Risk & Compliance

Found: One Former CFO

Fastow resurfaces after SEC threatens subpoena. Also: Andersen's Berardino says mistakes made; Cap Gemini CEO resigns. Plus: Prudential to start tr...
Stephen TaubDecember 13, 2001

Andrew Fastow, the ex-CFO of Enron Corp. who was being sought out by the Securities and Exchange Commission and a few congressional committees, resurfaced Wednesday at a New York City news conference.

Fastow, who was rumored to have fled the country, appeared with attorney David Boies. “This is not a situation where he is not going to be available. Mr. Fastow will be responding to a variety of inquiries from a variety of government agencies,” Boies reportedly said, stressing that the only reason he was holding the press conference was to dispel rumors that Fastow had fled the country to Israel or somewhere else. Yesterday, CFO reported that one source believed Fastow had plans to fly to Israel.

The SEC is investigating conflict-of-interest issues regarding Fastow’s involvement in off-balance-sheet partnerships he created and managed while at Enron. Fastow earned $30 million in management fees from these dealings.

Earlier in the day, the SEC filed a subpoena enforcement action in court against Fastow. “Fastow’s failure to comply with the subpoena has impeded and continues to impede the commission’s investigation,” said the SEC in court documents, according to published accounts.

The SEC asked a federal judge in Washington to enforce its unanswered subpoena of October 31.

“We told the SEC we would be happy to present Mr. Fastow, however we were not going to be in a position to turn him over to the SEC on 48 hours notice,” Boies reportedly said at the press conference. He said he would answer the SEC’s enforcement request in court. “We’d like to talk to him, get the documents prepared, schedule a time that is convenient,” Boies added.

The subpoena ordered Fastow to turn over a large number of documents related to Enron, including those concerning the partnerships, according to Reuters.

The SEC also demanded records of brokerage accounts in Fastow’s name or that he has an interest in, says Reuters.

Andersen’s Berardino Says Mistakes Made

Meanwhile, Andersen chief executive Joseph Berardino told Congress at its Wednesday hearings that it warned client Enron about “possible illegal acts” last month when the energy company refused to provide crucial data about its finances to Andersen.

Berardino also admitted that his auditing firm erred in the way it treated one of several Enron special-purpose entities (SPEs) that were designed to keep debt off its balance sheet.

“We made a professional judgment about the appropriate accounting treatment that turned out to be wrong,” Berardino reportedly said. “At the time our team made a very good faith, reasonable decision in terms of looking at these transactions. In hindsight, they made an error in judgment. In no way do we think that this caused the collapse.”

Berardino insisted, however, that the huge fees Andersen received from Enron for both auditing and consulting did not affect the auditors’ objectivity. “I do not believe the fees we received compromised our independence,” Berardino said in his prepared testimony.

Enron paid Andersen $52 million last year, but Berardino said the $25 million it received for auditing work is along the lines with the fees for General Electric Co. and Citigroup Inc., and slightly more than fees for audits of J.P. Morgan Chase & Co. and Merrill Lynch & Co.

Berardino also told the House Financial Services Committee that Enron did not provide Andersen with key information about an agreement with a major financial institution for a financing vehicle called Chewco. If that had been disclosed, Andersen would have required Enron to consolidate the partnerships on its balance sheet, Berardino said.

“It is not clear why the relevant information was not provided to us. We are still looking into that. On November 2, 2001, we notified Enron’s audit committee of possible illegal acts within the company,” he said, according to reports.

Enron disagrees with Berardino.

In a press release issued late in the day, Enron acknowledged that the comments made by Berardino were generally supportive of Enron’s good faith and propriety in the preparation of its financial statements. “Enron engaged in real time audit procedures with its auditors on every significant structured finance vehicle,” said Kenneth L. Lay, Enron chairman and CEO. “It has always been Enron’s policy to be open with its accountant, Andersen.”

But Andersen management said it had been unaware of an arrangement relevant to one SPE’s off-balance-sheet treatment. Enron noted, however, that it was the company’s management, not Andersen, that discovered the arrangement and its relevance and reported it to Andersen within 24 hours.

Separately, Enron CEO Lay sent a letter on December 11 to Rep. Michael Oxley (R-Ohio), chairman of the House Committee on Financial Services, explaining why he was not able to attend Wednesday’s hearings. Lay said the hearing conflicted with an organizational meeting of Enron’s creditors, also scheduled for Wednesday.

Meanwhile, SEC chief accountant Robert Herdman told the House committee that the commission will continue to push FASB to come up with better guidance on when SPEs should or should not be consolidated on the balance sheet.

Herdman refused to offer details about the SEC’s Enron investigation, however. He simply said, “In view of the events surrounding Enron, the profession and the Commission are considering what further improvements should be made.”

Cap Gemini CEO Resigns

Cap Gemini Ernst & Young said that Geoff Unwin has resigned as chief executive, effective January 1. He will be replaced by chief operating officer Paul Hermelin.

Unwin, 59 years old, said he had planned to retire when he turned 60.

The announcement came at the same time that the IT services company projected that fiscal 2001 revenue would come in at $7.5 billion, which would be shy of the firm’s earlier forecasts.

Cap Gemini management also said it would lay off another 2,500, bringing the total job cuts to 5,400 for the year. The company blamed the job cuts on spending declines among many of its clients — particularly those in the telecommunications industry.

Hermelin joined Cap Gemini in 1993 and was the principal initiator of the Ernst & Young acquisition, according to the company.

Prudential to Cap Big IPO Week

In a week that potentially will see 11 companies go public, the crown jewel of the lot will begin trading on Thursday.

Prudential Financial, the second largest life insurer in the United States, raised $3.03 billion Wednesday night when it sold 110 million shares at $27.50 apiece, the midpoint of its anticipated range.

Prudential’s opening market value is about $15.6 billion.

It is the largest insurance IPO ever and the third-largest initial public offering this year, topped only by Kraft Foods Inc. and Agere Systems Inc., a spin-off of Lucent Technologies Inc.

Prudential is not the only company to begin trading on Thursday. The insurer will be joined by at least two others.

Centene Corp., which provides managed-care programs to Medicaid recipients, on Wednesday raised $49 million in its IPO when it sold 3.5 million shares at $14 a pop.

Centene sold 3.25 million shares, while the Elizabeth A. Brinn Foundation, a charitable affiliate of three Centene board members, sold 250,000 shares. The company plans to use the proceeds to repay $4 million in debt as well as for general corporate purposes.

Nassda Corp., a provider of circuit simulation and analysis software for semiconductors, priced 5 million shares at $11 apiece, above its anticipated range of $8 to $10, raising $55 million.

Meanwhile, the share price of NetScreen Technologies, Inc., which sells network security systems and appliances for enterprises and service providers, soared nearly 50 percent on Wednesday, closing at $23.72 in its first day of trading. NetScreen had priced 10 million shares at $16 per, also above its anticipated range of $12 to $14. That range was lifted from $9 to $11 on Monday.

Jumbo Debt Offerings As Well

Companies are also finding the debt market hospitable to issuers.

On Wednesday, a few companies raised billions in the bond market, which months ago set a single-year record for investment-grade debt issuance.

  • Verizon Wireless, the largest U.S. wireless operator, issued $3.75 billion of debt, 50 percent more than it had planned.

The communications company issued $2.5 billion of 5.375 percent 5-year notes priced to yield 5.485 percent, or 120 basis points over comparable Treasurys. Verizon also issued $1.25 billion of 2-year floating-rate notes yielding 40 basis points over three-month Libor, which is now 1.843 percent. Those notes were rated A2 by Moody’s and A-plus by S&P. The company plans to use the proceeds to pay down short-term debt, according to Reuters, citing a spokeswoman at the company.

  • Federal Farm Credit Banks Funding Corp. issued $1.5 billion in a 3-year designated bond. The bond matures on December 15, 2004, and has a 3.875 percent coupon. It was priced to yield 3.987 percent, or 104.5 basis points over 2-year Treasurys.

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