The Securities and Exchange Commission settled charges against two former Enron executives, including a former chief accounting officer, for the role they played in a sham transaction involving a Brazilian power plant. Jerry K. Castleman, the chief accountant for Enron South America, and Kathleen M. Lynn, a former senior vice president with Enron International, each consented to the final judgments without admitting or denying the SEC’s allegations.
Lynn, who was also the chief operating officer of Enron’s LJM private equity funds, agreed to pay nominal disgorgement of $1.00 and a civil penalty of $30,000. Castleman will pay $41,268.29, consisting of disgorgement of $30,000 and prejudgment interest of $11,268.29, with all but $12,000 of the penalty waived. The commission added that it intends to have the disgorgement and civil penalty paid into an account under the Fair Fund provision of the Sarbanes-Oxley Act to distribute to victims of the fraud.
The SEC initially filed its complaint last October against Castleman, Lynn, and Cheryl I. Lipshutz, the former vice president of Enron’s corporate finance division special projects group. At the time, Lipshutz agreed to settle the charges without admitting or denying the regulator’s allegations. Under the deal, she was ordered to pay disgorgement of $20,000, prejudgment interest of $7,150 and a penalty of $25,000.
The SEC’s complaint alleged that the three former executives participated in a transaction that manipulated the energy company’s reported earnings, resulting in Enron’s filing of materially false and misleading financial statements in its. The questionable statements appeared in Enron’s annual report for the fiscal years ended December 31, 1999 and 2000, and in the company’s quarterly reports for the third quarter of fiscal year 1999, the first three quarters of fiscal 2000, and the first two quarters of fiscal 2001, noted the SEC.
Among other things, the commission charged that Enron sold an interest in a troubled power project in Cuiaba, Brazil, to a related party called LJM Cayman LP (LJM1), controlled by Enron’s then Chief Financial Officer Andrew Fastow. Through a sell off, Enron South America (ESA), an Enron subsidiary, deconsolidated its interest in the project, and Enron recognized earnings from related gas supply contracts. Enron and ESA needed these earnings to meet earnings estimates for the third and fourth quarters of 1999, according to the commission.
The SEC asserted that under relevant accounting rules, deconsolidation and recognition were not appropriate, because the seller—Enron—did not transfer to the buyer (LJM1) the usual risks and rewards of ownership, in that the sell off included an oral side agreement that LJM1 would not lose money on its Cuiaba investment. “The side agreement was neither memorialized in the deal documents nor disclosed to Enron’s auditor,” the SEC stated.
In 2001, to satisfy the side agreement, Enron bought back LJM1’s interest without reversing the previously—and improperly—recognized earnings, according to the complaint. In addition, Enron paid LJM1 a profit, despite the poor economics of the project, said the regulator.
In March, the SEC charged two former Enron lawyers for their role in the Brazilian transaction. The Commission alleged that Jordan H. Mintz, former vice president and general counsel of Enron’s global finance group, and Rex R. Rogers, former vice president and associate general counsel, made material misrepresentations and omitted material disclosures from the company’s public filings.