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Deregulation - 2002 - Page 5
Enron Turns Dreams to DustChicago Tribune by Flynn McRoberts January 16, 2002
CONROE, Texas -- For more than 30 years, Charles Prestwood worked for Enron Corp. and its predecessors. He didn't trade electricity or the exotic commodities that made Enron famous. Prestwood tended pipelines at a natural-gas storage site, the sort of job that doesn't capture Wall Street's attention but ensures heat for Chicago and other points north during winter.
When he quit work in October 2000 at the age of 62, Prestwood's retirement account was packed with nearly $1.3 million in Enron stock, which was near its peak. Today, weeks after his old company became the biggest business failure in American history, Prestwood's nest egg is crushed.
"We were very loyal to the company because Enron had been good to us," he said as he relaxed in his home in Conroe, an hour north of Houston.
"We're not investors. That was our life savings. It's so heartbreaking to know that we helped build that company for so many years--and then to watch it just be destroyed right before our eyes."
Variations of Prestwood's story litter the nation's energy capital and Enron-connected communities: From thousands of retirees like him, and the 4,500 employees dismissed shortly before and after the Houston energy giant filed for bankruptcy protection on Dec. 2.
While many top Enron officials bailed out of the plummeting stock, Prestwood and his co-workers watched helplessly after the company insisted that an administrative switch prohibited them from selling their shares.
So while the human fallout from Enron's spectacular collapse ranges from longtime field workers such as Prestwood to hot-shot finance professionals making six figures, many share a venomous anger at their old bosses.
"They knew what was going on," said Mike Boutcher, who uprooted his family from Burlington, Wis., 18 months ago and moved to Houston after being wooed by Enron's new business development unit. "They took their money and ran and stiffed everybody else."
After being "canned" in November, as Boutcher put it, he has seen only $5,000 of a promised $35,000 severance package. With help from strangers and friends, including $600 from their Houston church to rent a moving van, he and his family recently returned to Burlington.
In Texas, Prestwood is staying put, but his plans have gone the way of his nearly worthless Enron stock.
"My hope was that I would make it through life and leave my children a little something. Buy me a new tractor. Do a little traveling. If I needed a new lawnmower, I could go and buy it," Prestwood said.
"But right now I hope and pray my little ol' mower won't break, because I wouldn't have the money to fix it."
Prestwood doesn't even know the value of his retirement fund, saying "I've been ashamed to even call up there."
Were he to do so, he would find that each of his 13,184 Enron shares, worth $90 apiece 17 months ago, would fetch 67 cents--at least before the New York Stock Exchange halted trading of shares on Friday.
"I still got it," he said of his shares. "Most expensive thing on it is the ink."
After testifying last month before Congress on the Enron debacle, Prestwood said he would like to see legislation passed to protect retirees and employees. In the meantime, he has joined one of the burgeoning number of lawsuits against the company.
Enron officials set off the stock's dramatic slide on Oct. 16, when they announced a third-quarter loss of $681 million amid disclosure of questionable bookkeeping, which hid losses from investors, employees and retirees such as Prestwood.
"I'm a conservative person, and I guess that's why I'm in trouble now. I put all of my money in Enron stock," Prestwood said, his pet Chihuahua, Junior, at his feet.
"If I ever got another chance with that money again, I would have mine so diversified it would look like the dang phone book," he said. "But I'll never get to see that again. I have to face reality."
Lawyers representing former Enron employees say the amount of retirement and other funds lost by those workers is unknown until the company reveals all its assets and liabilities to the U.S. Bankruptcy Court.
David McClain, a Houston commercial bankruptcy lawyer representing a group of 20 employees, said he believes "it's in the billions. I just don't know how many billions."
McClain and other attorneys representing employees argue that such figures should push the workers ahead of the large banks that dominate the list of Enron creditors. Those lawyers want the bankruptcy trustee handling the case to appoint a separate employees committee.
"Without that, it's a fairly bleak picture," McClain said. With an employees committee, "at least the employees will have a [better] say in how the assets of Enron are divided up."
The birth of Enron
Such a committee would give a greater voice in the proceedings to workers like Prestwood. He started with Houston Natural Gas in 1967 and was still there when it merged in 1985 with InterNorth to form what became known as Enron.
Prestwood drove each day from his home on Dogwood Lane in Conroe to the company's Bammel plant, a huge storage reservoir where he helped run the compressors and maintain pipeline pressure "so no one would be left out in the cold."
In his words he was "a common hand," but he raised a son and a daughter on that work, never missing a paycheck after graduating from high school in Splendora.
He now gets by each month on $1,300 in Social Security and about $500 from a company pension that was succeeded by the now-nearly worthless 401(k) plan.
"I have never been this broke in my life," he said. "I had great trust in Enron because it's a company I helped build, and I was very proud to be a member of that team. But right now I'm struggling to buy groceries."
His trust in Enron stock also came from the raves it was getting from analysts. He remembers checking early last year and seeing "strong buy" recommendations by almost all the experts tracking the company.
"When a person sees things like that, you have a tendency to believe that people know what they're talking about," Prestwood said, "so that is the reason I didn't roll mine out before we got into that lockdown."
He also is irked at Chicago-based accounting firm Arthur Andersen LLP for being a poor watchdog.
"They're the ones who's supposed to put the blessings on the books," Prestwood said.
He didn't get worried when the stock initially started to decline, figuring it was just a reflection of the weakening economy.
"And then come to find out Enron's balance sheets had some problems. That started a whirlwind that couldn't be stopped," he said. "Those large investors, when they start selling their stock you know what's going to happen. Like a marble rolling off a table, it's going to go straight down.
"We weren't large investors. We were lunch pail-carrying people," he said. "We had no idea that there was anything wrong, until it was too late. ... I feel like I've been betrayed."
At age 44 and newly arrived at Enron, Boutcher wasn't counting on his retirement fund the way Prestwood was. But after a company human resources representative informed him Nov. 12 that he had been "redeployed"--company speak for "canning," he said--Boutcher hoped his $35,000 severance package would keep him afloat while he looked for another job.
He received the first installment of $5,000 on Dec. 1. The next, about $20,000, was supposed to arrive with the new year.
"I haven't seen a nickel of that," Boutcher said.
Recruited man's dashed dream
This wasn't what he envisioned in July 2000 when Enron recruited him away from Commonwealth Edison with a $75,000 base salary and promises of up to half that in bonuses and stock options. And the job was intoxicating: Boutcher soon was working on a billion-dollar insurance program to help companies guard against power outages.
The details help illustrate the high-wire creativity that marked Enron's ascendancy and fall. Boutcher used housing start indexes to hedge against the possibility of making insurance payments to the companies whose power outages cost them money. His reasoning: More housing construction meant more crews accidentally digging into underground power cables, which in turn meant the possibility for more outages.
"That's risky stuff," he said. "But the attitude was, `Hey, we're Enron. We can do that because we can.'"
Some former employees have compared the atmosphere to a cult. Boutcher said that's no exaggeration.
"It was intense. It was euphoric. It made you want to get up and go to work early in the morning and stay late at night," he said. "There always was a deal to be had."
The atmosphere fed corporate cockiness.
"You get caught up in the arrogance: We're Enron. We're the best. Either do a deal with us, or we'll walk away from the table," Boutcher said. "You bought into it 100 percent. ...You tasted it every day when you came in the front doors."
A banner used to hang in the lobby of Enron's headquarters in downtown Houston. Boutcher said it read, "From America's No. 1 energy company to America's No. 1 company."
Boutcher said he believed Enron's chief executive office, Kenneth Lay, had it out for Jack Welch, the celebrated head of General Electric.
"He always wanted to pass GE," Boutcher said. "They would put excerpts from Jack's book on corporatewide e-mail distribution, and some of it was required reading."
At employee meetings in the Hyatt Hotel across the street from the Houston headquarters, Lay would tell workers their stock was heading for $120 a share. Such dreams seem ridiculous now, with Enron hoping a joint venture with a Swiss investment bank will at least salvage its once-vaunted trading operation.
Sympathy from strangers
Last month, Boutcher packed his bags and children and moved back to Wisconsin. Help came from some unexpected quarters.
Checks for $100 and $250 arrived anonymously.
"We had no money for Christmas presents," Boutcher said. "I got stuff from eBay from a guy in New York who I'd never met in my life, a Barbie set for my 7-year-old daughter, a truck for my 2-year-old."
Boutcher said he is praying for a job with his old employer before the family's last $3,500 evaporates. "I'm hoping ComEd doesn't hold grudges."
Enron Received WarningThe New York Times by D. Van Natta, A. Berenson January 16, 2002
WASHINGTON, Jan. 14 A senior Enron employee explicitly warned the company's chairman in August that several years of improper accounting practices threatened to bring down the company, Congressional investigators said today.
"I am incredibly nervous that we will implode in a wave of accounting scandals," the employee, Sherron S. Watkins, wrote in an unsigned seven- page letter to Kenneth L. Lay, Enron's chairman and chief executive. Excerpts from the letter were released today by the House Energy and Commerce Committee, one of five Congressional committees investigating Enron's collapse.
The company, which once had a market value of $70 billion, filed for bankruptcy protection on Dec. 2 after acknowledging that it had overstated its profits by nearly $600 million.
The seven-page letter suggests that Mr. Lay had been warned about the company's accounting problems at a time when he was assuring employees and investors that Enron's stock would rebound. Disclosure of the letter came as a lawyer for Mr. Lay said that he had used company stock to repay a loan, raising questions about whether Mr. Lay shed some holdings as the stock declined.
The letter could also bring significant new problems for Enron; its accounting firm, Arthur Andersen; and Vinson & Elkins, the company's law firm, at a time when the Justice Department has dispatched dozens of prosecutors and federal investigators to Houston, where a federal task force's wide-ranging criminal inquiry will be based.
The letter from Ms. Watkins, a vice president of corporate development, was sent to Mr. Lay between Aug. 14, when the company's chief executive, Jeffrey K. Skilling, suddenly resigned, and Aug. 31. In an Aug. 21 letter, Mr. Lay sought to reassure Enron employees that the company was on solid footing, writing, "One of my highest priorities is to restore investor confidence in Enron. This should result in a significantly higher stock price." At the time, Enron shares were trading at almost $37. By late November, it was trading as low as 30 cents a share.
After receiving the letter, Mr. Lay asked Vinson & Elkins to investigate the issues raised in it. But the company insisted that the law firm limit its investigation to a review of whether the letter contained new factual information, not a wider inquiry into whether Enron was properly accounting for its profits and losses. On Oct. 15, Vinson & Elkins found that Enron had committed no wrongdoing, lawyers involved in the matter said.
Ms. Watkins could not be reached for comment today. Her husband, Richard Watkins, referred phone calls to a lawyer.
In the letter, Ms. Watkins raised concerns about Enron's accounting practices and asked whether company partnerships were being used to hide losses and inflate the company's stock price. These are among the issues now being investigated by the Justice Department, the Securities and Exchange Commission, the Department of Labor and members of Congress.
Federal investigators are trying to determine whether Enron executives, armed with inside information about Enron's financial condition, sold their own stock before the improper accounting methods were publicly disclosed in October. Thousands of Enron employees, who were barred from selling the stock for six weeks in the fall, lost vast amounts of their retirement savings.
In her letter, Ms. Watkins expressed anguish about the accounting practices of four Enron partnerships and the involvement in one deal of the company's former chief financial officer, Andrew S. Fastow. She also complained to Mr. Lay that several senior Enron employees had repeatedly raised questions and concerns about Enron's accounting methods to senior Enron officials, including Mr. Skilling.
Philip H. Hilder, Ms. Watkins's lawyer, said in an interview tonight that Ms. Watkins worked for Mr. Fastow, who ran two of the partnerships that Enron allegedly used to inflate its profits, between July and September. After September, Ms. Watkins "asked to be reassigned," Mr. Hilder said.
He said he did not believe the company retaliated against her for writing the letter. He would not comment on whether investigators had contacted her.
Excerpts of the letter were released today by Representative Billy Tauzin, the Louisiana Republican who is chairman of the House Energy and Commerce Committee, and Representative James C. Greenwood the Pennsylvania Republican who is the head of the investigations subcommittee.
People who have reviewed the full text of her letter said Ms. Watkins wrote Mr. Lay: "I have heard one manager-level from the Principal Investments Group say, `I know it would be devastating to all of us, but I wish we would get caught. We're such a crooked company.' "
Ken Johnson, a committee spokesman, said today, "Obviously this is an explosive new development in our investigation that clearly shows that top Enron executives were warned of serious financial problems months before the company reduced shareholder equity."
Robert S. Bennett, Enron's Washington lawyer, protested the committee's release of excerpts from the letter. "I think it's very unfair for committees of Congress who profess to be conducting fair and objective investigations to be selectively releasing documents with their spokespeople putting spins on them," he said.
He said Mr. Lay acted "very, very responsibly" and was concerned about the issues raised by Ms. Watkins and referred them to Enron's outside law firm for investigation.
Congressional investigators who have reviewed the full text of her letter said Ms. Watkins began it with two prescient questions: "Has Enron become a risky place to work? For those of us who didn't get rich over the last few years, can we afford to stay?"
She then went on to express deep concerns about the accounting practices used by Arthur Andersen involving three partnerships by the names of Condor, Raptor and Whitewing.
Ms. Watkins complained about the opaque structure of the Enron partnerships that were used to conceal losses. "Is there a way our accounting gurus can unwind these deals now?" she asked. "I have thought about how to do this, but I keep bumping into one big problem we booked the Condor deals in 1999 and 2000, we enjoyed a wonderfully high stock price, many executives sold stock, we then try to reverse or fix the deals in 2001 and it's a bit like robbing the bank in one year and trying to pay back two years later. Nice try, but investors were hurt."
Silencing the Enron AlarmThe New York Times by Bob Herbert January 15, 2002
The e-mails are chilling.
Last Aug. 14, the day Jeffrey Skilling mysteriously resigned after just six months as Enron's chief executive, the company's chairman, Kenneth L. Lay, sent an e-mail to all employees in which he said, "I want to assure you that I have never felt better about the prospects for the company."
By then Enron's prospects were as hopeless as those of a sand castle at high tide. Mr. Skilling and Mr. Lay had already cashed in more than $160 million worth of Enron stock. On Dec. 2 Enron would go into the record books as the largest corporate collapse in the nation's history.
But unsuspecting Enron employees who, by the thousands, were about to lose their jobs, their retirement nest eggs, their entire life savings could read in Mr. Lay's e-mail: "Our performance has never been stronger; our business model has never been more robust; our growth has never been more certain." On Aug. 27 Mr. Lay sent employees another e-mail, this time asserting, "One of my highest priorities is to restore investor confidence in Enron. This should result in a significantly higher stock price."
The e-mails were released over the weekend by Representative Henry Waxman, a California Democrat whose office is investigating the Enron collapse. In a letter to Mr. Lay, Mr. Waxman noted, "By the time of the second e-mail, when the stock price was $37, you had already sold $40 million of Enron stock during 2001 and over $100 million since October 1998."
Two months after his encouraging e-mails to employees, Mr. Lay was on the phone with the secretary of the Treasury, Paul O'Neill, telling him about the perilous state of Enron's affairs. He also called Commerce Secretary Donald Evans. And he was in frequent touch with a Treasury undersecretary, Peter Fisher. So the Bush administration knew that Enron's situation was dire.
But did anyone sound the alarm with the company's employees, or with the millions of Enron shareholders from coast to coast? Not only were the employees deliberately left in the dark, but Enron had many of them locked into rules that prohibited them from selling their stakes in the company, thus assuring their financial ruin.
If any of this was a matter of concern to the Bush administration, we haven't heard about it. Treasury Secretary O'Neill was on television yesterday blithely stating, "I didn't think this was worthy of me running across the street and telling the president."
Enron's collapse may have been a devastating financial blow to tens of thousands of hard-working families, but Mr. O'Neill, during an appearance on "Fox News Sunday," made it clear that he was unperturbed. "Companies come and go," he said.
He added that "part of the genius of capitalism" is that "people get to make good decisions or bad decisions. And they get to pay the consequences or to enjoy the fruits of their decisions. That's the way the system works."
I guess it was Mr. Lay, Mr. Skilling and other top Enron executives who made the good decisions, because they sure reaped the benefits. You might say they made out like bandits. And it must have been the rank-and-file employees and the ordinary investors who made the bad decisions, because they're the ones paying the consequences.
Bush administration officials are making a big deal out of the fact that calls from Mr. Lay did not result in a bailout or, presumably, any other assistance to Enron. The truth is that Enron had already gotten just about everything it wanted from the federal government. It walked right into the heart of the Bush administration and helped shape its national energy policy, even as consumer representatives and environmental advocates were largely frozen out.
And by systematically flooding public officials Republicans and Democrats alike with enormous quantities of campaign cash and lots of other booty, it got the people who should have been looking out for the public's interest to look the other way.
The amount of looting at Enron was astonishing, maybe unprecedented. "It's so huge it's hard to get your arms around it," said Philip Schiliro, Representative Waxman's chief of staff.
Enron was the best-connected company in Washington, not just with the White House but also with the movers and shakers on Capitol Hill. What it wanted was to be able to operate in the dark, and it got what it wanted. And that's how the few at the top were able to milk the company of so much cash.
Popped Enron BubbleThe New York Times by Gretchen Morgenson January 15, 2002
What the world is now awakening to is that the Enron Corporation was not much of a company, but its executives made sure that it was one hell of a stock.
In recent years, Enron came to exemplify the productivity miracle that new technologies were thought to have bestowed on astute companies across America. Now in bankruptcy, with the odor of scandal all around it, Enron, once an innovative energy company, has instead become an indictment of the anything- goes approach to business that characterized the late 1990's. The bull market euphoria convinced analysts, investors, accountants and even regulators that as long as stock prices stayed high, there was no need to question company practices.
"Enron is the prime example of all the things that were allowed to go wrong during the stock market mania," said William Fleckenstein, president of Fleckenstein Capital, a money management firm in Seattle. "This wall got built brick by brick in broad daylight in the 1990's by companies doing whatever they had to do to make their numbers, being willing to sacrifice the long-term well-being of the company so that the executives could get rich."
And the Enron insiders became rich indeed. Thanks largely to munificent stock option grants, which they turned into shares, they sold $1.1 billion worth of stock from 1999 to mid-2001.
Mostly on the strength of the highflying shares, Enron executives were able to convince investors, bankers, analysts, accountants, debt-rating agencies and even Enron's own employees that its promise was real, its financial results genuine and its growth never-ending. Never mind that the way it accounted for trades, as is common at energy trading companies, made its revenues appear to be far larger than the economic reality of its business.
Now the spotlight in the Enron follies is trained on the nation's capital. But the story of the company's rise and fall, and the retirement savings its workers lost, inevitably leads back to Wall Street.
Enron's executives were surely smart enough to know that once they had convinced bankers, brokers and accountants of the company's strength, all parties could pretty much be counted on to keep the myth of solidity alive, even after problems arose. When questions were first raised about partnerships that should have been listed in financial statements, true believers could be relied on to drown out naysayers.
Naturally, given the millions of dollars Wall Street firms generated selling Enron's shares and bonds to investors, analysts were among the most vociferous defenders of the company, even after its stock began to fall. David N. Fleischer, who followed Enron for Goldman, Sachs, recommended it until Oct. 17, the day after Enron disclosed that it had lost $618 million in the most recent quarter and that because earlier financial statements had been inaccurate, it was lopping $1.2 billion off its net worth. Even with the stock at 68 cents, Mr. Fleischer currently rates Enron a market performer.
Across town at Lehman Brothers, Richard Gross continues to rate Enron a strong buy. Raymond C. Niles at Salomon Smith Barney did change his rating on Enron from buy to neutral, but not until Oct. 26, when the stock closed at $15.40. During the previous 12 months, Enron had traded as high as $84.63.
Of course, if a company wants to mislead its investors, analysts and accountants, there is probably little that can be done to stop it. Arthur Andersen, Enron's auditor, has said that it was misled.
But what is becoming evident about Enron is the decidedly ephemeral nature of its operations and its revenues. Beginning as a mundane natural gas pipeline company in the 1980's, Enron had morphed into a financial services firm by the late 1990's. It traded things like oil, but created new markets to trade oddities like weather and bandwidth.
Because Enron operated in a largely unregulated arena and because of the way energy trading firms are allowed to account for their operations, the company recorded revenue that made the economic status of its business appear larger than it really was. Under accounting rules, when an energy trading company trades electricity or gas, it can count as revenues the whole amount of every transaction rather than simply the profit or loss, as a brokerage firm does.
It is similar to the way Priceline .com counted as revenues the whole sale price of plane tickets sold online rather than just commissions, as traditional travel agents do.
That is largely how Enron, a relative newcomer to the trading of commodities and related financial instruments, was able to produce $101 billion of revenue in 2000, up from $40 billion in 1999. By comparison, Goldman, Sachs, a highly regulated firm with a long history of trading in the field, generated $6.5 billion in trading revenue last year.
Enron appears to have done nothing wrong in accounting for trading revenues, unlike its almost certainly improper accounting for dealings with entities off its balance sheets. But the larger-than-life revenue numbers allowed Enron's executives and other advocates to promote the idea that its operations were far grander than they were, worthy of a ranking near the top of the Fortune 500.
To a Wall Street obsessed not with earnings but with revenue growth, the performance propelled Enron's shares into the stratosphere, enriching executives and investors. "The way these revenues were accounted for at Enron essentially made them pro forma revenues, which have little basis in reality," one institutional money manager said. "Yet the size of the revenues allowed the company to expand its balance sheet by piling on debt. That is why the company unraveled so quickly."
The moment that rival trading firms and other customers at Enron began to lose confidence in the company, its business dried up. But its onerous debt of at least $31 billion remained, forcing it to make the largest bankruptcy filing in United States history.
Mr. Fleckenstein and some other investors are concerned that other bombs like Enron's may be ticking, but that investors will have little help in spotting them before they blow. The combination of aggressive accounting like Enron's method of shifting big obligations off its balance sheet and a conflicted auditing firm, he said, are not limited to Enron. Aggressive accounting has become much more common in recent years, and as auditors have increased their consulting business among the companies whose books they vet, their willingness to sign off on debatable practices has grown.
And as investors know only too well, analysts on Wall Street cannot be relied upon to dig deeply into companies' books. Eager to help their firms generate business selling securities to investors and reap their own rewards in bonuses Wall Street analysts have made a habit of missing corporate misdeeds altogether or ignoring what they see.
"Enron proves how meaningless financial statements have become," Mr. Fleckenstein said. "Until someone makes sure that financial statements have meaning, we will never get this problem behind us."
Enron InsidersEmployee Advocate DukeEmployees.com January 14, 2002
Many investors and employees have suffered as Enrons stock crashed. But one group came out smelling like a rose, according to The New York Times, the company insiders.
These insiders liquidated $1.1 billion worth of stock between 1999 and mid 2001. Mr. Lay took in $101.3 million; a former subsidiary chairman, $353.7 million; a director, $79.5 million; another director, $75.2 million; former CEO, $66.9 million; and the former CFO raked in $30 million.
A "unlawful insider trading" lawsuit has been filed against twenty-nine defendants.
A congressman has questioned Mr. Lay, in a letter, about his touting of the stock to employees, shortly before the crash.