|
Are
Women More Ethical and Moral?
One interesting sidebar on this was an
NBC News feature last night on February 6, 2003. It was pointed out
that most of the bad deeds in the Enron scandal were committed by men (e.g.,
Skilling, Lay, Fastow, and Duncan). Most of the white knights in whistle blowing
have been women (the show featured three of those women). The implication was
that we should place more trust in the feminine gender. Sounds good to me!
What NBC News overlooked was the the
Mata Hari of the Enron Scandal --- Wendy Gramm ---
http://www.trinity.edu/rjensen/fraud.htm#bribes
Reply from Roger Collins [rcollins@cariboo.bc.ca]
Bob, I was turning
out what passes for my "home office" earlier today and came across the
Winter 1997 issue of Contemporary Accounting Research (Vol 14, #4).
One of the articles therein (page 653) is entitled:
"An Examination of
Moral Development within Public Accounting by Gender, Staff Level and Firm"
by Bernardi, R and Arnold, D F (Sr)
The authors'
dataset covers 494 managers and seniors from five "Big Six" firms.
According to the
abstract;
"The results
indicate a difference in the average level of moral development among
firms.....Second, female managers are at a significantly higher average
level of moral development than male managers. In fact, average scores for
male managers fell between those expected for senior high school and college
students. The data suggest that a greater percentage of
high-moral-development males and a low-moral development females are leaving
public accounting than their respective opposites. These results
indicate that the profession has retained, through advancement, males who
are potentially less sensitive to the ethical implications of various
issues."
- all of which
leads me to wonder whether your comments (about Enron) re our needing more
female executives wasn't right on target - and also, which accounting firms
ranked where in "average level of moral development".
Roger
Associate Professor
UCC School of Business
"Study Reveals Financial Performance Higher for Companies with Women at the
Top," AccountingWeb, January 30, 2004 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=98624
A new study released today by Catalyst demonstrates
that companies with a higher representation of women in senior management
positions financially outperform companies with proportionally fewer women
at the top. These findings support the business case for diversity, which
asserts companies that recruit, retain, and advance women will have a
competitive advantage in the global marketplace.
In the study The Bottom Line: Connecting Corporate
Performance and Gender Diversity, sponsored by BMO Financial Group, Catalyst
used two measures to examine financial performance: Return on Equity (ROE)
and Total Return to Shareholders (TRS). After examining the 353 companies
that remained on the F500 list for four out of five years between 1996 and
2000, Catalyst found:
- The group of companies with the highest
representation of women on their senior management teams had a 35-percent
higher ROE and a 34- percent higher TRS than companies with the lowest
women's representation.
- Consumer Discretionary, Consumer Staples, and
Financial Services companies with the highest representation of women in
senior management experienced a considerably higher ROE and TRS than
companies with the lowest representation of women.
"Business leaders increasingly request hard data to
support the link between gender diversity and corporate performance. This
study gives business leaders unquestionable evidence that a link does
exist," said Catalyst President Ilene H. Lang. "We controlled for industry
and company differences and the conclusion was still the same.
Top-performing companies have a higher representation of women on their
leadership teams."
"The Catalyst study confirms my own long-held
conviction that it makes the best of business sense to have a diverse
workforce and an equitable, supportive workplace," said Tony Comper,
Chairman and CEO of BMO Financial Group, sole sponsor of the research.
A Note on Methodology
Catalyst divided the 353 companies into four
roughly equal quartiles based on the representation of women in senior
management. The top quartile is the 88 companies with the highest gender
diversity on leadership teams. The bottom quartile is the 89 companies with
the lowest gender diversity. Catalyst then compared the two groups based on
overall ROE and TRS.
"It is important to realize that our findings
demonstrate a link between women's leadership and financial performance, but
not causation," said Susan Black, Catalyst Vice President of Canada and
Research and Information Services. "There are many variables that can
contribute to outstanding financial performance, but clearly, companies that
understand the competitive advantage of gender diversity are smart enough to
leverage that diversity."
From The Wall Street Journal's Accounting Educators' Reviews on
February 14, 2002
TITLE: SEC Still Investigates Whether Microsoft Understated Earnings
REPORTER: Rebecca Buckman
DATE: Feb 13, 2002
PAGE: A3
LINK:
http://online.wsj.com/article/0,,SB1013558932799654480.djm,00.html T
OPICS: Financial Accounting
SUMMARY: Microsoft is undergoing a continuing SEC investigation into
whether the company has understated its revenues. Questions relate to issues
in unearned revenue.
QUESTIONS:
1.) What is conservatism in accounting? Is it an accepted practice?
2.) In general, what is unearned revenue? How is it presented in the
financial statements? When is this balance recognized as earned? What
accounting adjustment is made at that time?
3.) Why must Microsoft record some unearned revenues from software sales?
Could that practice be supported through reserves of some cash accounts?
4.) Given Microsoft's recent experiences in testifying against allegations
of violating federal antitrust laws, why might the company want to understate
its income?
5.) Why does the former Microsoft employee, Mr. Pancerzewski, say that "he
disagrees that there is no harm in a company understating its income"? Do you
think there could be problems in understating income even for companies that
are not facing charges of earning excess profits through anti-competitive
practices?
Reviewed By: Judy Beckman, University of Rhode Island
Reviewed By: Benson Wier, Virginia Commonwealth University
Reviewed By: Kimberly Dunn, Florida Atlantic University
The
Enron Scandal on Creative Accounting and Audit Independence
Message to Valero on April 17, 2004
| Hi Pepper,
I request that you print this message for all participants of the
workshop that I will present at Valero.
Of all the many documents and books that I have read about derivative
financial instruments, the most important have been the books and
documents written by Frank Partnoy. Some of his books are listed at the
bottom of this message.
The single most important document is his Senate Testimony. More than
any other single thing that I've ever read about the Enron disaster,
this testimony explains what happened at Enron and what danger lurks in
the entire world from continued unregulated OTC markets in derivatives.
I think this document should be required reading for every business and
economics student in the world. Perhaps it should be required reading
for every student in the world. Among other things it says a great deal
about human greed and behavior that pump up the bubble of excesses in
government and private enterprise that destroy the efficiency and
effectiveness of what would otherwise be the best economic system ever
designed.
It would be neat if you could print his entire testimony as advance
reading (15 pages) for the audience ---
http://www.senate.gov/~gov_affairs/012402partnoy.htm
Please print my message as well since it lists some of his other
writings.
The CD I sent you contains only a miniscule fraction of the helper
documents and videos on derivatives and derivatives accounting that I
have linked at
http://www.trinity.edu/rjensen/caseans/000index.htm
I appreciate this opportunity to meet with Valero specialists in
derivatives and derivatives accounting.
Thanks,
Bob
Frank Partnoy is best known as a whistle blower at Morgan Stanley who
blew the lid on the financial graft and sexual degeneracy of derivatives
instruments traders and analysts who ripped the public off for billions
of dollars and contributed to mind-boggling worldwide frauds. He
is a Yale University Law School graduate who shocked the world with
various books include the following:
- FIASCO: The Inside Story of a Wall Street Trader
- FIASCO: Blood in the Water on Wall Street
- FIASCO: Blut an den weißen Westen der Wall Street
Broker.
- FIASCO: Guns, Booze and Bloodlust: the Truth About High Finance
- Infectious Greed : How Deceit and Risk Corrupted the Financial
Markets
- Codicia Contagiosa
His other publications include the following highlight:
"The Siskel and Ebert of Financial Matters: Two Thumbs Down for the
Credit Reporting Agencies" (Washington University Law Quarterly)
Bob Jensen's threads on Enron (See below)
Bob Jensen's threads on Derivative Financial Instruments Fraud are at
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
Also note
http://www.trinity.edu/rjensen/Fraud.htm#FrankPartnoyTestimony
How Enron Used SPEs and Derivatives Jointly is Explained at
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
Bob Jensen’s threads on derivatives
accounting are at
http://www.trinity.edu/rjensen/caseans/000index.htm
In the end, derivatives are like antibiotics. It's dangerous to
live with them, but the world is better off because of them. The
same can be said about FAS 133 and its many implementation guides and
amendments. Booking derivatives at fair value is dangerous, but
the economy would be worse off without it. What we have to do is
to strive night and day to improve upon reporting of value and risk in a
world that relies more and more on derivative financial instruments to
manage risks. |
Selected works of FRANK PARTNOY
Bob Jensen at
Trinity
University
1.
Who is Frank Partnoy?
The controversial
writings of Frank Partnoy have had an enormous impact on my teaching and my
research. Although subsequent
writers wrote somewhat more entertaining exposes, he was the one who first
opened my eyes to what goes on behind the scenes in capital markets and
investment banking. Through his
early writings, I discovered that there is an enormous gap between the
efficient financial world that we assume in agency theory worshipped in
academe versus the dark side of modern reality where you find the cleverest
crooks out to steal money from widows and orphans in sophisticated ways where
it is virtually impossible to get caught.
Because I read his 1997 book
early on, the ensuing succession of enormous scandals in finance, accounting,
and corporate governance weren’t really much of a surprise to me.
From his insider
perspective he reveals a world where our most respected firms in banking,
market exchanges, and related financial institutions no longer care anything
about fiduciary responsibility and professionalism in disgusting contrast to
the honorable founders of those same firms motivated to serve rather than
steal.
Young men and women
from top universities of the world abandoned almost all ethical principles
while working in investment banks and other financial institutions in order to
become not only rich but filthy rich at the expense of countless pension
holders and small investors.
Partnoy opened my eyes to how easy it is to get around auditors and corporate
boards by creating structured financial contracts that are incomprehensible
and serve virtually no purpose other than to steal billions upon billions of
dollars.
Most importantly,
Frank Partnoy opened my eyes to the psychology of greed.
Greed is rooted in opportunity and cultural relativism.
He graduated from college with a high sense of right and wrong.
But his standards and values sank to the criminal level of those when
he entered the criminal world of investment banking.
The only difference between him and the crooks he worked with is that
he could not quell his conscience while stealing from widows and orphans.
Frank Partnoy has a
rare combination of scholarship and experience in law, investment banking, and
accounting. He is sometimes
criticized for not really understanding the complexities of some of the deals
he described, but he rather freely admits that he was new to the game of
complex deceptions in international structured financing crime.
2.
What really happened at Enron?
I begin with the following document the best thing I ever read explaining
fraud at Enron.
Testimony of Frank Partnoy Professor of Law, University of San Diego School of
Law Hearings before the United States Senate Committee on Governmental
Affairs, January 24, 2002 ---
http://www.senate.gov/~gov_affairs/012402partnoy.htm
The following
selected quotations from his Senate testimony speak for themselves:
-
Quote:
In other words, OTC derivatives markets,
which for the most part did not exist twenty (or, in some cases, even ten)
years ago, now comprise about 90 percent of the aggregate derivatives
market, with trillions of dollars at risk every day.
By those measures, OTC derivatives markets are bigger than the
markets for
U.S.
stocks. Enron may have been just an energy company when it was created in
1985, but by the end it had become a full-blown OTC derivatives trading
firm. Its OTC
derivatives-related assets and liabilities increased more than five-fold
during 2000 alone.
-
Quote:
And, let me
repeat, the OTC derivatives markets are largely unregulated.
Enron’s trading operations were not regulated, or even recently
audited, by U.S. securities regulators, and the OTC derivatives it traded
are not deemed securities. OTC
derivatives trading is beyond the purview of organized, regulated exchanges.
Thus, Enron – like many firms that trade OTC derivatives – fell into a
regulatory black hole.
-
Quote:
Specifically, Enron used derivatives and special purpose vehicles to
manipulate its financial statements in three ways.
First, it hid speculator losses it suffered on technology stocks.
Second, it hid huge debts incurred to finance unprofitable new
businesses, including retail energy services for new customers.
Third, it inflated the value of other troubled businesses,
including its new ventures in fiber-optic bandwidth.
Although Enron was founded as an energy company, many of these
derivatives transactions did not involve energy at all.
-
Quote:
Moreover, a thorough inquiry into these dealings also should include the
major financial market “gatekeepers” involved with Enron: accounting firms,
banks, law firms, and credit rating agencies.
Employees of these firms are likely to have knowledge of these
transactions. Moreover, these
firms have a responsibility to come forward with information relevant to
these transactions. They benefit
directly and indirectly from the existence of
U.S.
securities regulation, which in
many instances both forces companies to use the services of gatekeepers and
protects gatekeepers from liability.
-
Quote:
Recent
cases against accounting firms – including Arthur Andersen – are eroding
that protection, but the other gatekeepers remain well insulated.
Gatekeepers are kept honest – at least in theory – by the threat of
legal liability, which is virtually non-existent for some gatekeepers.
The capital markets would be more efficient if companies were not required
by law to use particular gatekeepers (which only gives those firms market
power), and if gatekeepers were subject to a credible threat of liability
for their involvement in fraudulent transactions.
Congress should consider expanding the scope of securities fraud
liability by making it clear that these gatekeepers will be liable for
assisting companies in transactions designed to distort the economic reality
of financial statements.
-
Quote:
In a nutshell, it appears that some
Enron employees used dummy accounts and rigged valuation methodologies to
create false profit and loss entries for the derivatives Enron traded.
These false entries were systematic and occurred over several
years, beginning as early as 1997.
They included not only the more esoteric financial instruments Enron began
trading recently – such as fiber-optic bandwidth and weather derivatives –
but also Enron’s very profitable trading operations in natural gas
derivatives.
-
Quote:
The
difficult question is what to do about the gatekeepers.
They occupy a special place in securities regulation, and receive
great benefits as a result.
Employees at gatekeeper firms are among the most highly-paid people in the
world.
They have access to superior information and supposedly have
greater expertise than average investors at deciphering that information.
Yet, with respect to Enron, the gatekeepers clearly did not do
their job.
For more on Frank Partnoy's testimony, click
here.
3.
What are some of Frank Partnoy’s best-known books?
Frank Partnoy,
FIASCO: Blood in the Water on Wall Street (W. W. Norton & Company, 1997,
ISBN 0393046222, 252 pages).
This is the first
of a somewhat repetitive succession of Partnoy’s “FIASCO” books that
influenced my life. The most
important revelation from his insider’s perspective is that the most trusted
firms on Wall Street and financial centers in other major cities in the
U.S., that were once highly professional and trustworthy, excoriated the
guts of integrity leaving a façade behind which crooks less violent than the
Mafia but far more greedy took control in the roaring 1990s.
After selling a
succession of phony derivatives deals while at Morgan Stanley, Partnoy blew
the whistle in this book about a number of his employer’s shady and outright
fraudulent deals sold in rigged markets using bait and switch tactics.
Customers, many of them pension fund investors for schools and municipal
employees, were duped into complex and enormously risky deals that were
billed as safe as the U.S. Treasury.
His books have
received mixed reviews, but I question some of the integrity of the
reviewers from the investment banking industry who in some instances tried
to whitewash some of the deals described by Partnoy.
His books have received a bit less praise than the book
Liars Poker by Michael Lewis, but critics of Partnoy fail to give credit
that Partnoy’s exposes preceded those of Lewis.
Frank Partnoy,
FIASCO: Guns, Booze and Bloodlust: the Truth About High Finance (Profile
Books, 1998, 305 Pages)
Like his earlier
books, some investment bankers and literary dilettantes who reviewed this
book were critical of Partnoy and claimed that he misrepresented some
legitimate structured financings.
However, my reading of the reviewers is that they were trying to lend
credence to highly questionable offshore deals documented by Partnoy.
Be that as it may, it would have helped if Partnoy had been a bit
more explicit in some of his illustrations.
Frank Partnoy,
FIASCO: The Inside Story of a Wall Street Trader (Penguin, 1999, ISBN
0140278796, 283 pages).
This is a
blistering indictment of the unregulated OTC market for derivative financial
instruments and the devious million and billion dollar deals conceived by
drunken sexual deviates in investment banking.
Among other things, Partnoy describes Morgan Stanley’s annual drunken
skeet-shooting competition.
This is also one
of the best accounts of the “fiasco” caused by Merrill Lynch in which Orange
Counting lost over a billion dollars and was forced into bankruptcy.
Frank Partnoy,
Infectious Greed: How Deceit and Risk Corrupted the Financial Markets
(Henry Holt & Company, Incorporated, 2003, ISBN: 0805072675, 320 pages)
Partnoy shows how
corporations gradually increased financial risk and lost control over overly
complex structured financing deals that obscured the losses and disguised
frauds pushed corporate officers
and their boards into successive and ingenious deceptions." Major corporations
such as Enron, Global Crossing, and WorldCom entered into enormous illegal
corporate finance and accounting.
Partnoy documents the spread of this epidemic stage and provides some
suggestions for restraining the disease.
4.
What are examples of related books that are somewhat more entertaining
than Partnoy’s early books?
Michael Lewis,
Liar's Poker: Playing the Money Markets (Coronet, 1999, ISBN 0340767006)
Lewis writes in
Partnoy’s earlier whistleblower style with somewhat more intense and comic
portrayals of the major players in describing the double dealing and break
down of integrity on the trading floor of Salomon Brothers.
John Rolfe and
Peter Troob, Monkey Business: Swinging Through the Wall Street Jungle (Warner
Books, Incorporated, 2002, ISBN: 0446676950, 288 Pages)
This is a hilarious tongue-in-cheek account by Wharton and Harvard MBAs
who thought they were starting out as stock brokers for $200,000 a year
until they realized that they were on the phones in a bucket shop selling
sleazy IPOs to unsuspecting institutional investors who in turn passed
them along to widows and orphans.
They write. "It took us another six months after that to realize
that we were, in fact, selling crappy public offerings to investors."
There are other books along a similar vein that may be more revealing and
entertaining than the early books of Frank Partnoy, but he was one of the
first, if not the first, in the roaring 1990s to reveal the high crime
taking place behind the concrete and glass of Wall Street.
He was the first to anticipate many of the scandals that soon
followed. And his testimony
before the U.S. Senate is the best concise account of the crime that
transpired at Enron. He lays
the blame clearly at the feet of government officials (read that Wendy
Graam) who sold the farm when they deregulated the energy markets and
opened the doors to unregulated OTC derivatives trading in energy.
That is when Enron really began bilking the public.
ARTICLE ONE
"How Enron Ran Out of Gas," by Paul Kedrosky (Professor of Business at the
University of British Colombia, The Wall Street Journal, October 29,
2001, Page A22 ---
Click Here
http://interactive.wsj.com/archive/retrieve.cgi?id=SB1004306265411230320.djm&template=pasted-2001-10-29.tmpl
Is troubled Enron
Corp. the
Long Term Capital Management of the energy markets, or merely yet another
mismanaged company whose executives read too many of their own press releases?
Or is poor Enron just misunderstood? Those are the questions after another
week of Chinese water torture financial releases from the beleaguered
Houston-based energy concern.
A year ago Enron was
the hottest of the hot. While tech stocks were tanking, Enron's shares gained
89% during 2000. Even die-hard Enron skeptics -- of which there are many --
had to concede that last year was a barnburner for the company. Earnings were
up 25%, and revenues more than doubled.
Not bad, considering
where the company came from. A decade ago 80% of Enron's revenues came from
the staid (and regulated) gas-pipeline business. No longer. Enron has been
selling those assets steadily, partly fueling revenues, but also expanding
into new areas. By 2000, around 95% of its revenues and more than 80% of its
profits came from trading energy, and buying and selling stakes in energy
producers.
The stock market
applauded the move: At its peak, Enron was trading at around 55 times
earnings. That's more like Cisco's once tropospheric valuation than the meager
2.5 times earnings the market affords Enron competitor Duke Energy.
But Enron management
wanted more. It was, after all, a "new economy" Web-based energy trader where
aggressive performers were lucratively rewarded. According to Enron Chairman
and CEO Ken Lay, the company deserved to be valued accordingly. At a
conference early this year he told investors the company's stock should be
trading much higher -- say $126, more than double its price then.
Then the new economy
motor stalled. The company's president left under strange circumstances. And
rumors swirled about Enron's machinations in California's energy markets.
Investors pored over Enron's weakening financial statements. But Enron
analysts must have the energy and persistence of Talmudic scholars to
penetrate the company's cryptic financials. In effect, Enron's troubles were
hiding in plain sight.
It should have been a
warning. Because of the poor financial disclosure there was no way to assess
the damage the economy was doing to the company, or how it was trying to make
its numbers. Most analysts blithely concede that they really didn't know how
Enron made money -- in good markets or bad.
Not that Enron didn't
make money, it did -- albeit with a worrisomely low return on equity given the
capital required -- but sometimes revenues came from asset sales and complex
off-balance sheet transactions, sometimes from energy-trading revenues. And it
was very difficult to understand why or how -- or how likely it was Enron
could do it again next quarter.
Enron's
financial inscrutability hid stranger stuff. Deep inside the company filings
was mention of LJM Cayman, L.P., a private investment partnership. According
to Enron's March 2000 10-K, a "senior officer of Enron is the managing member"
of LJM. Well, that was a puzzler. LJM was helping Enron "manage price and
value risk with regard to certain merchant and similar assets by
entering into derivatives, including swaps, puts, and collars." It was, in a
phrase, Enron's house hedge fund.
There is nothing
wrong with hedging positions in the volatile energy market -- it is crucial
for a market-maker. But having an Enron executive managing and benefiting from
the hedging is something else altogether, especially when the Enron executive
was the company's CFO, Andrew Fastow. While he severed his connection with LJM
(and related partnerships) in July of this year -- and left Enron in a whirl
of confusion last week -- the damage had been done.
As stories in this
paper have since made clear, Mr. Fastow's LJM partnership allegedly made
millions from the conflict-ridden, board-approved LJM-Enron relationship. And
recently Enron ended the merry affair, taking a billion-dollar writedown
against equity two weeks ago over some of LJM's wrong-footed hedging.
Analysts, investors, and the Securities & Exchange Commission were left with
many questions, and very few answers.
To be fair, I
suppose, Enron did disclose the LJM arrangement more than a year ago, saying
it had erected a Chinese wall between Fastow/LJM and the company. And in a
bull market, no one paid much attention to what a bad idea that horribly
conflicted relationship was -- or questioned the strength of the wall. Now it
matters, as do other Enron-hedged financings, a number of which look to have
insufficient assets to cover debt repayments due in 2003.
We didn't do
anything wrong is Mr. Lay's refrain in the company's current round of
entertainingly antagonistic conference calls. That remains to be seen, but at
the very least the company has shown terrible judgment, and heroic arrogance
in its dismissal of shareholders interests and financial transparency.
Where has Enron's
board of directors been through all of this?
What kind of oversight has this motley collection of academics, government
sorts, and retired executives exercised for Enron shareholders? Very little,
it seems. It is time Enron's board did a proper investigation, and then
cleaned house -- perhaps neatly finishing with themselves.
Then I discovered
the "tip of the iceberg" article below:
ARTICLE TWO
"Enron Troubles Only the Tip of the Iceberg?," by Peter Eavis, TheStreet.com ---
http://www.thestreet.com/markets/detox/10003083.html
Dealings with a
related party have tarnished Enron's (ENE:NYSE - news - commentary - research
- analysis) reputation and crushed its stock, but it looks like that case is
far from unique.
The battered energy
trader has done business with at least 15 other related entities, according to
documents supplied by lawyers for people suing Enron. Moreover, Enron's new
CFO, who has been portrayed by bulls as opposing the related-party dealings of
his predecessor, serves on 12 of these entities. And Enron board members are
listed as having directorships and other roles at a Houston-based related
entity called ES Power 3.
The extent of Enron's
dealings with these companies, or the value of its holdings in them, couldn't
be immediately determined. But the existence of these partnerships could feed
investors' fears that Enron has billions of dollars of liabilities that don't
show up on its balance sheet. If that's so, the company's financial strength
and growth prospects could be much less than has generally been assumed on
Wall Street, where the company was long treated with kid gloves.
Enron didn't
immediately respond to questions seeking details about ES Power or about the
role of the chief financial officer, Jeff McMahon, in the various entities.
Enron's board members couldn't immediately be reached for comment.
Ten Long Days
Enron's previous CFO,
Andrew Fastow, was replaced by McMahon Wednesday after investors criticized
Fastow's role in a partnership called LJM, which had done complex hedging
transactions with Enron. As details of this deal
and two others emerged, Enron stock cratered.
The turmoil that
resulted in Fastow's departure began two weeks ago, when Enron reported
third-quarter earnings that met estimates. However, the company failed to
disclose in its earnings press release a $1.2 billion charge to equity related
to unwinding the LJM transactions. Since then, investors and analysts have
been calling with increasing vehemence for the company to divulge full details
of its business dealings with other related entities. Enron stock sank 6%
Friday, meaning it has lost 56% of its value in just two weeks.
Enron's End Run?
New financial chief's involvement in Enron
business partners |
|
Enron-Related Entity |
Creation Date |
McMahon Involved? |
|
ECT Strategic Value Corp. |
4/18/1985 |
Yes |
|
JILP-LP Inc. |
9/27/1995 |
Yes |
|
ECT Investments Inc. |
3/1/1996 |
Yes |
|
Kenobe Inc. |
11/8/1996 |
Yes |
|
Enserco LLC |
1/7/1997 |
Yes |
|
Obi-1 Holdings LLC |
1/7/1997 |
Yes |
|
Oilfield Business Investments - 1 LLC |
1/7/1997 |
Yes |
|
HGK Enterprises LP Inc. |
7/29/1997 |
Yes |
|
ECT Eocene Enterprises III Inc. |
2/20/1998 |
Yes |
|
Jedi Capital II LLC |
9/4/1998 |
Yes |
|
E.C.T. Coal Company No. 2 LLC |
12/31/1998 |
Yes |
|
ES Power 3 LLC |
1/7/1999 |
Yes |
|
Enserco Inc. |
3/25/1999 |
No |
|
LJM Management LLC |
7/2/1999 |
No |
|
Blue Heron I LLC |
9/17/1999 |
No |
|
Whitewing Management LLC |
2/28/2000 |
No |
|
Jedi Capital II LLC |
4/16/2001 |
No |
|
Source: Detox |
However, Enron has
yet to break out a full list of related entities. The company has said nothing
publicly about McMahon's participation in related entities, nor has it
mentioned that its board members were directors or senior officers in ES Power
3. (Nor has it explained the extensive use of Star Wars-related names
by the related-party companies.) It's not immediately clear what ES Power 3 is
or does. So far, subpoenas issued by lawyers suing Enron have determined the
names of senior officers of ES Power 3 and its formation date, January 1999.
Among ES Power 3's
senior executives are Enron CEO Ken Lay, listed as a director, and McMahon and
Fastow, listed as executive vice presidents. A raft of external directors are
named as ES Power 3 directors, including Comdisco CEO Norman Blake and
Ronnie Chan, chairman of the Hong Kong-based Hang Lung Group. A
Comdisco spokeswoman says Blake isn't commenting on matters concerning Enron
and a call to the Hang Lung group wasn't immediately returned.
Demands, Demands
Rating agencies
Moody's, Fitch and S&P recently put Enron's credit rating on review for a
possible downgrade after an LJM deal that led to the $1.2 billion hit to
equity. Enron still has a rating three notches above investment grade. But its
bonds trade with a yield generally seen on subinvestment grade, or junk,
bonds, suggesting the market believes downgrades are likely.
If Enron's rating
drops below investment grade, it must find cash or issue stock to pay off at
least $3.4 billion in off-balance sheet obligations. In addition, many of its
swap agreements contain provisions that demand immediate cash settlement if
its rating goes below investment grade.
Friday, the company
drew down $3 billion from credit lines to pay off commercial paper
obligations. Raising cash in the CP market could be tough when investors are
jittery about Enron's condition.
This week, a number
of energy market players reduced exposure to Enron. However, in a Friday press
release, CEO Lay said that Enron was the "market-maker of choice in wholesale
gas and power markets." He added: "It is evident that our customers view Enron
as the major liquidity source of the global energy markets."
McMahon reportedly
objected to Fastow's role in LJM, allegedly believing it posed Fastow with a
conflict of interests. But he will need to convince investors that the 12
entities he's connected to don't do the same. Enron has said that its board
fully approved of the LJM deals that Fastow was involved in. Now, board
members will have to comment on their own roles in a related entity.
Related Links
Selected quotations from "Why
Enron Went Bust: Start with arrogance. Add greed, deceit, and
financial chicanery. What do you get? A company that wasn't what
it was cracked up to be." by
Benthany McLean, Fortune
Magazine, December 24, 2001, pp. 58-68.
Why Enron Went
Bust: Start with arrogance. Add greed, deceit, and financial
chicanery. What do you get? A company that wasn't what it was
cracked up to be."
In fact , it's next
to impossible to find someone outside Enron who agrees with Fasto's
contention (that Enron was an energy provider rather than an energy trading
company). "They were not an energy company that used trading as part
of their strategy, but a company that traded for trading's sake," says
Austin Ramzy, research director of Principal Capital Income Investors.
"Enron is dominated by pure trading," says one competitor. Indeed,
Enron had a reputation for taking more risk than other companies, especially
in longer-term contracts, in which there is far less liquidity. "Enron
swung for the fences," says another trader. And it's not secret that
among non-investment banks, Enron was an active and extremely aggressive
player in complex financial instruments such as credi8t derivatives.
Because Enron didn't have as strong a balance sheet as the investment banks
that dominate that world, it had to offer better prices to get business.
"Funky" is a word that is used to describe its trades.
In early 2001, Jim
Chanos, who runs Kynikos Associates, a highly regarded firm that specializes
in short-selling, said publicly what now seems obvious: No one could
explain how Enron actually made money ... it simply didn't make very much
money. Enron's operating margin had plunged from around 5% in early
2000 to under 2% by early 2001, and its return on invested capital hovered
at 7%---a figure that does not include Enron's off-balance-sheet debt,
which, as we now know, was substantial. "I wouldn't put my money in a
hedge fund earning a 7% return," scoffed Chanos, who also pointed out that
Skilling (the former Enron CEO who mysteriously resigned in August
prior to the December 2 meltdown of Enron) was
aggressively selling shares---hardly the behavior of someone who believed
his $80 stock was really worth $126.
Enron's executives will
probably claim that they had Enron's auditor, Arthur Andersen, approving
their every move. With Enron in bankruptcy, Arthur Andersen is now the
deepest available pocket, and the shareholder suits are already piling up.
Enron's belated FAQ statement on
"related party transactions" ---
http://www.enron.com/corp/pressroom/faq.html
Exclusive Reports ---
http://houston.bcentral.com/houston/stories/2001/07/02/story1.html
Enron Keeps Bleeding ---
http://www.businessweek.com/reuters_market/M/REUT-MCO.HTM.htm
Enron Corporation homepage ---
http://www.enron.com/
Enron Corporation's Financial Statements
Annual Information
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