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Record: 1Title:Enron Executives Reassured Employees, Investors as Firm Spun Out of ControlAuthors:Charlene OldhamSource:Dallas Morning News, The (TX), 02/03/2002; ?Database: Newspaper SourceFeb. 3--With that very public reassurance, Kenneth Lay predicted blue skies on the day that protege Jeffrey Skilling unexpectedly stepped down after a six-month stint as Enron Corp.'s chief executive. But over the next few months, Enron's employees, investors and competitors were to get precious little honesty as the Houston-based energy trader spiraled toward the biggest U.S. bankruptcy ever. At nearly every turn last fall and into winter, company officials were saying one thing to the world and doing something very different behind the scenes. A look at the executives' statements and their subsequent actions reveals a pattern of delays and disparities that effectively stonewalled all of Enron's various stakeholders. "Somewhere along the way, they stopped treating it as a company and started treating it as a stock, and that's where their downfall started in my mind," said Mitch Zacks, vice president of Zacks Investment Research Inc. in Chicago. "They started managing not the company, but the stock." The blame doesn't lie with Mr. Lay, according to his attorney, Robert S. Bennett. Other Enron executives, Mr. Bennett has said, concealed critical financial details from the company's founder. Mr. Lay himself has been silent on the revelations about Enron's months-long concealment of the problems that finally torpedoed the company. But he gets his turn to speak publicly Monday before the Senate Commerce Committee. His successor as CEO, Stephen Cooper, isn't wading into the fray. He wants to concentrate on shepherding the company back to solvency, Enron spokesman Mark Palmer said. "The past is the past, and we are focusing on the future," Mr. Palmer said. As recently as August, that future still looked bright. Enron had booked more than $100 billion in revenue in 2000. Even if its stock was sliding, the company itself was still around -- and making money. Lots of other highfliers weren't. And much of corporate America was having a lousy year on Wall Street anyway. Add in Mr. Lay's sunny conference call, and this was the public face Enron put forth not long before it surprised Wall Street with its third-quarter earnings report on Oct. 16. Company executives described it as routine, albeit disappointing. It included $1.01 billion in charges. On closer examination, certain items proved to be anything but routine. The truth began trickling out just a day later, on Oct. 17, when Enron slashed shareholder equity by $1.2 billion to account for transactions between the company and some partnerships created by Andrew Fastow, its chief financial officer. Still, no public statement from Enron prepared Wall Street, its workforce and the country for the whirlwind collapse to come. An inquiry from the Securities and Exchange Commission, a buyout offer from lesser rival Dynegy Inc., a restatement of earnings back to 1997, a debt downgrade and the death of the Dynegy deal -- all of these paved Enron's rough road to bankruptcy court on the first Sunday of December. Thousands of pink slips followed at the energy trader's downtown Houston headquarters, and Enron employees who had already lost millions in retirement savings suddenly found themselves without jobs. The U.S. Department of Justice underscored the gravity of Enron's collapse when it launched a criminal probe in January -- only to discover later that Enron and its auditor had been shredding piles of paper potentially crucial to the investigation. The chain of events leaves even industry insiders breathless. "I've never seen anything like it," said Nanci Mackenzie, president of energy trader Aquila Inc.'s Dallas office. "We're all appalled. I'm just like everyone else. I read the paper and I am shocked." "As we look at the environment right now, we feel pretty good about where Enron sits... I think the earnings show that the company is in excellent shape right now." -- Jeffrey Skilling, Aug. 14, 2001 At the time Jeffrey Skilling made that valedictory statement, much of the obvious evidence indicated that it was true. Despite missteps such as a failed foray into broadband trading and problems at a power plant in India, the company still commanded a quarter of the country's wholesale electricity and natural gas trading markets. Mild weather and a slack economy helped save California from a summer of rolling blackouts -- in effect taking Enron out of the crosshairs of California politicians who had been accusing the company of price gouging. Enron executives had recently resisted pressure to buy power plants and other hard assets, sticking to a strategy that favored flexibility and intellectual capital over concrete holdings. That meant the company's most valuable asset was not a natural gas pipeline or a power plant, but its online trading platform. EnronOnline was the premiere marketplace for energy contracts that vaulted Enron into national prominence and generated the bulk of its revenue. It once handled 1,800 products and $2.8 billion in transactions daily. And it seemed every new product added to Enron's share price. Dozens of Wall Street analysts helped, too. They rated the stock a "strong buy" and included it on lists of their firms' favorite picks. Ironically, it was EnronOnline's stunning success that prompted executives to sow the seeds for the company's collapse, analysts and energy industry executives now say. So intent was the company on protecting its rapid growth -- and its surging stock price -- that during the 1990s it began pushing more and more of its liabilities off its corporate books, analysts say. Fine print in Enron's financial statements hinted at some of its accounting maneuvers. But Enron's earnings had always been opaque, and Wall Street had no clear idea of what the company's finances really looked like. Moreover, the 1990s bull run allowed many companies to push the accounting envelope. "The number of extraordinary items increased dramatically. The number of restructuring costs increased dramatically," said Mr. Zacks of Zacks Investment Research. "And each of these things the market ignored because everybody was making money." Trouble was, the stock market's terrible 2001 was forcing Enron's hidden bookkeeping to the surface. "I am incredibly nervous that we will implode in a wave of accounting scandals. ... The business world will consider the past successes as nothing but an elaborate accounting hoax." -- Sherron Watkins to Mr. Lay, Aug. 22, 2001 A sudden departure such as Mr. Skilling's is the kind of thing that sets off alarms on Wall Street. No need to worry, the CEO said on his way out: He was leaving to spend time with his family, and nothing more. When an analyst asked Mr. Lay whether to expect another bombshell, the answer came in unqualified terms. "There are no accounting issues, no trading issues, no reserve issues, no unknown problem issues," Mr. Lay said. "I think I can honestly say the company is probably in the strongest and best shape it has ever been in." Enron executives knew otherwise. It's now clear that some top staffers had been voicing concerns about Enron's accounting for months. Among them was J. Clifford Baxter, the vice chairman who resigned in May and committed suicide last month. Also among this group was a vice president of development, Sherron Watkins, an eight-year Enron employee. She dropped a brief memo in Mr. Lay's suggestion box the day after Mr. Skilling stepped down. In an Aug. 22 meeting with Mr. Lay, Ms. Watkins handed over a more detailed letter that was prescient. "I realize that we have a lot of smart people looking at this and a lot of accountants ... have blessed the accounting treatment," she wrote. "None of that will protect Enron if these transactions are disclosed in the bright light of day." Officials at Arthur Andersen LLP, Enron's auditor, and attorneys at Vinson & Elkins LLP, the company's law firm, were advised of Ms. Watkins' concerns. But no substantive action was taken at the time, and her letter wouldn't become public till this year. A little more than a month after receiving that letter, Mr. Lay used an online chat to reassure employees about Enron's accounting practice, future stock performance and the upcoming release of the company's third-quarter earnings. "Basically, what we tried to do here was clean up anything that needed cleaning up." -- Ken Lay, Oct. 16, 2001 In truth, it may take a cadre of forensic accountants years to do that. But Mr. Lay advised analysts and investors in mid-October that the $1 billion-plus in third-quarter charges on investments in faltering ventures would be the last the company logged for a while. Fate and securities regulators intervened, however. As the company's complex accounting practices came out into the open, Wall Street learned that Enron had used more than 3,000 partnerships and kept them off its balance sheet. The partnerships concealed millions of dollars of debts and losses from investors' eyes while providing profits to Mr. Fastow and others. Mr. Lay initially stood by his financial chief, telling analysts that he and Enron's board continued "to have the highest faith and confidence in Andy and believe he is doing an outstanding job as CFO." A day later, on Oct. 24, with Wall Street's confidence sagging, Mr. Lay dismissed Mr. Fastow. Enron had clearly lost its glow as Houston's symbol of a new energy industry. It was tapping a $3 billion emergency credit line. But industry experts still saw it as a viable company, and Mr. Lay's peers in Houston civic circles cautioned against counting him out. Meanwhile, Mr. Lay was privately offering a contrasting assessment in phone calls to two Cabinet secretaries and Federal Reserve Chairman Alan Greenspan between Oct. 26 and Nov. 8. He cut a significant figure in Washington because of his connections and millions of dollars in personal and corporate campaign contributions. But the officials declined to intervene. With that decision, they insulated the Bush administration from the worst of an accounting scandal that was getting more complex by the day. And those contacts remained secret until January, well after Mr. Lay's darkest fears had been realized. When the calls were revealed, an Enron spokeswoman said Mr. Lay told officials he hadn't ruled out the possibility that the company would seek bankruptcy protection -- a disclosure that would have been explosive at the time. Enron's shares closed at $15.40 on the day Mr. Lay deposed his financial chief. That Friday also marked the beginning of a 401(k) lockdown that barred employees from making any changes while the pension plan changed administrators. The lockdown ended on Nov. 13, when shares closed at $9.98. "First of all, let me say that I could not have ever contemplated the events that we as a company and you as a stakeholder have faced over the last few weeks. The Enron management team is focused on protecting the investment of all investors..." -- Ken Lay, Nov. 14, 2001 Five days earlier, a glum-faced Mr. Lay had stood next to Charles L. Watson, chief executive of Dynegy, as the smaller cross-town rival announced it was scooping up the former No. 7 company on the Fortune 500 list. Investors hoped Enron's innovative trading platform, EnronOnline, and at least a little of its master-of-the-universe mentality would survive should the humbling marriage be consummated. But not even its suitor knew the severity and extent of Enron's financial problems. Enron's cash-flow crunch came to a head later that month when credit rating agencies downgraded its debt to junk status, accelerating some of the company's payment schedules and making energy trading an impossibility. In a matter of weeks, Enron was dismissing 4,000 employees at its Houston headquarters, where more than half of its 21,000-person workforce had logged the long hours needed to propel the company to international prominence. Those employees lost not only jobs, but also millions of dollars in retirement savings thanks, in large part, to repeated assurances from the CEO many of them saw as a grandfather figure. They also eventually lost faith in a corporate culture that encouraged respect and integrity -- but not before the 401(k) lockdown barred many from selling Enron stock. By contrast, Mr. Lay and other top executives sold $1.1 billion shares from 1998 through 2001. Company spokesmen have denied any wrongdoing in connection with the sales. Shareholders have argued otherwise, pointing to the gap between Enron executives' public pronouncements and private actions. The lawsuits could drag for years. "There was a sense that it would be a long, rough road coming back," said Scott Wohlander, a former manager in Enron's retail energy business. "But, at the time, no one really thought that Enron would explode." Employees had every reason to believe executives' assurances because Enron enforced an open-door policy where their questions had always been met with optimism and -- they believed -- honesty. "They preached integrity the whole time," said Sean Jez, a Houston attorney at Fleming & Associates who is representing about 850 former employees and other shareholders. "Why wouldn't employees believe them?" The assurances kept coming from Mr. Lay even as the trail of disclosures grew longer and longer. As with the third-quarter charges, he told analysts that each financial erosion would likely be the company's last for a while. "It probably goes without saying that everything we know now you know," he said in the November conference call. Today, some Enron employees aren't even sure what Mr. Lay knew and when, especially after he returned as CEO in August. And they may never find out -- congressional hearings or no. "He's got Vinson & Elkins signing off on it. He's got Arthur Andersen signing off on it. To what extent was he learning about what a mess he came back to when he came back, I don't know," Mr. Wohlander said. "Nobody knows that but Ken Lay." -----To see more of The Dallas Morning News, or to subscribe to the newspaper, go to . (c) 2002, The Dallas Morning News. Distributed by Knight Ridder/Tribune Business News. DYN, UCU, ENE, ENRNQ,Source: Dallas Morning News, The (TX), Feb 03, 2002Item: 2W63010638499 ................
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