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Enron report blasts managers on partnerships

Enron Corp inflated its profits by nearly $1 billion and top employees raked in millions of dollars "they should never have received" through complex partnerships key to the company's collapse last year, said an Enron internal inquiry report released on Saturday.

Faulting repeated failures in judgment and oversight by Enron executives, the Powers Report compiled by investigators for a special board committee was instantly criticised by others involved in the ever-widening Enron scandal.

The report's findings were called "extremely self-serving" by Andersen, the Big Five accounting firm that was Enron's auditor for years until the two parted ways following Enron's filing on December 2 of the biggest bankruptcy in US history.

The 218-page report was certain to provide fresh fodder for four days of Enron hearings next week in Congress at which former Enron chairman Kenneth Lay was set to appear on Monday.

The report concluded that partnerships with names such as LJM1, LJM2 and Chewco were used to do deals meant to hide losses, fatten profits and enrich corporate executives at the former energy trading giant that was President George W Bush's biggest political contributor.

Former Enron chief financial officer Andrew Fastow was singled out for harsh criticism for acting as both Enron CFO and running some of the partnerships. In these dual roles, he made personal gains of at least $30 million, it said.

Enron director William Powers, dean of the University of Texas School of Law, led the team that compiled the report. It blasted former Enron executives for their roles in complex financial partnerships used in deals that hid losses.

"The intent of this report is to shed light on certain related party transactions and I believe the report does that. I'll save all comment on the report for my congressional testimony," Powers said through a spokeswoman.

A VARIETY OF ABUSES

"While these related-party transactions facilitated a variety of accounting and financial reporting abuses by Enron, they were extraordinarily lucrative for Fastow and others," said the report filed on Saturday in a New York court.

"Enron employees involved in the partnerships were enriched, in the aggregate, by tens of millions of dollars they should never have received. These benefits came at Enron's expense," it said.

Houston-based Enron, once the seventh-largest company in America, collapsed in a cloud of debt and questions about its finances and accounting practices. It is under investigation by nine congressional committees, the Justice Department, the Securities and Exchange Commission and the Labor Department.

Robert Bennett, lawyer for Enron, said the report "shows the company did the honorable and responsible thing."

Enron's decision to let Fastow be involved in LJM partnership-related transactions created an arrangement that "was fundamentally flawed," the report said.

Supervision of the LJM partnerships was "not rigorous enough," said the report. "No one in management accepted primary responsibility for oversight; the controls were not executed properly; and there were structural defects."

Important information on the LJM deals was withheld from the Enron board of directors, but the report also faulted the board for not asking more questions about the transactions.

"The board cannot be faulted for failing to act on information that was withheld, but it can be faulted for the limited scrutiny it gave to the transactions between Enron and the LJM partnerships," the report said.

Referring to deals done through outside partnerships, the Powers report said, "We believe these transactions resulted in Enron reporting earnings from the third quarter of 2000 through the third quarter of 2001 that were almost $1 billion higher than should have been reported."

After posting its first quarterly loss in four years on October 16 and a charge against profits of $1 billion, Enron had to reduce shareholders' equity by $1.2 billion to cover some soured partnership deals. Fastow was ousted as CFO on Oct 24.

These events triggered a crisis in investor confidence, aggravated by Enron's disclosing on November 8 that it had overstated earnings by $600 million dating back to 1997.

When a rescue takeover effort by smaller rival Dynegy Inc fell apart in late November, Enron headed for bankruptcy court, destroying thousands of jobs and devastating investors.

'OBTUSE' DISCLOSURES

While Enron disclosed publicly some of its complex partnership deals, the disclosures came in jargon-filled footnotes to financial reports now widely criticised.

"Various disclosures were approved by one or more of Enron's outside auditors and its inside and outside counsel," the Powers report said.

"However, these disclosures were obtuse, did not communicate the essence of the transactions completely or clearly, and failed to convey the substance of what was going on between Enron and the partnerships."

The report said Powers committee investigators had only limited access to Enron audit work papers of Andersen.

Andersen spokesman Charlie Leonard said: "The authors of this report, whose independence has already been questioned, were hand-picked by Enron's board. Their conclusions appear to be extremely self-serving.

"The report falsely states that Andersen did not co-operate with the authors. On the contrary, the authors rebuffed several attempts by Andersen to provide input to the report."

The report revealed that concerns about the partnerships were raised by a senior Enron executive in March 2000.

Jeffrey McMahon, then-treasurer at Enron and now president and chief operating officer, told the committee he approached then-Enron President Jeffrey Skilling "with serious concerns about Enron's dealings with the LJM partnerships," although Skilling disputes the elements of the conversation.

"If McMahon's account is correct, it appears that Skilling did not take action after being put on notice that Fastow was pressuring Enron employees who were negotiating with LJM -- clear evidence that the controls were not effective," it said.

McMahon did not approach then-CEO Lay or the Enron board, the report said.

Separately, one of Enron's partnerships raised concerns at the biggest US pension fund in 1999 when a top Enron executive offered the fund the opportunity to invest in the venture, according to a news report on Saturday.

Fastow in 1999 offered the California Public Employees Retirement System a chance to invest in Enron's LJM2 Co-Investment partnership, according to the Los Angeles Times.

CalPERS officials rejected the offer, citing a potential conflict of interest for Fastow, the newspaper reported.

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