Risk & Compliance

Causey Celebre

Enron's former chief accountant turns himself over to FBI agents and pleads not guilty. Plus, a guilty plea from Computer Associates; Italian polic...
Stephen TaubJanuary 23, 2004

Another Enron senior executive has taken the perp walk.

Richard Causey, Enron’s former chief accounting officer, was charged with six counts of securities fraud and conspiracy to commit securities fraud yesterday and pleaded not guilty. He surrendered to the FBI in Houston around dawn, and was taken in handcuffs to the federal courthouse.

U.S. Magistrate Judge Frances Stacy set bond at $1 million. A brother-in-law secured the bond with $500,000 in cash, according to the Houston Chronicle. The 44-year-old Causey faces up to 55 years in prison and fines as high as $5.25 million if convicted on all charges, according to Bloomberg.

The indictment, unsealed Thursday morning, described Causey as “a principal architect and operator of the scheme to manipulate Enron’s reported earnings” in an effort to fool investors and profit from higher stock prices.

The Securities and Exchange Commission similarly charged Causey in a civil lawsuit.

The SEC’s complaint alleged that Causey and others fraudulently manipulated Enron’s merchant asset portfolio; improperly used off-balance-sheet special purpose entities; manipulated Enron’s “business segment reporting” to conceal losses at Enron’s retail-energy business (Enron Energy Services); manipulated expenses to conceal losses at Enron’s broadband unit (Enron Broadband Services); and manipulated reserves in Enron’s wholesale energy-trading business to conceal earnings volatility and losses.

Causey’s trial is expected to begin March 8 and last three to six weeks. He was fired in early 2002 after refusing to testify before Congress.

Causey was mentioned only by job title in the October 2002 complaint against former Enron CFO Andrew Fastow, who last week agreed to a plea deal that will put him in prison for 10 years.

In his plea statement, Fastow confessed that he and Causey, who was identified by corporate title, had an unwritten agreement to set up a Fastow-controlled side company—called LJM—that would earn a profit by helping Enron hedge its assets, the Houston newspaper reported.

Fastow also reportedly confessed that he and Causey back-dated documents to inflate the worth of an Enron technology company investment.

Causey, who holds a master’s degree in accounting from the University of Texas, spent a number of years with Arthur Andersen, and moved onto Enron in 1991.

Observers claim that prosecutors will now focus their efforts on former chairman Kenneth Lay and former chief executive officer Jeffrey Skilling.

CA Finance Executive to Plead Guilty

A former finance executive of Computer Associates pleaded guilty yesterday to federal charges stemming from an accounting fraud investigation of the software giant, according to published reports.

Lloyd Silverstein, a former senior vice president of finance who had worked in CA’s finance department for nearly 16 years, entered the plea as part of an agreement reached with the government. He, along with two other finance executives, were asked to resign in October.

The government, with Silverstein’s help, will allege a pattern of revenue manipulation at CA that dates back “many years,” according to Newsday. Silverstein’s cooperation may also show a “concerted effort among [some] CA people to cover up” the accounting misdeeds—the basis for the obstruction charge, the report added.

Silverstein is also expected to admit to taking part in the alleged cover-up for an unspecified time before deciding to end his participation and cooperate with the government.

James Walden of the law firm O’Melveny & Myers LLP told Newsday that Silverstein “made a courageous decision to report wrongdoing, even though he knew that decision would have personal consequences. He is accepting responsibility and, in one way or another, I predict many others will be called upon to own up to their own roles as well.”

Silverstein’s plea deal is another indication that the government’s two-year criminal investigation of the company is apparently coming to a head. Last week, CFO.com reported that the SEC was considering filing civil charges against CA, stemming from premature recognition of revenue from software-license contracts in fiscal 2000.

In October, the audit committee of CA’s board discovered “a number” of instances in which the company booked revenue in fiscal 2000 when software contracts had not been signed. A person close to the situation said the manipulated revenue involved “hundreds of millions” of dollars, but CA officials have refused to characterize it, noted a Newsday report.

In response, Standard & Poor’s Ratings Services put its corporate credit and senior unsecured ratings of CA on CreditWatch, with negative implications, a status it reaffirmed on Thursday.

In a conference call with Wall Street analysts Wednesday night, CA executives said that, because of the continuing internal probe, its independent auditor was unable—for the second quarter in a row—to give its standard review of the quarterly financials. But CA noted its audit committee has made “substantial progress” in finishing the probe.

Italian Police Search S&P

Standard & Poor’s is the latest organization to be dragged into the Italian probe of the collapse of Parmalat.

Executives at the ratings agency, which is owned by The McGraw-Hill Companies, said its Milan offices were searched as part of a global investigation into the food giant’s sale of billions of euros in bonds despite its dire finances, according to Reuters.

“We welcome the opportunity to cooperate with the Italian authorities,” a spokesman for S&P in London told the wire service. “We are victims of what appears to be a massive case of fraud and deception.” The S&P spokesman stressed that the company was not under investigation itself. Rather, the Italian police are looking for information received from Parmalat.

S&P kept an investment-grade rating on Parmalat’s debt until early December, according to the report.

The S&P search came a day after tax police took documents from the Milan offices of investment bank Morgan Stanley and Banca Intesa’s Nextra fund-management unit.

In another European accounting scandal, the Swiss Exchange is investigating whether Adecco selectively disclosed information to some analysts and reporters about last week’s announcement of “material weaknesses” in controls at its North American unit, according to published reports.

Foamex Restates Results

Foamex International will restate results for each of the first three quarters of 2003, mainly as a result of a calculation error in the carrying value of certain in-transit raw materials that bloated inventories by $2.4 million, according to the company.

In addition, officials of the manufacturer, to comply with an applicable accounting rule, said they have reclassified $83.4 million of revolving credit borrowings from long-term to current. There has been no change in the maturity of the credit facility, which remains at April 30, 2007.

A company spokesman said Foamex is trying to assure that managers do a better job of monitoring the value of the in-transit raw material inventory. In addition, he noted that when officials discovered the error, they informed the company’s external auditors and audit committee.

Meanwhile, another company with accounting problems—Dynacq Healthcare—named Killman, Murrell & Co. as its new auditor, replacing Ernst & Young. E&Y resigned last month after criticizing Dynacq for lack of internal controls.

In December, the SEC launched an informal investigation pertaining to Dynacq’s financial statement reporting, costs and revenue recognition, allowances for doubtful accounts, and internal controls.

At the same time, Nasdaq officials warned that they may delist the company’s stock. A hearing is scheduled for February 5.

Jobless Rate Down, Except in Rochester

More good news on the job front—except for many who work at Kodak.

The number of Americans who filed for unemployment benefits fell—for the first time—to 341,000 last week, which is close to the lowest level in nearly three years, reports Bloomberg. The drop came when the number of initial jobless claims fell by 1,000 from the prior week.

“The labor market is shifting into higher gear,” Geoffrey Somes, a senior economist at Fleet Bank in Boston, told the wire service. “We haven’t seen that manifested in hiring yet, but we should see payroll growth developing in the first half of the year.”

Meanwhile, the American Bankers Association’s economic advisory committee yesterday forecast that monthly job growth will reach 200,000 by mid-year.

The news is grimmer in upstate New York, where officials at Kodak said the one-time photography giant will cut as many as 15,000 jobs, or about 20 percent of its workforce. The reason: a move away from traditional film brought on by the popularity of digital photography.

Kodak is also shuttering one-third of its manufacturing space.

CFOs on the Move

  • At Burlington Resources, CFO Steven Shapiro and chief operating officer Randy Limbacher will assume expanded roles in a newly created office of the chairman. They were also elected to Burlington’s board, effective immediately. The office of the chairman sets strategic direction and guides the execution of company volume and financial goals. Shapiro has served as executive vice president and finance chief since 2002. He joined Burlington in 2000 after serving as CFO at Vastar Resources.
  • Sanmina-SCI Corp. CFO Rick Ackel will leave the company to pursue other opportunities. Mark Lustig will temporarily assume the post.
  • Papa John’s International promoted David Flanery to the new post of CFO. He previously served as senior vice president of finance, investor relations, and strategic supply-chain management.
  • Eileen Kennedy was named senior vice president of Nationwide Financial Services Inc. She will become CFO on April 1, succeeding Mark Thresher, who last month was named president and COO.
  • Netflix announced that CFO Barry McCarthy is leaving the company. The company also announced a stock split.
  • John Christie Worthington, president of metals processor Worthington Industries, has received the additional title of CFO.