Risk & Compliance

Enron Could Force Kenneth Lay to Repay $94 Million Loan

Report blames Lay, Skilling, many others for company's demise. Also: another HealthSouth finance executive pleads guilty; a soaring GDP bodes well.
Stephen TaubNovember 26, 2003

Enron could seek to force Kenneth Lay, its former chairman, and Jeffrey Skilling, its former CEO, to repay millions of dollars in loans to spread among creditors because the loans weren’t approved by the entire board, a bankruptcy court examiner reportedly concluded.

From May 1999 through October 2001, Lay borrowed $94 million from Enron and repaid it with company stock, according to an AP account of the examiner’s report. In May 1999, Skilling repaid $2 million in loans with stock. Only the board’s compensation committee allowed both men to repay loans with stock, according to the report. That stock wound up being inflated by the frauds perpetrated by the company.

Whether or not they’re legally to blame, Enron’s former top two executives, along with former accountants, directors, and inside and outside lawyers make up “a circle of responsibility for Enron’s financial demise,” the examiner, Neal Batson, reportedly said.

Batson said enough evidence exists to prove that Lay and Skilling did a poor job of overseeing Enron’s use of financing methods to hide debt and inflate profits — a failure that ultimately led to the energy company’s collapse, according to the Associated Press.

Lay and Skilling “failed to respond appropriately to the existence of ‘red flags’ indicating that certain senior officers” were misusing such transactions to distribute inaccurate financial statements, according to Batson’s fourth and final report.

Made public Monday, the 1,134-page report also said Lay and Skilling were lax in their analysis of deals involving partnerships run by former Enron CFO Andrew Fastow. Fastow, who has pleaded innocent to 98 charges, including money laundering, fraud, is slated to go on trial in April. Neither Lay nor Skilling has been charged with any crime.

Batson reportedly said that Enron’s culture encouraged officers to manipulate the financial figures to boost the stock and award huge bonuses justified by the company’s ability to meet earnings targets.

The report also blamed accountants at Arthur Andersen LLP for helping craft accounting techniques to dress up Enron’s financials and failing to closely vet a number of transactions.

Further, outside Vinson & Elkins attorneys approved questionable deals that Enron used to book earnings or hide debt, the report said, according to the published accounts. Vinson & Elkins also allegedly allowed the company to avoid disclosing Fastow’s interest in partnerships that did deals with Enron. Harry Reasoner, a Vinson & Elkins spokesman, called Batson’s report a “mishmash of facts,” asserting that the firm can show that it met its professional obligations, according to the AP.

Banks earned millions in fees by taking part in shady deals even when they knew the accounting was suspect, according to the report. Enron’s former directors also failed as the ultimate check and balance for officer misconduct, Batson reportedly said. However, “circumstances involving complex matters and obfuscation by officers” left them at a disadvantage, he admitted.

Former HealthSouth Finance Executive Pleads Guilty

It’s now 15 and probably holding at HealthSouth Corp.

Catherine Fowler, a former vice president of treasury and cash manager became the 15th former executive of the health-care company to plead guilty to criminal fraud charges in the $2.7 billion accounting scandal, according to Reuters.

She pleaded guilty to conspiracy to deceive auditors and maintain false books and records.

Fowler reportedly faces a maximum of five years in prison, forfeiture of any ill-gotten gains, and a fine of up to $250,000 or twice the gain or loss from the commission of her crimes.

“With today’s guilty plea we have now obtained 15 convictions in the HealthSouth corporate fraud investigation,” U.S. Attorney Alice Martin said in a statement.

Fowler admitted being part of a conspiracy to make it seem that stock had been sold in 2002 when it actually was sold in 2001, according to an Associated Press that cited prosecutors. She also admitted to sending a series of wire transfers to generate a paper trail concerning the phony transactions and attended a meeting where senior officers discussed the scam, prosecutors reportedly said.

Fowler worked at HealthSouth from May 1994 until April 2003. In March 2003, the Securities and Exchange Commission had filed a lawsuit accusing the company and its then-chairman and chief executive officer, Richard Scrushy, with overstating earnings by $2.7 billion in a scheme to make the company appear it was meeting Wall Street analyst forecasts.

When Fowler was asked by federal Judge U.W. Clemon if she knew what she was doing was a crime, She reportedly answered: “Yes.”

Fowler reportedly said, “I was told to do my job and not ask questions.” She said she understood that to mean she would lose her job if she did not go along.

Fowler will probably be the last former HealthSouth executive to receive a plea deal from prosecutors in exchange for cooperation, according to Reuters.

Earlier this month, the Justice Department indicted Scrushy on 85 criminal counts “stemming from a wide-ranging scheme to defraud investors, the public and the U.S. government about HealthSouth’s financial condition.”

After Scrushy was indicted, U.S Attorney Martin said that “the window is closed,” according to the wire service story. She was reportedly referring to any other person in the case wanting to come forward and get a deal in exchange for a guilty plea,.

Christmas in November?

It’s beginning to look a lot like an economic recovery.

Gross domestic product (GDP) surged at an 8.2 percent annual rate in the third quarter, more than double the second quarter’s 3.3 percent gain, according to the U.S. Commerce Department. That’s the strongest quarterly increase in 19 1/2 years.

In a similarly encouraging development, nonresidential business spending jumped at a 14 percent annual rate, double the second quarter’s 7.3 percent and much stronger than the 11.1 percent third-quarter rise reported earlier.

The Commerce Department also slashed its initial estimate of inventory reductions, saying they fell by $14.1 billion in the quarter instead of the initially reported $35.8 billion.

The economy’s strong showing dovetails with a survey of senior executives at U.S. multinational companies released last week by PricewaterhouseCoopers. The execs were much more bullish on the economy than they had been in recent months.

Sixty percent of the 177 senior executives polled surveyed in the survey, the most recent PricewaterhouseCoopers Management Barometer, said the U.S. economy is now expanding. In the prior quarter’s survey, that number was 26 percent.

Just 3 percent said the economy is declining, while 37 percent perceive no change.

Keep in mind, however, that the extent of the optimism varies heftily according to the industries in which the executives operate. For example, 52 percent of technology company executives are optimistic; 64 percent of those in non-tech businesses are so inclined; 56 percent who work in manufacturing have a sunny outlook; and 63 percent of non-manufacturers think things are looking up.

Looking ahead 12 months, 73 percent of the executives are optimistic about the direction of the economy. That’s an increase of 10 points from the previous quarter, according to the survey.

“After three years of stagnation, executives have turned sharply upbeat in their perceptions of the U.S. economy and its near-term direction,” said PWC global assurance leader Gerald M. Ward.

Somewhat less upbeat, although brightening a tad, are the executives’ attitudes toward hiring. Forty-two percent of the executives plan a net addition to their payroll over the next 12 months. That’s up from 35 percent in the prior quarter. At the same time, 24 percent expect a reduction. The upshot: The average net hiring increase was just 0.3 percent.

Again, however, it all depends upon the industry. For example, 51 percent of large technology companies expect to hire, compared to 38 percent of non-tech companies. And just 28 percent of manufacturers expect to hire, while 38 percent plan a net workforce reduction.

Short Takes

  • Jack Lai has been named CFO of Silicon Storage Technology, a maker of memory chips used in cellular telephones and other electronic devices. Lai replaces Jeffrey Garon, who is leaving to pursue other opportunities. Previously, Lai was CFO of privately-held Aplus Flash Technology.
  • In better news for Boeing, the company got a federal income tax refund and related interest of $1.1 billion resulting from a partial settlement with the Internal Revenue Service for the tax years 1992 to 1997. Boeing said in an SEC filing the settlement would increase its fourth quarter 2003 earnings by about $700 million, or 87 cents per share.
  • BellSouth raised its dividend 2 cents, or 8.7 percent, on Monday. It is the third dividend increase this year. Over the past seven quarters, BellSouth’s quarterly dividend has risen 31.6 percent, from 19 cents to 25 cents.

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