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SEC inquiry now full-scale probe: Enron

Enron Corp, swept up in a deepening crisis, said on Wednesday an informal inquiry by the US Securities and Exchange Commission had become a full-scale investigation of questionable financial dealings that have rocked the company in recent weeks and sent its stock plummeting.

The nation's largest energy trader, scrambling to head off another shock to its already-shattered credibility, elected University of Texas law school dean William Powers to its board of directors, where he was to lead an internal inquiry into transactions that caused Enron to take a $1 billion charge to third quarter earnings and name a new chief financial officer.

The company said on October 22 the SEC was looking into its finances, but stressed that the agency had only requested information. The disclosure that it was now a full-blown, formal investigation may indicate regulators did not like what they saw.

Before the announcement, which came after the stock market closed on Wednesday, Enron stock rose $2.74 to $13.90 to end a 10-day tailspin that saw its price drop to nine-year lows while losing $17 billion in market value. Analysts said bottom-fishing investors, along with speculation talk that Enron may become a takeover target, had boosted shares.

Investors had been dumping Enron shares following disclosures that the company did off-the-balance sheet transactions with two limited partnerships run by former CFO Andrew Fastow, who was replaced last week by another Enron executive, Jeff McMahon.

Concern about possible conflicts of interest arising from the deals and the company's failure to explain them had dropped the stock to levels not seen since the early 1990s, caused a downgrade in credit status, and brought the SEC in.

Enron chairman and chief executive officer Ken Lay said the company was trying to shore up its credibility with the appointment of Powers and the launching of an internal inquiry.

"I have asked the Board to take this action to address fully and forthrightly investors' questions and concerns," he said in a statement.

"Responding to the SEC offers us an additional opportunity to achieve this same goal for investors and we will co-operate fully," he said.

The company said a committee led by Powers would include several Enron directors who do not work at the company and that it would have the power to "examine and take any appropriate actions with respect to transactions between Enron and entities connected to related parties."

Powers, a 1973 graduate of Harvard Law School, has been at the University of Texas law school in Austin since 1978 and was named dean in May 2000. He is an expert in torts law and has written extensively on products liability.

Enron also said the committee hired William McLucas, a former head of the SEC's Division of Enforcement, as its attorney. His firm, Wilmer, Cutler & Pickering, has retained Deloitte & Touche to provide independent accounting advice, the company said.

An SEC spokesman would not comment on any aspect of the matter.

Enron was once a Wall Street darling touted by analysts and investors alike as one of the world's most innovative firms. A year ago, its profits and stock price were soaring as it transformed itself from a regulated natural gas pipeline company into a high tech wonder creating new Internet-based markets in an assortment of commodities.

But setbacks in broadband trading, overseas investments and the California power crisis took some of the shine off Enron's star. In August, the financial world was stunned when chief executive Jeff Skilling resigned after just six months on the job, saying he wanted a lifestyle change.

Investors who thought Enron could do no wrong turned on the company, complaining that its financial statements were incomprehensible and its management unresponsive.

The capper came two weeks ago when Enron said that, along with the $1 billion charge against its earnings, it also had cut shareholder equity by $1.2 billion because of the curious transactions with the Fastow-led entities.

Fastow has denied any wrongdoing, but has been unable to say much because of the SEC probe and a growing number of shareholder lawsuits against Enron.

To assure the financial world that it had plenty of cash, Enron tapped into a $3.3 billion credit line last week.

But on Monday, Moody's Investors Service dealt the company a blow by cutting its credit rating to two notches above junk bond status. It warned further cuts were possible.

Analysts said it was imperative that Enron fully explain the transactions that led to its fall from grace and disclose whatever liabilities they may have caused.

"Enron needs to substantially improve the level of disclosures," said Nitin Khandkar, a portfolio manager with Dubai-based Al Majid Investment Co, which owns Enron stock. "The accounting policies it follows should not be merely legal but should also reflect the company's true profitability."

"People are still struggling with trying to quantify what the worst-case scenario could be," said Mike Heim, an analyst with A G Edwards & Sons.

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