Risk & Compliance

Circuit Breaker: Enron Dumps CFO Amid Conflict Questions

Also, House passes stimulus package, and good credits continue to issue a whole lot of paper.
Stephen TaubOctober 25, 2001

Enron Corp. is set to replace CFO Andrew Fastow. As CFO.com reported in a story earlier this week, Fastow’s role in a limited partnership has raised concerns about a conflict of interest.

Fastow is succeeded by Jeff McMahon, who had been serving as chairman and CEO of Enron’s Industrial Markets group. From 1998 to 2000, McMahon was Enron’s treasurer. He resigned that post in part because he disapproved of Fastow’s role in running two partnerships, according to The Wall Street Journal.

“In my continued discussions with the financial community, it became clear to me that restoring investor confidence would require us to replace Andy as CFO,” said Kenneth L. Lay, Enron chairman and CEO, in a statement.

McMahon, 40, joined Enron in 1994 and spent three years in the London office as CFO for the company’s European operations. Upon returning to the United States, McMahon assumed the post of EVP of finance and treasurer for Enron Corp. In 2000, he was named president and COO of Enron Net Works, where he focused on E-commerce activities.

As reported on Friday, The Wall Street Journal said a limited partnership organized by Fastow, who has been Enron’s CFO since 1997, racked up millions of dollars in profits from transactions conducted with the energy company.

On Monday, Enron said the Securities and Exchange Commission requested information regarding certain related party transactions.

On October 16, Enron stunned Wall Street when it announced that it would take a $1.01 billion after-tax charge for the September 30 quarter.

Since the announcement, Enron’s share price has more than halved.

Fastow’s dismissal seems to be an about-face for Enron. In a conference call Tuesday, Lay said the partnerships were fully disclosed and took steps to assure that there was no conflict as Fastow played both roles. Enron has since dissolved the partnerships.

“Obviously, the board and even the lawyers and auditors realized that there would be an apparent conflict of interest there and the board prescribed certain methods for it to be dealt with … so Enron would never be compromised,” Lay said in published accounts. “We are very concerned [at] the way Andy’s character has been loosely thrown about in certain articles, as well as the company’s reputation.”

Predictably, on Wednesday at least two law firms — Stull, Stull & Brody and Bernstein Liebhard & Lifshitz, L.L.P — filed class-action suits against Enron, Lay, Fastow, and Jeffrey K. Skilling, the former Enron chief executive who resigned in August.

The suits allege that the defendants issued false and misleading information that materially misstated the company’s condition and prospects to the investing public. Moreover, the suits argue that the company failed to disclose material information necessary to make its prior statements not misleading.

The complaints charge that Enron issued a series of statements concerning its business, financial results, and operations which failed to disclose, among other things:

  • The company’s Broadband Services Division was experiencing declining demand for bandwidth, and the company’s efforts to create a trading market for bandwidth were not meeting with success, as many of the market participants were not creditworthy.
  • The company’s operating results were materially overstated, since Enron failed to write down in a timely fashion the value of its investments with certain limited partnerships — the partnerships that were managed by Fastow.
  • Enron was failing to write down impaired assets on a timely basis in accordance with GAAP.

House Passes Stimulus Package

On Wednesday, the House of Representatives narrowly passed a stimulus package that will pump about $100 billion into the economy over the next year through corporate tax breaks and checks to workers who did not benefit from earlier income tax rebates.

The bill aims to repeal the corporate alternative minimum tax and allow businesses to write off purchases of computers and other equipment faster. Another objective is to lower the tax rate on some capital gains.

If it succeeds, individuals who did not benefit from the tax rebates issued earlier in the year will receive checks of up to $300 ($600 for couples).

In one of the first signs of partisan politics since the September 11 attacks, House Democrats complained that the package gave corporations big tax breaks while providing little help to those who lost their jobs.

President Bush has urged lawmakers to pass the bill.

Financing News

Companies with good credit ratings on Wednesday enjoyed another active underwriting day.

  • Pfizer Inc. issued $600 million in three-year notes, led by Morgan Stanley. It was upsized by $100 million. The notes were priced at par to yield 3.625 percent, or 88 basis points over comparable Treasurys. Pfizer is rated Aaa by Moody’s and AAA by S&P.
  • Emerson Electric, which is rated Aa3 by Moody’s and AA-minus by S&P, issued $250 million in 10-year notes, led by J.P. Morgan. It was priced to yield 5.803 percent, or 118 points over comparable Treasurys.
  • Peco Energy Co., a unit of Exelon Corp., issued $250 million of 10-year first mortgage notes in the private placement market. Wachovia Securities and Merrill Lynch & Co. were the joint lead managers. It was priced to yield 5.971 percent, or 135 points over Treasurys, and was rated A2/A.
  • Brascan Corp. said it plans to offer $500 million in debt securities over the next 25 months to be used for general corporate purposes.

In Brief

  • Canada fined Pfizer Inc $955,000 for illegally fixing the price of a food preservative agent. Canada’s Competition Bureau said in a statement that Pfizer had pleaded guilty to taking part in an international conspiracy from 1992 to 1994 to fix the price of sodium erythorbate, used to maintain the flavor and color of meat.