Enron probe finds conflicts abounded in partnerships

HOUSTON -- Complex partnerships used to disguise Enron Corp.'s financial problems were run by company executives with conflicting interests, an internal probe into the company's collapse found.

Enron employees who reported to Andrew Fastow, the company's former chief financial officer, negotiated deals on the energy giant's behalf with partnerships that Fastow ran. The deals weren't always best for the company financially, and employees complained Fastow pressured them to accept unfavorable terms, the investigation found.

Fastow and others earned tens of millions of dollars brokering deals between the partnerships and Enron.

The internal investigators focused their criticism on Fastow and Michael Kopper, an Enron employee who was put in charge of a partnership.

Ethics problems

The investigative team, made up of three Enron board members, directed their critique at the people in charge of the partnerships, which were used to hedge investments and hide debt off Enron's books. The probe also determined that Fastow and Kopper broke the company's ethics code.

Kopper declined to be interviewed by Enron's internal investigators, while Fastow declined to answer most of their questions.

Kenneth Lay and Jeff Skilling, former chief executive officers, told the investigative team they had only cursory knowledge of the employees' involvement in the partnerships.

University of Texas School of Law Dean William Powers Jr. and director Raymond Troubh, who headed the investigation, were appointed to Enron's board to probe the partnerships after they were dissolved. The report said the board was unaware of the conflicts of interest.

The report also criticized C.E. Andrews, a partner at accounting firm Arthur Andersen LLP, Enron's former auditor. He said the investigators had a conflict of interest.

"It does not reflect an independently credible assessment of the situation, but instead represents an attempt to insulate the company's leadership and the board of directors from criticism by shifting blame to others," Andrews said.

The 203-page report, released three days before Powers was scheduled to testify before Congress, said greed motivated architects of the partnerships while top managers, directors, auditors and outside lawyers failed to watch them.

Profits overstated

One of the partnerships, dubbed Chewco after the "Star Wars" character Chewbacca, was formed in 1997 with Fastow as its manager. Chewco was backed mainly by Enron and lacked the required 3 percent interest from an independent third party to be considered a separate entity. Nevertheless, Enron kept Chewco's activities off its balance sheet through March last year, the report said.

In November 2001, Enron acknowledged that financial statements from 1997 through the first half of 2001 were unreliable because the performances of the partnerships were not included in its own earnings reports. In restating earnings for the period, Enron said it overstated profits by $586 million.

Kopper aggressively negotiated deals with Enron on behalf of Chewco, the probe found. But an unidentified Enron employee, who also answered to Fastow, told investigators he was uncomfortable about receiving pressure from his boss to accept deals that were not always in Enron's best interest.

Kopper earned at least $10 million from his participation in the partnerships, the report said. Enron acknowledged last year that Fastow earned more than $30 million. With approval from the board and top managers, Fastow ran and invested in two other partnerships, LJM Cayman L.P. and LJM Partners L.P.

The report said LJM and Enron had no separation as the LJM partners negotiated deals to buy Enron assets. Fastow knew what assets Enron wanted to sell and whether it had alternative buyers.