Enron Discloses SEC Inquiry

Information Request Involves Ties to Money-Losing Partnerships

By Peter Behr, Staff Writer
The Washington Post

October 23, 2001

Enron Corp. shares sank more than 20 percent yesterday after the Houston energy company disclosed a Securities and Exchange Commission request for information about Enron's ties to outside investment partnerships set up by the company's chief financial officer.

The SEC would not comment on its action, which Enron spokesman Mark Palmer called an "informal inquiry," not an investigation. "We welcome this request," said Kenneth L. Lay, chairman and chief executive of the Houston-based company.

But the announcement jarred investors' confidence in the giant energy-trading company, already hurt by the unexpected resignation of chief executive Jeffrey K. Skilling in August, and heavy losses from investments in broadband Internet and other technology ventures.

"A lot of people threw in the towel today," said Anatol Feygin, an analyst with J.P. Morgan in New York.

The SEC request was made privately last Wednesday, the day after Enron reported a $1 billion write-off of investment losses and restructuring charges from unsuccessful technology ventures and other operations. The write-offs left Enron with a $618 million loss in the third quarter (84 cents a share).

The Wall Street Journal reported last week that $35 million of the write-off was tied to losses at limited partnerships established by Enron's chief financial officer, Andrew Fastow, and run by him until July.

Enron told investment analysts last week that it had repurchased 55 million shares of its stock held by the partnerships that Fastow had directed, reducing shareholder equity by $1.2 billion.

According to the Wall Street Journal, Fastow set up several investment partnerships with the approval of Enron's board. The partnerships engaged in billions of dollars in complex financial transactions involving Enron and made major investments in power plants and other assets alongside Enron.

An Enron shareholder has filed suit in Texas state court alleging that Enron's board violated its duty to the company by permitting the chief financial officer to engage in the outside transactions that allegedly earned millions of dollars in fees for himself and other investors in the partnerships. What Enron received from the relationships is not clear.

Feygin said that the company had informed analysts about the limited partnerships, which offered Enron a way to take positions in strategic but uncertain technology ventures without detailing the outcomes in its public financial statements.

"In hindsight, that was an error in judgment. I don't think it was an error in principle," the analyst said.

Enron could have revealed the SEC inquiry last week but did not disclose it until yesterday, and for many investors, that was the last straw, Feygin said.

The stock closed yesterday at $20.65, down $5.40, as 36 million shares changed hands.

Staff researcher Richard Drezen contributed to this report.

2001 The Washington Post Company