September 19, 2004

MOVE OVER, MARTHA:

Skilling, Lay Cases Build on Plea Deals (Carrie Johnson, September 17, 2004, Washington Post)

Mark E. Koenig, who headed the company's investor relations unit from 1998 to 2002, served as the most important link between Enron managers and outside analysts who recommended the stock to investors.

Koenig pleaded guilty late last month to aiding and abetting securities fraud, telling a judge that by early 2001, he knew Enron's financial reports "intentionally concealed the true state of Enron" and in particular the success of two core businesses: Enron Broadband Services, which sent video and other data on high-speed networks, and Enron Energy Services, set up to provide energy to other large companies.

Koenig described in his plea agreement a series of conferences and telephone calls in which he misled investors to artificially boost Enron's stock price. In one such session, on Jan. 22, 2001, Koenig told analysts that a deal to sell some of the broadband unit's projected future revenue accounted for a "fairly small amount" of its quarterly revenue. In fact, the deal brought the struggling unit 84 percent of its $63 million in revenue that quarter, court papers said.

Koenig also said he and other top managers misled investors about the reason for a reorganization of two of Enron's businesses in early 2001. He told analysts the move was made to "increase efficiency," when in fact the shift allowed the company to hide hundreds of millions of dollars in losses at its retail unit by combining its finances with the vastly more successful wholesale energy division, which made large profits trading electricity, according to court papers.

That wholesale unit later came under fire for allegedly bilking West Coast energy consumers out of millions of dollars by using deceptive trading tactics. Three former Enron traders have pleaded guilty to playing a role in the price manipulation, which investigators say took place throughout the California power crisis in 2000 and 2001.

"The company was losing money virtually everywhere," including its Internet, retail gas and power, and high-tech investment portfolio, said University of San Diego law school professor Frank Partnoy, who has studied the Enron collapse. "The trading operation was the heart that remained healthy throughout but everything else died."

Perhaps the unit where the contrast between expectations and reality was the starkest was the broadband division, which was responsible for a huge spike in the company's stock price throughout most of 2000. Its onetime chief executive, Kenneth D. Rice, pleaded guilty to securities fraud July 30 and agreed to cooperate with prosecutors. Rice had a close friendship with Skilling, whose allegedly false optimistic statements to analysts and investors about broadband figure largely in Skilling's own indictment.

"The purpose in making these misrepresentations was to falsely portray to the investing public that [the broadband division] had a thriving telecommunications business that had successfully developed revolutionary software which would, in turn, cause Enron's stock price to increase significantly," Rice said in his plea agreement. The government claims the broadband unit never made a profit.


Well, Paul Krugman was certainly wrong about Enron being of greater historic import than 9-11, but you do have to admire the political timing that sees these cases ghead to court just as Kerry Edwards attacks the Administration for being too cozy with business.

Posted by Orrin Judd at September 19, 2004 7:14 PM
Comments

The deception and crimes described in this exerpt took place in 2000 and very early 2001 when Clinton was still President.

Posted by: Earl Sutherland at September 19, 2004 8:18 PM

Don't forget - Paul Krugman was on Enron's payroll in the late 90s.

Perhaps his idea that Enron is a bigger story than 9/11 has something to do with corporate America recognizing the genius of hiring a certain economist to flack for them.

Posted by: jim hamlen at September 19, 2004 9:23 PM
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