Asymmetrical Information

I understand about being hostage to other people's analysis. But if you get a chance, a guest blog post or just a link to people making their case would be quite interesting and helpful. This is certainly the first time I've heard about alternative theories of the case, and I would guess the same about ~99% of your readers.

I haven't followed the case closely; what I know is secondhand from people who have, which of course makes me hostage to their analysis.

I find it interesting to read the foregoing remark in conjunction with this one:

I find it unlikely that the jury was in any way able to come to an informed decision about their guilt or innocence.

So you acknowledge not following the case, but are willing to disparage the jury? I have to say this doesn't reflect terribly well on you.

Rather, my point was that of all the parties, Fastow seems to be the guiltiest;

The conclusion I have, after reading several books on the case, is that Skilling was clearly the single most culpable individual in bringing Enron's bankruptcy about.

So you acknowledge not following the case, but are willing to disparage the jury?

She did not follow the case, so she is forced to look at the opinions of those who did and decide whose opinion of the Enron mess is more credible.

On the one hand, you have an administrative manager, a dairy farmer, a payroll manager, a retired engineer, a ship inspector, a teacher, an apartment marketer, a design engineer, a roofing saleswoman, a school principal, a court clerk, a personnel manager, a retired sales assistant and a dental hygienist who spent a few months listening to people tell them about one of the most complicated white collar criminal cases in history and then unanimously decided the accused were guilty.

On the other hand, you have numerous professional economic and legal analysists who've devoted years to studying the case and still haven't reached a consensus as to what crimes were committed or who was responsible for them.

You don't have to have followed the case to reasonably conclude that the jury is highly unlikely to have reached an informed and impartial verdict of guilty beyond a reasonable doubt. Personally, based on my experiences with jury duty, if a jury ever finds the truth it is probably as a result of divine intervention.

The conclusion I have, after reading several books on the case, is that Skilling was clearly the single most culpable individual in bringing Enron's bankruptcy about.

Bringing about the bankruptcy of a company is not illegal.

Jane Galt, once again why didn't you tell us Skilling and Lay were sure to be convicted prior to the verdicts? This was not obvious before the jury came back. Also Skilling and Lay presented a poor defense. There would have done better to argue they were too stupid to realize the accounting was rotten rather than make the absurd claim that the accounting was ok.

You claim it is troublesome that Fastow got a lighter sentence that Skilling or Lay. Putting aside the facts that Fastow and Skilling haven't been sentenced yet and that Lay's conviction will be vacated because he died before he could appeal I don't see anything troublesome. Fastow pled guilty. If you plead guilty you get a lighter sentence, that is how the system works. Furthermore Skilling and Lay were higher ranking than Fastow making them more culpable. Finally if Fastow gets 10 years this is not a light sentence.

And why are Ebber's claims of innocence any less believable than Lay's or Skilling's?

And what is this nonsense about no one having any idea about what happened? What happened is simple enough, Enron's accounting was designed to hide problems not identify and fix them. As a result over a period of years Enron's books became increasingly divorced from reality until inevitably the entire house of cards collapsed. Lay and Skilling were obviously morally culpable for this. The only arguments are about the exact parameters of their criminal legal culpability.

"Enron's accounting was designed to hide problems not identify and fix them. As a result over a period of years Enron's books became increasingly divorced from reality until inevitably the entire house of cards collapsed."

This is not only not a crime, it's barely a moral failing as I see it. Enron didn't so much mislead people as exploit the common con man's trick of letting the mark's own greed get the best of him. What people often forget is how aggressively Enron adamantly refused to explain their practices to analysts who nonetheless invested in the company anyway. Now you can criticize Skilling for arrogance, which is a moral failing, I guess, but why do those who chose to invest with their eyes wide open that they didn't know what they were investing in deserve any of our sympathy? When accounting is opaque (as Enron's undoubtedly was) and investors ask what something means and receive the answer: "If you don't get it, I don't have the time to explain it to you," that should serve as a strong signal. We can debate whether or not that includes the gullible employee-investors, a debate I've had many times with many people and am unwilling to continue in blog comments, but I will assert my bona fides as a published author on one small part of the Enron mess who was never paid by Enron or anyone else that the case against Skilling and Lay is not just weak -- it's incredibly weak.

Thank you Jane for giving us your opinion of your friends opinions of the facts of the case.
Sure cleared the whole business up for me. Although, my opinion of my friends opinions about the matter don't agree with your opinions.
This troubles me. Could you venture an opinion on This?

Mark writes:

I haven't followed the case closely; what I know is secondhand from people who have, which of course makes me hostage to their analysis.

I find it interesting to read the foregoing remark in conjunction with this one:

I find it unlikely that the jury was in any way able to come to an informed decision about their guilt or innocence.

So you acknowledge not following the case, but are willing to disparage the jury? I have to say this doesn't reflect terribly well on you.

Mark,

I've not read every single page of every study on breast implants, but based on what I have read that was written by ... you know ... actual scientists, I believe that Stern vs Dow Corning was wrongly decided.

Yes, there, I've said it.

I think that knowledgeable people are sometimes right where a jury of 13 random people off the street is wrong.

I think that if you think that respecting expert opinion over a vote of a small random sampling of people "doesn't reflect terribly well" on Jane Galt, then I'd rather be in her corner than yours.

Mark, I didn't say they got the case wrong . . . as I say, I haven't followed the case closely enough to know. But I have followed the case closely enough to know just how complicated it is. It is so complicated that the odds a jury was able to correctly decide it on the facts, the law, and a solid knowlege of the accounting practices involved . . . well, think of the proverbial tissue paper dog chasing an asbestos cat through the ninth circle of hell.

Thus, my opinion on the process is not insufficiently informed . . . only my opinion on the verdict, which is why I don't have one. Not that that has stopped anyone else . . .

I've actually studied a little bit of securities law, and as it happens I did a tiny bit of work on Causey's defense.

Here's my question for the "GUILTY! GUILTY!" crowd: kindly identify and explain the exact statutes violated by the Enron defendants.

Forget the facts; I consider it highly unlikely that the jury in any securities case can even begin to make sense of the law, since only a relatively small number of lawyers can.

As it happens, I have no opinion on the matter at all, other than to say that SarbOx is a total disaster for everyone except law firms.

I believe that your post misunderstands the thrust of the cited count in the indictment. The count was not intended to allege that Enron hid $1 billion of profits. In fact, Enron was not shy about disclosing those profits, and the meteoric rise in stock value was a result.

The gravamen of the issue is that Enron failed to disclose information that would have allowed investors to understand that these profits were speculative and temporary. The actionable behavior on the part of Skilling and Lay were their claims that these profits were due to a fundamental advantage that Enron's business model gave it. Skilling and Lay were the architects of this perception of Enron's preformance, but they never acknowledged how vulnerable the entire structure was.

The mechanism that led to Enron's collapse was cross-default provisions in many of its key financial instruments which were triggered when its stock dropped below a certain price. This mechanism meant that Enron had certain attributes analogous to a classic Ponzi scheme. The market bid up Enron's stock based on speculative profits, and the run up in stock prices was used to finance activities that Enron engaged in to report further profits.

When it became inevitable that the severe drop in natural gas prices in mid-to-late 2001 meant that Enron could not sustain the stock market's prior expectations of its profits that had caused the rise in Enron's stock during the 1998-2000 period, the Enron executives continued to claim that all was well with the ship. However, the damage caused by the declining gas prices in mid-to-late 2001 was exacerbated by the publicity of the Fastow activities released in October early 2001.

The market reaction to these disclosures helped to push the the stock price down below the critical threshold in the financial instruments, which then caused the ultimate collapse. Fastow's activities were not the cause of the Enron collapse, but the publicity about them came at a time that the market was already beginning to get leary about Enron, and that publicity in October 2001 certainly hastened the ultimate collapse that occurred when the cross default provisions were activated in late 2001.

Had the Enron business model been sound as Skilling and Lay had led the public to believe, the Fastow activities by themselves would not have caused the company to go under. The question is whether Skilling and Lay knew that the Enron business model was not as robust as they portrayed, or culpably continued to promote the stock while purposely avoided apprising themselves of this fact.

This is why the evidence of the attempt by Skilling in late 2000 to mask the large profits made by the Enron trading operation, which were inherently speculative, by attributing them to the retail operations, which would be considered by investors to be more stable and recurring, was a key aspect of the prosecution's case. This activity did not change Enron's reported earnings at all, but it prevented investors from getting a clear and accurate understanding of Enron's finances.

"well, think of the proverbial tissue paper dog chasing an asbestos cat through the ninth circle of hell."

Given that the 9th circle is frozen, he might stand a chance :)

That isn't how I read count one of the indictment; I read it as saying that they improperly held reserves against their profits in the California energy market, thus artificially reducing their profits in order to disguise the volatility of their earnings, and create an earnings slush fund which they could tap to smooth net income by deciding that they didn't need to hold so many reserves after all.

Again, I'm not saying they did nothing wrong, or that stockholders were not deceived as to the nature of Enron's business operations. I am only saying that the public belief that the Fastow scandal uncovered a massive scheme to cover up losses is incorrect. There don't seem to have been losses; there seems, by the government case, to have been excess volatility, which caused a credit crunch when revealed, pushing the firm into bankruptcy.

Skilling and Lay's contention is that there was not excess volatility, that the reserves were appropriate given the shaky finances of their counterparts to the trades, and that the other business were both less material to the balance sheet, and less volatile, than the prosecution represents. I haven't paid enough attention to judge the truth of this.

If the Feds want to charge and convict you (of anything they dream up), they can, and there's nothing you can do to stop them. You can only hope that you never cross their radar screen.

I'm a lawyer, and I still don't know what Michael Milken did that was illegal--the Feds made up charges so he could plead guilty to satisfy the court of public opinion. Even though Rudy was a great mayor of New York, I still fault him for generating crimes where they didn't exist (as does Spitzer) simply to get publicity.

"Skilling and Lay were no more likely to be acquitted than a black man accused of raping a white woman in Alabama in 1940."

And we'd also be no more likely to read an article written by an Economist editor which asserted guilt for a couple of yesterday's economic heroes. Too many fawning stories written about Enron, I guess.

Johnathan - should we just scrap the Securities Laws of 1933 and 1934, then? Why bother to require audited financials, just say 'caveat emptor' and be done with it?

That should work swimmingly, as it did before 1933 and 1934.

Novisad:"the severe drop in natural gas prices in mid-to-late 2001"

I didn't know that. I've wasted dozens of hours reading both the major books on Enron and countless newspaper and magazine articles (and blog posts)on the topic and I can't remember anyone pointing that out as a contributing factor to Enron's collapse. Sure enough, the front month natural gas contract closed above $9 at the end of 2000; it approached $2 by October 2001. I'm with Megan; the financial journalism on this topic was horrible. Or maybe I am just really inattentive.

You guys are all overcomplicating this. Executive management of a large public corporation, including it's Board of Directors, has a moral/legal responsibility to design a business model and accounting practices that are transparent to investors, and disclose major risks to investors, including the risk of being too reliant on energy price fluctuations. Ignorance is no excuse. In fact it's a totally lame one considering how these crooks pocketed mondo cash playing the market fluctuations. Get a grip. A monkey could have/would have/should have found them guilty. They ARE guilty. Getting lost in the details of these arguments is like listening to a murderer say he was temporarily insane, incompetent about killing, and unaware of what he was doing.

I once worked for a CEO and CFO who were both pseudo-born-again Christian types. They ran the company into the ground with poor decisions, and tried to cover it up to employees, the Board, bankers and investors, buy faking sales orders at month-end to hit "the numbers", illegally sending out shipments for said orders to run around in trucks for a week, only to bring them back as "returned shipments" after the month-end financials were done. Total crooks, right? Well when all this was found out, they played dumb, played the religion card, "I'm such a good person of God I'd never do that", and there was no shortage of confused, disapointed people around to "buy" this lame coverup. Meanwhile, lots of good staff people lost their jobs and a company died. Personally, I'd have hung them both myself if I could have. Not just for the criminality of it, but also for the "feigned religion" con. This crap happens every day somewhere. You've got good execs out there, and you have predatory execs. These Enron guys were predatory.

Thank you Thomas. Now would you, or anyone else, like to step up and point to the statute that was actually violated? I'm not saying there isn't one, I'm saying I don't know what it is, and you probably don't, either.

It is extremely sleazy to (for instance) cheat on your wife. You have a moral obligation to be honest with her (and with "other" woman, too). But it is not illegal to be sleazy (except in those few states that criminalize fornication and adultery). You might think, say, Bill Clinton and Rudy Guliani are pretty sleazy guys; that doesn't mean they belong in prison.

Thomas - What the executives you worked for did was clearly criminal. It's called fraud. What Jane's saying is that it is unclear from the record that what Lay and Skilling did falls into that category.

Take the recent example of the hedge fund Amaranth. Amaranth's energy manager made huge bets on the future price of natural gas. For months, those bets were hugely profitable and Amaranth made billions of dollars. Then, within a week's time, the market moved against Amaranth and the fund lost more than $5 billion -- more than wiping out all its previous profits. This was clearly a bad management move on behalf of the Amaranth manager and his supervisors. The question is was any of this criminal? So far, it appears not.

In the case of Enron, the bankruptcy may have been brought about more by the company making bad bets in the energy markets than by any underlying criminal activity. (In the case of Fastow, there clearly was criminal activity. In the case of Skilling and Lay, it's unclear. That is, until the very end when it appears that Lay and Skilling said some things on a call with financial analysts that were, at best, puffery.) The SPEs gave Enron too much ability to "manage" its income and Enron appears to have taken full advantage of this ability. However, recall that the financial markets were demanding and rewarding this effort from corporations. The problem is that while the SPEs gave a lot of flexibility in managing income from one quarter to the next, but they could dramatically restrict such flexibility long term. As energy prices started to fall, it became apparent to analysts that Enron would soon be forced to make huge corrections to it's estimates of the income to be earned from its contracts to deliver energy (income that had already been recognized through the use of the SPEs). A run on Ernon's stock ensued and Enron was dead. All of that could have happened with no criminal activity at all.

Rob Lyman, re SarbOx: No kidding! Far too many people appear to think that the mere existence of a problem means that a solution can't possibly make things worse...

You don't have to read much of this thread to see who's cheering on those prosecutors. "I know Eff-all about the crime or the facts, but doggone it, they're rich and they're guilty!"

Oh my. Rob and David: The law that was broken: Yeah I know which laws very well. I was pretty close to it all. I sued. You can look it up, and you will know it then too. It varies by state, anyway.

Fund managers are always suspect too: As a fund manager (or any variety of insider trader/market manipulator) you can make millions/billions by having your sister or aunt wage huge short-side options on fund-intensive stocks with YOUR own money, as you the fund manager intentionally move the stocks way up with your song and dance to gullible institutional investors who buy-in BIG, to intentionally send it to the moon just before the collapse you knew would happen. This happens every single day. IF you the fund manager then loses your job, so what? You already made your $20 million or more. You have no worries. You people are so gullible. Business schools are turning out expert market manipulators at a crazy rate. You'll see one day. I'm a capitalist not an anarchist.

Thomas, I don't think anyone has said frauds are not committed. The question is whether frauds (or some other crime) were committed by Lay and Skilling. You've claimed to know they broke the law and you know which law was broken. Fine. All Rob's asking is for you to clearly state which law was broken.

Thomas,

IAAL, although hardly a securities expert.

The entire US Code is here for your convenience.

Do provide a link to the law you know "very well." Or just a cite (I have Lexis and Westlaw at my fingertips). Or just a vague allusion.

Oh That's funny, Rob Lyman. Heh. You "law" pukes have everything at your fingertips except common sense, don't you? To you it's all a challenge to see what you can convolute to disprove common sense and decency. That's what they teach in law school, isn't it? But have at it, buddy. I've found a way to double-cross you double-crossers, and it's working. There are decent law people out there. Not many, mind you. But enough of them to expose the defenders of the predators, along with the predators themselves. It doesn't matter to me WHATEVER you may have at your pencil-thin, manicured fingertips.

I asked a fairly simple question, entirely in good faith.

I guess I have my answer.

Enron had fake profits. They were going down, so they rigged the California energy market to get real profits. California's government prevented them from making as much profit as they needed to bail out, and they went under.
Now the way that California's government did this infuriated me for personal reasons, but this is what they did. Putting on price caps caused blackouts when Enron played chicken with the California government, which is bad enough, but what they did to the solar energy Luz project...

"Good faith" to a lawyer who defends white collar criminals is "killer instinct". One precident debate, or statute debate leads to a thousand more, all on somebody's dime.

The Power's report details some of Enron's accounting. It said this in the executive summary:

"This personal enrichment of Enron employees, however, was merely one aspect
of a deeper and more serious problem. These partnerships---Chewco, LJM1, and
LJM2--were used by Enron Management to enter into transactions that it could not, or
would not, do with unrelated commercial entities. Many of the most significant
transactions apparently were designed to accomplish favorable financial statement
results, not to achieve bonafide economic objectives or to transfer risk. Some
transactions were designed so that, had they followed applicable accounting rules, Enron
could have kept assets and liabilities (especially debt) off of its balance sheet; but the
transactions did not follow those rules.

Other transactions were implemented--improperly, we are informed by our
accounting advisors--to offset losses. They allowed Enron to conceal ffrom the market
very large losses resulting from Enron's merchant investments by creating an appearance
that those investments were hedged--that is, that a third party was obligated to pay Enron
the amount of those losses---when in fact that third party was simply an entity in which
only Enron had a substantial economic stake. We believe these transactions resulted in
Enron reporting earnings from the third quarter of 2000 through the third quarter of 2001
that were almost $1 billion higher than should have been reported."

So much for Jane Galt's contentions that the SPEs were set up for legitimate purposes and that Enron's reported earnings were solid.

Jane --

You "find it disturbing that the main theory held by most people . . . that Skilling hid massive losses by fraud, which when unveiled brought the company down . . . seems to be contradicted by the indictment." You are correct that part of Count 1 alleges concealing volatile earnings.

Did you read the other parts of Count 1? Like where it alleges "concealing large losses, 'write downs,' and other negative information concerning its business units," and "masking the true magnitude of debt and other obligations required to keep the company's varied and often unsuccessfull business ventures afloat"? (p. 7.) That doesn't exactly "contradict" the main theory held by most people.

The earnings-smoothing was one example of something the jury found Lay and Skilling lied about, but it was one small piece of the case--most of which dealt with the hiding of huge losses.

As for causing Enron's collapse, this earnings-smoothing fraud was not disclosed until long after Enron's collapse, and thus obviously the public's learning of this fact did not cause the collapse. What was disclosed were several off-balance sheet partnerships that, according to Enron's own pre-bankruptcy disclosures, were improperly holding significant losses that should have been on Enron's balance sheet--a.k.a. "hiding massive losses."

Thus, when you say: "the public belief that the Fastow scandal uncovered a massive scheme to cover up losses is incorrect", you are deeply, deeply wrong. This is absolutely, unquestionably what Fastow did. It is also true that Lay and Skilling knew that Fastow was concocting elaborate schemes to cover huge losses that the company was sustaining. This, of course, is not necessarily a crime--if the accounting is correct, it's what's known as structured finance. So the only real question, w/r/t Lay and Skilling's criminal liability, is whether they knew that Fastow's elaborate loss-hiding schemes violated the applicable accounting rules.

On this point, a tempting first response might be, "Well, Skilling and Lay weren't accountants, and these accounting rules were extraordinarily complex, so even if they got it wrong surely they are not criminally liable (as opposed to civilly, or just making a reasonable mistake)." This is an interesting defense, just not one that Skilling and Lay presented much at trial.

One reason they didn't rely on this might be that at least in a few cases it's clear that they did know what the accounting prohibited. For example, Fastow ran several partnerships that made use of special purpose vehicles to remove substantial losses from Enron's balance sheet. Skilling knew this (no question--so did the Board). As an accounting matter (clearly known by Skilling), the losses in these vehicles could properly be kept off Enron's balance sheet only if Fastow truly bore the risk of loss. One thing that would be prohibited, for example, was an explicit oral (and certainly written) guarantee by Enron to Fastow that he would not lose any money on these deals. It seems clear that Skilling knew about this prohibition--i.e., he knew the accounting would be wrong if such an oral or written guarantee existed. At trial, for example, Skilling did not argue that he knew about oral/written guarantees to Fastow but simply believed, given the complex accounting rules, that those guarantees were permissible. Instead, Skilling testified that he did not know that oral or written guarantees were ever given to Fastow.

So on this issue, the jury was really just asked to decide a rather straightfoward factual question: Did Skilling know about (or himself give) oral or written guarantees given to Fastow that his partnerships would not lose any money? No need to really understand the accounting, the complex securities laws, etc., to make this judgment. Fastow (and others) testified that these guarantees were given and that Skilling knew, and the "Global Galactic" document (that Skilling's lawyers tried to argue was faked after the fact by Fastow) shows this as well. Skilling denied knowing. The jury was just asked to decide whom to believe--which is a classic thing juries do in all sorts of cases, from the simple to the complex, every day. They believed Fastow, not Skilling, and so they found Skilling guilty.

This example also shows why, for at least certain parts of the case, the jury's judgment can be given a fair degree of weight. When you question the jury's ability "in any way" to make an informed decision about guilt or innocence, you are vastly overstating things.

James Shearer, I didn't say that all of their SPEs were valid; only that most of the 150 were. The validity of the other 8 was among the contended facts at trial; Chewco et al were in that smaller group.

The Powers report, which came out in 2002, has been superceded by the government investigation.

PJ, obviously the jury was able to weigh some of the facts in evidence. The question is not whether they were qualified to judge whether or not Skilling was telling the truth when he stated his name; but rather whether they were qualified to judge

a) What accounting problems existed
b) Whether they were in fact illegal at the time
c) How likely Skilling and Lay were to have

i. known about them
ii. known that they were illegal

d) how material those accounting violations were
e) how guilty Skilling and Lay were under the law

The securities lawyers I've talked to say that even in more run-of-the-mill, less emotionally charged and contested trials, the lawyers often have difficulty understanding the underlying facts of the case and relevant law. Moreover, the longer you spend explaining them to the jury, the more the jurors hate you. If you know anything about securities trials, you know about these difficulties.

Let me once again clarify what I am and am not claiming.

I am not claiming that I have any knowlege that Skilling and Lay are innocent.

I am claiming that what happened at Enron is not what most lay people think happened.

That I find it impossible to imagine any circumstances under which they would not have been indicted.

That I find it impossible to believe that the jury was able to deliver a qualified verdict.

And that I find it very disturbing that even after the convictions, I am still hearing multiple, incompatible theories of the case.

In other words, that, unlike in most trials, the fact that Lay and Skilling were indicted and convicted is not very convincing evidence of their guilt. I'm not taking issue with their guilt, only with the process by which belief in their guilt has been generated. I'm a process person. I think it's more important than any individual outcome.

When the process is more important than the result, the process is broken and obsolete, inherently unjust. That's the problem.

Johnathan - should we just scrap the Securities Laws of 1933 and 1934, then? Why bother to require audited financials, just say 'caveat emptor' and be done with it?

That would probably have the net effect of wasting less of investors' money.

Jane Galt said:

"James Shearer, I didn't say that all of their SPEs were valid; only that most of the 150 were. The validity of the other 8 was among the contended facts at trial; Chewco et al were in that smaller group."

Who cares if most of them were valid? Some of them were used in a material way to cook the books.

Jane Galt:

"The Powers report, which came out in 2002, has been superceded by the government investigation."

Are you claiming the government investigation reached different conclusions than the section of the Power's report that I quoted? If not why bring it up especially since you have been claiming at great length that the government investigation could not be trusted?

Another quote from the Power's report showing the bogus nature of Enron's accounting:

"Asset Sales. Enron sold assets to LJM that it wanted to remove from its books.
These transactions often occurred close to the end of financial reporting periods. While
there is nothing improper about such transactions if they actually transfer the risks and
rewards of ownership to the other party, there are substantial questions whether any such
transfer occurred in some of the sales to LJM.

Near the end of the third and fourth quarters of 1999, Enron sold interests in seven
assets to LJM1 and LJM2. These transactions appeared consistent with the stated
purpose of allowing Fastow to participate in the partnerships--the transactions were done
quickly, and permitted Enron to remove the assets from its balance sheet and record a
gain in some cases. However, events that occurred after the sales call into question the
legitimacy of the sales. In particular: (1) Enron bought back five of the seven assets after
the close of the financial reporting period, in some cases within a matter of months; (2)
the LJM partnerships made a profit on every transaction, even when the asset it had
purchased appears to have declined in market value; and (3) according to a presentation
Fastow made to the Board's Finance Committee, those transactions generated, directly or
indirectly, "earnings" to Enron of $229 million in the second half of 1999 (apparently
including one hedging transaction). (The details of the transactions are discussed in
Section VI of the Report.) Although we have not been able to confirm Fastow's
calculation, Enron's reported earnings for that period were $570 million Ore-tax) and
$549 million (after-tax).

We have identified some evidence that, in three of these transactions where Enron
ultimately bought back LJM's interest, Enron had agreed in advance to protect the LJM
partnerships against loss. If this was in fact the case, it was likely inappropriate to treat
the transactions as sales. There also are plausible, more innocent explanations for some
of the repurchases, but a sufficient basis remains for further examination. With respect to
those transactions in which risk apparently did not pass from Enron, the LJM partnerships
functioned as a vehicle to accommodate Enron in the management of its reported
financial results."

"James Shearer, I didn't say that all of their SPEs were valid; only that most of the 150 were. The validity of the other 8 was among the contended facts at trial; Chewco et al were in that smaller group."

Who cares if most of them were valid? Some of them were used in a material way to cook the books.

James, the question isn't just whether 8 of them were used to cook the books, but whether Lay and Skilling knew about it. It would have taken pretty near all their time to have studied all 150 SPEs in sufficient detail to have discovered if underlings were doing something devious and trying to hide it, they would not have had time to run the company. And as I understand it, the only evidence that Lay and Skilling did know about those eight is the testimony of the man who did fiddle the books. That's the testimony of an admitted criminal and liar who got many years taken off his own sentence for implicating others.

markm, how many of the 150 SPE's were material to results of Enron like the SPEs which were bogus? How many had Fastow dealing with himself, an arrangement which in my opinion should never have been permitted at all and which obviously deserved careful scrutiny? I think it is perfectly reasonable for a jury to conclude beyond a reasonable doubt that Enron's accounts could not have been as far off as they were without Skilling and Lay knowing corners were being cut.

In any case the defense argument was that the books were fine not that Skilling and Lay were too stupid to realize that the books were being cooked.

As for Fastow's testimony, John Gotti was sent to prison for life because of the testimony of Sammy "the Bull" Gravano who received 5 years despite having admitted to many murders. People knowledgeable about criminal enterprises tend to be criminals themselves.

how many of the 150 SPE's were material to results of Enron like the SPEs which were bogus?

All 150 SPEs were material to Enron's bottom line.

Dan claims:

"All 150 SPEs were material to Enron's bottom line."

I doubt this. Do you have a source? In any case my claim is the bogus SPEs were clearly more significant to Enron then the average Enron SPE and hence more worthy of management scrutiny.

I don't find the big picture defense in which Skilling and Lay were too busy with bigger things to concern themselves with petty details like billion dollar accounting errors very convincing. In any case it was not the defense presented.

Comments are Closed.