Risk & Compliance

Enron on Parade: Skilling Set to Appear Later Today

Company's former CFO, Andrew Fastow, refuses to testify before House subcommittee. Skilling on deck. Plus: Tyco speeds the break-up plow, CA delays...
Stephen TaubFebruary 7, 2002

As expected, former Enron CFO Andrew Fastow refused to testify before Congress this morning, citing his Fifth Amendment right against self-incrimination.

Michael Kopper, a former Enron executive, also invoked the Fifth Amendment, as did Richard Causey, Enron’s chief accounting officer. Richard Buy, Enron’s chief risk officer, also took the Fifth.

Members of the House Energy and Commerce Committee were none too pleased by the lack of cooperation. “Reluctant witnesses will not keep us from getting at the truth,” said Rep. James Greenwood (R-Pa.), chairman of the Oversight and Investigations Subcommittee. Added Billy Tauzin, Louisiana Republican and chairman of the House Energy and Commerce Committee: “It’s a simple story of old fashion theft and inexplicable acts that allowed the perps to get away and destroy a company.”

Former Enron CEO Jeffrey Skilling is scheduled to testify later today. Word is that Skilling will actually offer some testimony in his testimony.

Today’s hearings come just 24 hours after Tauzin (R-La.) said his staff had uncovered evidence that may prove Enron managers broke the law. According to Tauzin, his investigators discovered documents that show senior Enron management engaged in self-dealing, money-losing transactions with outside partnerships then hid those losses. How? Reportedly, Tauzin claims the executives simply reported fictitious gains.

The Louisiana republican also asserts that Enron conducted business with a partnership whose sole asset was Enron stock — and those shares came from the company. “This clearly violated existing law and the most basic norms of corporate behavior,” Tauzin said at the beginning of yesterday’s hearings.

Tauzin also lambasted auditor Andersen for not uncovering the alleged wrongdoing at Enron. “We have found that Enron’s financial statements violated numerous existing accounting rules,” he said.

On Wednesday, a British institutional investor says he plans to question the hiring of the embattled accountancy as auditor for travel group Airtours. “We want to ask what steps the audit committee have taken to satisfy it as to the independence of the auditors,” said Ian Black, an investment manager at insurer CIS, a small investor in Airtours, in a wire service report. Black plans to raise his objection at the company’s annual general meeting today, according to reports.

Today hasn’t been as bad a day for Andersen, however. A new story in the Los Angeles Times claims Enron executives withheld information from the audit firm for four years. The article alleges that Enron hid information about Chewco, one of the company’s special purpose entities, from Andersen’s auditors in Houston (See summary of story).

Calpine’s Reg FD Problem

While Washington and Wall Street are mulling major auditor independence initiatives, another SEC hot spot has once again flared up. On Wednesday, Calpine Corp. reported that it has received an informal request for information from the enforcement division of the commission. The inquiry stems from a Jan. 4 Dow Jones newswire report. In that report, the news service claimed Calpine may have made selective disclosures to Wall Street securities analysts.

Management at the power supply company said in a statement that it has made no inappropriate disclosure, and that it is working with the SEC to clarify this matter.

In a separate, but unrelated matter, the company also stated that it has received a comment letter from the non-enforcement division of Corporation Finance of the SEC seeking clarification and offering guidance on certain disclosures. These comments do not require the company to alter any aspect of its financial results.

Calpine management said that it has had — and will continue to have — an ongoing dialogue with its accountants, lawyers and the SEC to continually enhance its financial disclosure practices.

Not surprisingly, Calpine’s share price fell more than 22 percent after the announcement. The share price of Reliant Resources Inc., which earlier this week reported it would be restating some of its results, fell 16 percent

The Dow Jones article reportedly said Calpine told several Wall Street analysts that it would cut capital spending and reduce earnings estimates during the following week. As it turns out, 12 days after the article was published, Calpine reportedly cut its earnings forecast and announced plans to pare 2002 capital spending by as much as $2 billion.

SPE: Not the Raiser’s Edge

Another day, another reissuing of financial statements.

Yesterday, prison builder and operator Cornell Cos. said it was reviewing the accounting for its August 2001 sale/leaseback transaction. Company management said the restatement could result in “material financial consequences.” Another not-so-great sign: Cornell reported that Steve Logan, company president and CEO, is relinquishing the chairmanship.

The sale/leaseback transaction involved a special purpose entity (SPE), Municipal Corrections Finance, unaffiliated with Cornell and headquartered in Baton Rouge, La.

According to the company: “The review is focused on a retainer agreement entered into with an investment bank in September 2001, which provided that Cornell pay the investment bank a non-refundable retainer fee of $3.65 million to provide financial advisory services concerning future financing vehicles and the strategic development of Cornell’s business and that the retainer would be applied on a mutually agreed upon basis toward future contingent fees associated with investment banking services that may be provided to Cornell.” Exhale.

The inquiry focuses on whether the retainer agreement affects the previously reported accounting treatment for the August 2001 sale/leaseback transaction, and whether the amount paid the investment bank was appropriately reflected in the company’s financial statements, it added.

“The Special Committee is reviewing whether, as an accounting matter, the retainer amount paid by Cornell to the investment bank would reduce the previously established equity of the Investment Bank affiliate in the special purpose equity,” it added.

Financing News

  • Management at Tyco International said it will speed up its planned break-up of the company. Tyco management said it will kick off the restructuring with a spinoff or sale of its Tyco Capital finance unit within eight to 12 weeks.

Clearly, Tyco management is out of the loop on this one. Earlier this week, managers at the captive finance arm said they were changing the name of the company back to its original moniker, CIT. The reason? It appears that the Tyco brand has become something of a millstone of late.

Also on Wednesday, Tyco management said it has agreed to terminate it’s planned $3.1 billion merger with Bard, which, as far as we know, is still called Bard.

  • Computer Associates International Inc. said it would delay the closing of its $1 billion debt offering. The reason? Moody’s said it may lower its credit rating for Computer Associates. “The company believes its strong cash flow, ongoing debt reduction and competitive successes support its current debt ratings,” Computer Associates responded in a statement.
  • Management at R.J. Reynolds Tobacco Holdings Inc. said its board of directors has authorized the repurchase of up to $1 billion of its stock.
  • Equifax Inc., a credit reporting and database marketing company, has increased its share repurchase program by $250 million, bringing its current authorization to $290 million. The company repurchased $50 million of stock in 2001.

Barely Noted

In case you needed it, here’s yet another indication that the warm fuzzy economy of the Nineties is shot all to hell. According to Reuters, management at Lehman Brothers Holdings Inc. has apparently decided to end its flexible dress policy — a policy which has been in effect for three years. From now on, men will have to wear suits and ties to work. Female employees will be required to wear skirts, pants, dresses, or “other equivalent attire.” That ought to turn things around at the bank.