New York Times - 1 Nov 01

Prof. Robert B. Laughlin
Department of Physics
Stanford University, Stanford, CA 94305
(Copied 10 May 09)

S.E.C. Opens Investigation Into Enron

Published: Thursday, November 1, 2001

The Securities and Exchange Commission has opened a formal investigation into transactions among the Enron Corporation and partnerships headed by Andrew S. Fastow, the company's former chief financial officer, Enron said yesterday.

The commission's move comes as Enron struggles to reassure investors and its partners that its profits are real and that its cash position is strong. Shares of Enron, the world's largest trader of electricity and natural gas, have plunged 83 percent this year as investors question the company's complex and opaque accounting. Shares of Enron rose $2.74 yesterday, to $13.90, ending a 10-day string of losses.

In addition, Enron's board said yesterday that it had appointed a special committee to examine the transactions. The panel will be headed by William Powers Jr., the dean of the University of Texas law school, who was elected to Enron's board yesterday. The committee has hired William R. McLucas, a former head of the division of enforcement at the S.E.C., as its counsel. He is a partner in the law firm of Wilmer, Cutler & Pickering in Washington.

Enron disclosed 10 days ago that the commission had opened an informal inquiry into its transactions with Mr. Fastow. A formal investigation significantly increases the pressure on the company.

John Heine, a spokesman for the commission, said he could not comment on the S.E.C.'s investigation of Enron. But, speaking generally, Mr. Heine said the opening of a formal inquiry enabled the commission to subpoena documents and was used when S.E.C. staff members thought that the companies or executives were not responding voluntarily to their questions.

If staff members "run into situations where they feel they need information to look further and the sources for that information are not cooperative, the staff can go to the commission and recommend that the commission issue a formal order of investigation authorizing that the staff issue subpoenas," Mr. Heine said.

When it disclosed the commission's informal inquiry on Oct. 22, Enron promised to cooperate fully with the S.E.C. "We welcome this request," Kenneth L. Lay, Enron's chairman, said.

A spokesman for Enron did not return calls yesterday.

Enron began this year on an apparently unstoppable growth streak. But the company has suffered one setback after another. The company's efforts to become a profit-making water supplier and to create a new market in broadband communications capacity have been expensive failures. In August, Jeffrey K. Skilling resigned as chief executive, forcing Mr. Lay, his predecessor, to resume day-to-day control.

Enron's problems came to a head in mid-October, when it disclosed that its shareholders' equity, a measure of the company's value, dropped $1.2 billion in the third quarter because of a deal with partnerships led by Mr. Fastow. Because of complex accounting rules, the write-down was not apparent in Enron's quarterly earnings report. News of the write-down disturbed investors because it suggested that Enron might have found a way to hide losses, throwing the accuracy of its financial statements into question.

Last week, the company ousted Mr. Fastow, but it is now struggling to explain the transactions to its shareholders and bond-rating agencies. Amid rumors that the company might face a cash squeeze, Enron used a $3.3 billion line of credit last week and is seeking additional financing. Still, some energy companies are shying away from making trades with Enron that will take more than a few weeks to close.