is being investigated because the market price for electricity is set, by definition, as the price at which it last traded. Gordon Howald of Credit Lyonnaise Securities explains, if round-tripping can be proved to have artificially set high prices for electricity, the "ensuing litigation would bury the industry." Stock prices at the largest energy traders fell quickly after they admitted involvement in the trade scams. Reliant stock has fallen 60% over the last year, while shares of Dynegy, once Enron’s fiercest energy rival, are down 80%. Top executives at Reliant and CMS Energy resigned after the companies apologized for their participation and reported they would be releasing revised financial reports. On May 28, Dynegy announced the resignation of its chairman and CEO, Chuck Watson, once called the "white knight" in the Enron saga, and who as recently as December 24 of last year was featured on Forbes Magazine’s cover article entitled "Power Player." Watson left Dynegy with a severance package that has been reported as high as $33 million. New figures have also been released documenting the stock and cash payments made to top Enron executives last year. $744 million in payments and stock went out in the year leading up to Enron’s bankruptcy filing in December 2001, including $309.5 million in salary, bonuses, long-term incentives, loan advances and other payments, and an additional $434.5 million in stock options and received stock. Many former Enron officers now live in a kind of self-imposed exile. Kenneth Lay, Enron’s former chairman, who himself took $103,559,793 in payments last year, maintains plush offices in Houston’s business center, managing his family foundation with a staff of four or five, including his former Enron secretary. He and his wife Linda seem to have recovered from what, in January on national television, she tearfully called her family’s ‘near bankruptcy.’ The Lays have now sold more than $40 million of family real estate, and Linda Lay is marketing possessions from those properties in her new high-end resale shop, "Jus’ Stuff," in Houston. The Seattle Times has creatively dubbed it, "Salvation Armani." Jeffrey Skilling, former Enron chief executive, who pocketed over $8 ½ million, also manages his family matters, and has formed Veld Interests, what a spokesperson calls his new "company in search of a business." Andrew Fastow, former chief financial officer, made about $50 million over the last four years controlling the questionable Enron partnerships at the heart of the Arthur Anderson accounting debacle. He now busies himself with the construction of his family’s new home in River Oaks, Houston’s most exclusive neighborhood of old money and gated mansions where Lay and Skilling also live. Lou L. Pai, former Chairman of Enron Energy Services, is reportedly looking for investment opportunities for the $250 million he gained selling Enron stock over the last few years. News revelations have included tragedies as well. Charles Dana Rice, 47, senior vice president and treasurer of El Paso Corp. committed suicide in early June, the second top Houston energy executive to take his own life this year. Back in January, former Enron Corp. vice chairman J. Clifford Baxter was found dead of a self-inflicted gunshot wound in his parked car in the Houston suburb of Sugar Land. The release of the Enron memos has sparked talk of a criminal investigation into Enron and other traders’ practices. Enron’s directors have denied responsibility in front of Congressional committees, claiming Enron executives and its accounting firm, Arthur Anderson, concealed from them any improper or shady trading practices. Hearings continue, though, as Sen. Carl Levin, D-Mich, bluntly puts it "I just don’t buy it." In Washington State, Senators Patty Murray and Maria Cantwell, and Representative Brian Baird are spearheading investigative efforts. Five Federal agencies as well as the attorneys general of Washington, Oregon and California have vowed to continue their inquiry. Sen. Tom Daschle, D-S.D., has said of the continuing inquiries, "I don’t think there’s any doubt that somebody ought to go to jail and that we ought to find a way through public policy to fix a system that needs to be addressed." The fallout from Enron’s collapse spreads: In Oregon, Enron’s failure is marked by the increased scrutiny into the operation of the state’s two largest utilities, PacifiCorp and Enron subsidiary Portland General Electric (PGE). Both are under investigation by the Federal Energy Regulatory Commission (FERC). Mary Turina, PGE’s vice president, described a practice called "parking and lending" whereby PGE bought power from Enron, held it for some time, then sold it back to Enron. In early May it was revealed that PGE customers pay the highest electricity rates in the Pacific Northwest. Enron acquired PGE in 1997, and analysts argue that PGE came to rely even more on the inflated open energy market for its contracts after the purchase, further driving up its costs. Enron has cancelled the sale of PGE to Northwest Natural Gas, and PGE now figures prominently in the proposed Enron reorganization. While experts agree that PGE will survive the disaster surrounding Enron, the immediate and lingering effects could hurt the local utility. In April, three Oregon agencies began an investigation into whether or not to file an $80 billion lawsuit against Enron. That amount represents the amount PGE’s 2700 employees lost in retirement savings. The FERC has threatened to revoke the license of another Northwest company, Spokane’s Avista Corp. Currently, their license allows them to price electricity sold for wholesale prices at the going rate instead of having to undergo a lengthy ratemaking process. Losing it would hinder their ability to profit from trading in wholesale electricity markets. In mid June, Arthur Anderson, Enron’s auditor, was handed the first criminal conviction ever of a major accounting firm and the first conviction in the government’s ongoing Enron investigations. After ten days of deliberations, a federal jury convicted Arthur Anderson of obstruction of justice, stemming from charges of destruction of key evidence. This summer will mark the final chapter in Arthur Anderson’s 89 years as one of the top public accounting firms in the country, as it has announced it will no longer perform audits on public companies after August. Slide presentations released last week revealed Perot Systems Corp. might have coached energy suppliers to manipulate the very systems it built for California's electrical power grid operators. Perot Systems was one of two contractors hired to build, test and manage the computer systems for the California Independent System Operator (ISO) and the now-defunct California Power Exchange Corp. The Senate subcommittee investigating price manipulation in California's wholesale markets say the power point presentations, prepared by Perot Systems and uncovered by the subcommittee in subpoenaed documents turned over by Houston-based Reliant Energy Corp., describe "holes" in the state's energy market system and strategies that firms could use to increase congestion and drive up costs. The Senate committee has subpoenaed documents from Perot Systems Corp., and Ross Perot, its chairman, is expected to testify in early July. Global Crossings, a major telecommunications company which filed for bankruptcy in January, is under investigation by the Securities and Exchange Commission (SEC), FBI, and congressional investigative committees for charges of questionable trading activities, accounting practices, and document shredding. One deal under intense scrutiny involving Global Crossings, Enron, and Reliant Resources, is being called a "sham deal that misled investors by inflating reported revenues and earnings." The transaction was essentially an exchange of long-term services for a $17 million loan to Global by Enron, but the loan was not expected to appear on Global’s books because it was disguised as an apparent "swap" of fiber-optic network capacity. Enron had apparently first offered the deal to El Paso Corp., which passed, and the deal eventually went through with Reliant as the brokering partner. And in the most recent Enron development, the Justice Department has charged three former employees of the British National Westminster Bank with wire fraud in an alleged $7.3 million scheme involving Enron, prosecutors announced Thursday. The complaint alleges that through secret investments the former bankers were able to siphon off $7.3 million in income that belonged to their employer. NatWest was considered a "Tier 1" bank by Enron, which meant it was among a small group of banks that did the most business with Enron and were given preferential treatment by the company. Leslie Caldwell, director of the Justice Department's Enron task force, said, "This complaint shows that we intend to address the conduct not only of Enron but also of those who capitalized on Enron's willingness to enter into account-driven transactions that lacked business purpose and served merely to enrich those involved." Corporate financial scandals continue: Retail giant Rite Aid has been embroiled in an accounting crisis since 1999. On Friday, June 21, federal prosecutors unveiled a 37-count indictment against Rite Aid executives charging Martin Grass, Rite Aid's former CEO and the son of its founder, former chief counsel Franklin Brown, and former chief financial officer Franklyn Bergonzi with securities fraud, conspiracy and other offenses. In April, Internet stock analysts at Merrill Lynch were accused of selling their supposedly independent opinions to win business for Merrill Lynch, allegedly profiting greatly by misleading their investor clients. New York Attorney General Eliot Spitzer filed a 37-page document with the New York Supreme Court detailing the Merrill Lynch irregularities. A spokesman for the Attorney General’s office announced that subpoenas would be issued "to other prominent Wall Street firms" on the basis that "they're all major players." What's more, he said, the SEC is very interested in the case. "We've had a number of discussions with them." Even decorating maven Martha Stewart is apparently not immune from scrutiny. Shares of her Martha Stewart Living Omnimedia Inc. dropped nearly 24 percent Wednesday, June 26, following reports of possible charges of obstruction of justice and making false statements. Federal investigators have announced a wider examination into the sale of her nearly 4,000 ImClone Systems Inc. stock shares last December. Peter Bacanovic, Stewart’s Merrill Lynch stockbroker, and his assistant were suspended with pay last week by the brokerage firm for "factual issues regarding a client transaction." Locally, the business community is still recovering from the collapse of- and the ongoing criminal investigation into-Capital Consultants, previously one of Portland’s largest money management firms. Capital Consultants collapsed amidst charges that it was concealing huge losses by employing a Ponzi-like scheme involving various business entities that has cost 100,000 people much of their retirement income. Barclay Grayson, the former president of Capital Consultants pleaded guilty to mail fraud in the scheme that covered up losses at the firm and ultimately cost union workers and other clients of the firm about $355 million. This week, Wall Street reeled from the news that two more corporate giants were faltering: WorldCom, the nation's second-largest long-distance telephone carrier and parent company of MCI, announced it had improperly booked expenses to help boost its cash flow and profits, disguising nearly $4 billion in expenses from the investing public. Enron and WorldCom had the same auditor: Arthur Andersen LLP. The government filed civil fraud charges against WorldCom on June 26, and three WorldCom officials and an influential Wall Street analyst who promoted the company's stock will be summoned to appear at a July 8 hearing by the House Financial Services Committee. And just days later, Xerox, which had already admitted to one huge accounting error earlier this year, announced that a new audit found fresh accounting mis-statements revealing a two billion dollar hole in its accounts. Shares in the photocopying giant dropped by almost a third as it revealed it would have to correct stated earnings for the past five years to reclassify more than $6 billion in revenues. In recent months, an angered President Bush, a former businessman himself, has told friends and aides that he is "mad as hell at corporate America." One senior official said, "The president is not only very interested in this issue but increasingly outraged. He's going to call on corporate America to live up to the standards that's has made our economic system the envy of the world. He will stress that fundamentally our economy is strong," the official said. Bush will devote his radio address on Saturday, July 9, to the subject of corporate responsibility and will travel to New York to stress the need for better governing at the top level of American businesses. He will also emphasize the importance of Congress approving better enforcement and rules to protect pensions, shareholders and employees. Reforms cannot come too quickly. As Treasury Secretary Paul O’Neill, a former chief executive of Alcoa Inc., explains of WorldCom's accounting problem: "It's not possible for it to have been done by one individual. The scope of what they've done at WorldCom requires complicity of quite a few people, I think, because the numbers are so huge. The accounting technique they used is so fundamental – it's just mind-boggling." Some analysts believe the WorldCom scandal could replace the Enron collapse as the nation's biggest corporate scandal ever. They suggest investors be on the watch for more corporate fallout. As happened in the case of Enron, investor reactions were delayed as the collapse unfolded. And as one expert warned, "sometimes those (corporate) relationships are so Byzantine it takes a while for even those involved in the transactions to figure it all out. In other words: Stay tuned."
|
