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. Last Updated: 07/27/2016

Enron Report: Greed Spurred Collapse

WASHINGTON -- Enron Corp. collapsed last fall because of massive failures by its management, board and outside advisers, as well as self-enrichment by some employees "in a culture that appears to have encouraged pushing the limits," said an internal report.

The 218-page report by a special committee of the company's board of directors, filed Saturday with a federal bankruptcy court in New York just as senior Enron executives are preparing to testify before the U.S. Congress, found that Enron's rosy picture of financial success from the late 1990s through last summer was essentially a fiction. A handful of top managers covered up nearly $1 billion in losses in the 12 months that ended last September, a period during which senior executives sold millions of dollars worth of Enron shares.

The managers created a web of complex outside partnerships that facilitated the "manipulation of Enron's financial statements" and through the partnerships "were enriched by tens of millions of dollars they never should have received," the report said.

Senior officers and the board of directors made a "fundamentally flawed" decision that led to the collapse of the company..

The board, on recommendation from chairman Kenneth Lay and president Jeffrey Skilling, waived ethics rules in 1999 and allowed chief financial officer Andrew Fastow to head up private partnerships that would buy and sell assets with the company, even while Fastow kept his position at Enron. The board and top executives then neglected to monitor Fastow's activities, or even ask how much he made -- $30 million -- until last October, after media reports.

In one transaction in 2000, Fastow turned one partnership investment of $25,000 into a personal $4.5 million profit in two months. He also brought two other employees into the deal, with each making $1 million from a $5,800 investment in the same period.

The report describes Fastow as the primary creator of Enron's deceptive finances, while criticizing Lay for being inattentive. While Skilling minimized his role, his account is disputed by some other executives.

The $1 billion in overstated profits from September 2000 to September 2001 is much more than the $586 million over five years that the once high-flying energy trader reported last November after revealing accounting errors related to some of the partnerships. That announcement triggered a dive in Enron's stock price, costing shareholders and employees billions of dollars.

"Enron engaged in transactions that had little economic substance and misstated Enron's financial results, and the disclosures Enron made to its shareholders and the public did not fully or accurately communicate relevant information," the report said. It portrayed Enron officials as determined to disclose as little as possible about the partnerships.

"That impulse to avoid public exposure, coupled with the significance of the transactions for Enron's income statements and balance sheets, should have raised red flags for senior management, as well as for Enron's outside auditors and lawyers. Unfortunately, it apparently did not," the report said.

"The tragic consequences" of mishandling the partnerships "were the result of failures at many levels and by many people: a flawed idea, self-enrichment by employees, inadequately designed controls, poor implementation, inattentive oversight, simple (and not so simple) accounting mistakes and overreaching in a culture that appears to have encouraged pushing the limits," the report concluded.

It assessed blame on many:

Enron founder and longtime chief executive Lay was "the captain of the ship," but he did not ensure that those who reported to him were performing their oversight duties properly. Lay resigned last month on the insistence of Enron's creditors.

Jeffrey Skilling, who had been president and was chief executive for six months before resigning last August, bears "substantial responsibility" for the failure to monitor dealings between Enron and the partnerships.

The board of directors, which waived Enron's conflict-of-interest rules to allow Fastow to run the partnerships, called LJM and Chewco, "failed ... in its oversight duties."

Enron's outside auditor, Arthur Andersen LLP, "did not fulfill its professional responsibilities," the report said. It noted that Andersen was paid $5.7 million specifically to review and approve the setup of the partnerships that led to Enron's downfall.

The report said Fastow, Michael Kopper, a Fastow aide who made $10 million from the partnerships, and Ben Glisan Jr., an Enron accountant who later became the company treasurer, declined to be interviewed.

Many of those criticized in the report could not be reached for comment last night. Lay is scheduled to testify before a U.S. Senate committee Monday. Skilling and Fastow are supposed to appear before a House committee Thursday.

Enron lawyer Robert Bennett said the report shows "that while there is certainly criticism to go around or blame to go around ... it's very clear that a great deal of information was not provided to the board." Bennett said Enron "did an honorable job in investigating its own problems and publicly releasing a report about them."

Stepping up its criminal probe of Enron's collapse, the Justice Department told U.S. President George W. Bush's staff Friday not to destroy any documents related to the bankrupt energy trading company, Reuters reported.

The White House said it would comply with the request, which calls for staff to retain all written and electronic notes and files related to Enron's financial condition and business interests since Jan. 1, 1999.