Enron's deception had banks' help, investigation says
Mon Aug 11 01:22:02 2003
Enron's deception had banks' help, investigation says
By Greg Burns
Tribune senior correspondent
August 10, 2003
Some of the world's biggest banks worked closely with executives of Enron Corp.
to hide the true nature of shady transactions from Chicago's Andersen accounting
firm, according to a bankruptcy court investigation.
The findings raise questions about how much responsibility Andersen bears for
the energy company's collapse, suggesting it may have a more potent defense than
was previously recognized.
At the same time, the investigation stops short of clearing Andersen of
wrongdoing at Enron, and some say any deception on the part of the banks did
little more than help the auditors appear to be rigorous even if they were
looking the other way.
The investigation leaves unanswered whether Andersen was actually deceived or if
it "knowingly blinked," said John Coffee, a Columbia University law professor
who has followed the Enron case.
Mark Cheffers of AccountingMalpractice.com goes further: "As a general rule,
Andersen understood what was going on."
The accounting giant shut down last year after its Enron-related criminal
conviction for obstructing justice. News of its lax practices in connection with
Enron, WorldCom and other troubled clients shook the nation's confidence in big
Yet for all the blame heaped on Andersen, the bankruptcy court investigation led
by examiner Neal Batson paints a disturbing picture of Enron's bankers. He
depicts them as striking dozens of secret side deals behind the backs of the
auditors, resulting in improper accounting. Those agreements with company
executives were instrumental in helping Enron hide its debts and falsely boost
its reported financial results.
"It's just unconscionable that Andersen or any other auditor should be misled in
this fashion," said Duane Kullberg, a retired chief executive of the
Chicago-based partnership, which has dwindled to just 250 employees from a peak
of 85,000 worldwide. "We weren't given the documents we asked for. It's very
galling if you're one of the people who lost their jobs."
A spokesman for the firm added: "Andersen was scapegoated in a lot of ways."
The latest findings could shape the battle as Enron investors and creditors
fight to recover their huge losses, possibly influencing how much each defendant
would pay in a potential class-action settlement.
Also, the six commercial and investment banks identified in Batson's
investigation--Citigroup, J.P. Morgan Chase, Barclays, BT/Deutsche, CIBC and
Merrill Lynch--are trying to collect billions in loans they made to Enron. If
the judge in the bankruptcy case accepts Batson's findings, the banks could have
a tough time recovering anything, Coffee said.
Already, Citigroup, J.P. Morgan and Merrill have settled regulatory charges
stemming from the case, contributing more than $300 million to a fund earmarked
for restitution. In the settlements, none of those New York-based banks admitted
or denied the accusations that they participated in securities fraud, though
Citigroup has said any financing that its customers fail to count as debt on
their balance sheets in the future will have to be publicly disclosed.
CIBC disputed Batson's findings, saying the bank acted properly in "all of its
dealings" with Enron. Besides that, CIBC pointed out that the judge in the
bankruptcy case has not yet accepted Batson's investigative report, which the
bank described as "written from a particular point of view."
A Barclay's spokesman would say only, "We're totally comfortable with the way we
acted with Enron. We weren't seeking to mislead anyone." No one from Deutsche
Bank would comment.
Batson's 900-page report depicts the bankers eagerly cooperating in an array of
complex deals aimed at manipulating Enron's balance sheet while reaping profits
for the banks. In one e-mail, a J.P. Morgan executive describes to a colleague
how Enron's reliance on "balance-sheet advantaged" transactions meant it could
charge "premium" fees for services.
Sidestep on rules
One type of transaction, which became a specialty of Canada's CIBC, involved
helping Enron sell a variety of assets into a collection of off-balance-sheet
firms known as a "special purpose entities," or SPEs.
Through 11 deals over more than three years with CIBC, Enron recorded $585
million of profits that were wrongly attributed to gains from the sale of its
interests in everything from power plants to Internet companies. In reality, the
transactions enabled Enron to reduce its reported debt load by sidestepping
accounting rules, according to Batson's report.
Those rules required that Enron find a separate outside investor to hold at
least 3 percent of each SPE. The bank filled that role, but only with the verbal
assurance that Enron would guarantee its 3 percent, according to the report.
The promise meant CIBC was not a true equity investor because it bore no risk
for the investment's performance, which meant Enron should have booked the deal
as a borrowing.
"The whole reason it wanted to get the favorable accounting treatment was to get
the debt off its books," said Cheffers of AccountingMalpractice.com. "That's a
But CIBC never disclosed the existence of the verbal assurances to Andersen. And
in an internal e-mail, one of its executives, using italics to make the point,
suggests the bank knew that full disclosure would have undesirable consequences:
"Unfortunately, there can be no documented means of guaranteeing the equity or
any shortfall, or the sale accounting treatment is affected."
Shell game on oil, gas
Another similar set of transactions described in Batson's report involved an
energy trading company known as Mahonia Ltd., based on the island of Jersey near
The company was essentially an empty shell, set up as a middleman to give the
impression that Enron was selling a lot of oil and gas. Instead, it was used to
disguise loans from J.P. Morgan Chase in the Enron financial statements, the
"It is very insidious," Cheffers said. "It misrepresents the overall risk of the
company and allows the company to essentially defraud the public."
Mahonia supposedly paid in advance for oil and natural gas that Enron would
deliver in the future, getting its money from Chase in a transaction known as a
"prepay." In the 10 years leading up to its collapse, Enron obtained at least
$3.7 billion in financing through prepays involving the shell company.
Before it signed off on Enron's plan to report the deals as trading credits
instead of long-term debt, Andersen sought proof that Mahonia was independent.
A flurry of activity between the bank and Enron ensued, and together they
decided a letter should be sent. An Enron executive warned that the letter
should not reveal any link to the bank "anywhere on the fax letterhead or
anything along those lines," and recommended "a separate fax number, et cetera."
A few days later, Andersen got the letter. "With J.P. Morgan Chase's help," the
report concludes, "Mahonia was made to seem sufficiently independent to satisfy
Some say Andersen was far too easy to satisfy and should have pushed back much
harder against what in retrospect appears to be a thin veil of secrecy. "The
fact they asked for the letter tells you everything you need to know: `We need a
letter to cover ourselves on this,'" said Cheffers.
In its dealings with Enron, the accounting firm acquiesced to the client's
demand that it reassign a partner, Carl Bass, who was forcefully voicing doubts
about the numbers. And in its dealing with Waste Management and other troubled
companies, Andersen has drawn bitter criticism for putting client satisfaction
ahead of its integrity.
Yet collusion among top executives and bankers would challenge the "safety net"
of any auditor, raising doubts about what amounts to an appropriate level of
skepticism for an accountant, noted Lawrence Revsine, accounting professor at
Northwestern University's business school.
"Asking a question and getting an answer that turns out to be a lie: Is that
enough? Existing auditing standards are quite vague on that," he said, noting
that the new federal accounting oversight panel created in reform legislation
last year may well spell out more extensive requirements.
Investigations such as Batson's that piece together the elaborate steps used to
inflate corporate results during the recent boom times show the consequences of
pervasive greed, noted Kullberg, the former Andersen chairman.
The actions of the banks as well as the accounting firm in the Enron case
reflected a general erosion in ethical standards, Kullberg said. "The nature of
things in the '90s was that if you didn't get rich, you were stupid. Everybody
thought they could cut corners."
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