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Bank Of America Investment With its preliminary findings that Enron violated public disclosure rules in its dealings with banks, a bankruptcy examiner's report highlights numerous avenues for criminal investigators seeking to bring a case that the company's deluge of deals with off-the-books partnerships involved potential fraud.

Florida's pension fund lost $335 million on its Enron investments, more than any other public entity.

Investment Opportunity Throughout the report filed on Friday, the court-appointed examiner in the Enron case, Neal Batson, is careful to caution that his conclusions could change as he continues his investigation. But based on the report, there can be little dispute that some executives at Enron worked to disguise the company's true condition in filings with the Securities and Exchange Commission through complex financing deals involving the partnerships and banks.

Some businesspeople have a different view. "Enron is affecting the whole U.S. economy, particularly the energy industry, " said analyst Christopher Ellinghaus of Williams Capital Co., a New York investment firm. "At a time when the U.S. needs to improve its energy infrastructure with transmission lines and power plants, the Enron case has changed the credit market's whole view of debt and put off projects, " Ellinghaus said.

Banc Of America Investment All told, the report concluded, the transactions studied by the examiner provided Enron with almost $1.4 billion in cash from 1997 to 2001. This huge influx of money all reported as revenue from operations or investing originated as loans from the banks to partnerships set up by Enron. The partnerships then used the money to purportedly buy assets from the company, which, the report concluded, otherwise would have been difficult to sell.

The University of California, named lead plaintiff in the case because of its size and experience in similar litigation, said it lost almost $145 million on its Enron investment. "The university is participating in this lawsuit ... because of our concern for the integrity of the capital markets, " U.C. General Counsel James Holst told a news conference Monday. books deals facilitated by banks that were later exposed as sham transactions designed to hide Enron' - - very rich.

Banking Investment But these were sales in name only. Through a complex financial arrangement known as a total return swap, Enron retained all rights to any profits produced by the asset that was purportedly sold, and also assumed responsibility for paying the banks cash that equaled the total amount loaned to the partnership, plus a fixed interest rate. It would be as if an individual claimed to have sold his own house while remaining responsible for the mortgage, retaining the profit from any increase in value in a future sale, and continuing to live in the place to boot.

32 14 I admit, I am in no hurry to vaccine against chicken pox, this investment would not be done without a need.

Investment Solution Strategic What will be of interest to criminal investigators, however, is how often participants in the transactions failed to take actions that would be required if the deals were true sales. For example, to obtain approval from accountants that such a transaction can be treated as a sale, Enron would have had to obtain two written findings from its lawyers, known as a true sale opinion and a nonconsolidation opinion.

Four months before the bankruptcy reform, everything was dead, but on Capitol Hill, to the attention of Congress focused on the war against terrorism and the Enron scandal. But ironically, the bankruptcy of Enron, one of the forces that nearly derailed the bill is an important factor behind him on the.

Investment Banking Services According to a footnote in the report, however, Enron did not consistently obtain such opinions before entering into the transactions. Moreover, banks did not always demand to see evidence that the deal could be treated as a sale; instead, as they would with a loan, they simply relied upon the creditworthiness of Enron to back the deal something that would be necessary for a loan but irrelevant in an unrelated sale. The poor value of the assets in the partnerships that were purportedly receiving the loan would have dictated a far higher interest rate than was given in the transaction, the report says another sign that the true recipient of the loan was Enron.

Bank Investment Such distinctions obviously involve arcane areas of finance that are little understood by investors. And indeed, the report says, Enron's disclosures of the transactions which at times brought in as much as a third of its profits before taxes and interest were virtually nonexistent, and only had the potential of being understood by investors with deep knowledge of advanced accounting. Ultimately, the report concludes, the disclosures were in violation of generally accepted accounting principles.

Alternative Investment These types of facts are important, because of the challenges facing criminal investigators in bringing an accounting fraud case against Enron. Most of the transactions that have raised widespread criticism in Congress and among regulators were approved by both Arthur Andersen, Enron's auditors, and by outside lawyers. Because fraud cases require proof the defendant intended to commit a crime, such approval creates what is known as a reliance defense. In other words, the defendant could not have meant to commit a crime, because professionals said the transaction was appropriate.

Online Investment Services That is why a potential Enron accounting case is so difficult, and why the investigation has split into two distinct areas. In the first, Enron is the victim, with the partnerships used by executives including Michael J. Kopper, who recently pleaded guilty to felonies to steal money that rightfully belonged to the company. That investigation, involving partnerships with names like Southampton and Chewco, has been active, with numerous witnesses reporting to have been contacted recently by investigators. Lawyers in the case anticipate that Andrew S. Fastow, Enron's former chief financial officer who was identified by Mr. Kopper as a co-conspirator, will be indicted soon.

Accompany Essential Investment The second area of investigation involves Enron as culprit, misrepresenting its financial performance to investors through its dealings with the partnerships. It is there that the reliance defense comes into play, making any criminal case where accountants were fully informed far more difficult.

Investment Company According to people who have spoken to government investigators, prosecutors in the Enron case recognize the complexity presented by the reliance on accountants and lawyers, but nevertheless are actively exploring bringing accounting fraud charges. In such a case, the government could potentially argue that the accountants and lawyers were so compromised by Enron's money and pressure that their opinions were meaningless. Moreover, while each individual transaction may have had approval, the total result was deceptive a fact that could only have been fully understood by the executives at the highest reaches of Enron.

Investment Management Solution This is where Mr. Batson's report provides possible signals for the criminal case. With evidence scattered throughout the report that accountants, executives and bankers failed to take actions that they otherwise would have for transactions that were actual sales, the deals provide certain levels of proof that participants may have been acting with a wink and a nod when providing loans disguised as sales. In essence, the credibility of the accountants, lawyers and bankers could be challenged by their failure to obtain certain necessary documentation or to price loans at an appropriate rate.

Investment Management Services There are strong reasons for the government to crack down on the types of financial finagling that took place at Enron. Ultimately, by using legitimate rules to disguise the true nature of its finances, the company undermined the disclosure rules that lie at the foundation of the American capital markets. By engaging in transaction after transaction that pushed close to and in some cases over the literal requirements of the accounting rules, Enron was able to create an image in its financial disclosures of a company that simply did not exist.

Guide Investment Stock By Kurt Eichenwald
New York Times - 9/23/2002

Topic: Enron

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