Enron scams fill 2,000 pages

The scale of the deception at Enron, the bankrupt energy firm, was further exposed yesterday in a 2,000 page report detailing the increasingly desperate measures the company used to hide its true financial position.

The second in a series of reports from court-appointed examiner Neal Batson disclosed that Enron transferred as much as $5bn of assets off balance sheet through sham transactions as part of the attempt to manipulate its financial statements. The disclosure sets the stage for a bitter fight in the bankruptcy court to determine which assets creditors have a claim over.

With every new examination of activities at Enron, the scale of the alleged fraud and corruption grows. The latest report from Mr Batson is no exception.

Andrew Fastow, the former finance chief awaiting trial on fraud charges, creamed "at least $60.6m" from arranging transactions designed to prop up earnings between Enron and its special purpose entities, the report claims. Previous estimates were that Mr Fastow had pocketed $45m from the deals.

The report also details the yawning gaps between Enron's reported numbers and its actual state. In 2000, Enron reported income of $979m, of which 96 per cent was generated from six "accounting techniques" used by the company to give the appearance that it was making money.

Enron reported income of $352m from the sale of assets to SPEs, which had taken loans to pay for the acquisitions - loans that Enron was liable to repay. Debt that year was reported to be $10.2bn when in reality it was $22.1bn. Cash flow should have been a negative $154m instead of the reported $3bn in the black.

"Enron so engineered its reported financial position and results of operations that its financial statements bore little resemblance to its actual financial condition or performance," Mr Batson says.

He concludes that the Enron estate could seek $74m from former chairman Kenneth Lay, who borrowed the money and repaid it in company shares in the months before it fell into bankruptcy. The estate could also go after $55m in deferred compensation that was handed out as accelerated payment to a number of senior executives in the weeks before Enron collapsed.

One of the accounting techniques, called mark-to-market, was used aggressively by Enron. Assets were carried at their "fair value", a figure that can be estimated by management and was used by Enron to accelerate earnings of new projects which actually were not generating any cash. A deal with Blockbuster to deliver video on demand never got off the ground but Enron recorded a gain of $111m from it.

It ultimately used the accounting method on 35 per cent of its assets so that "a mere 5 per cent fluctuation in the value of these assets would have resulted in a gain or loss of $1.1bn". To mask the fact that the earnings were not "real", the company was forced to come up with schemes to generate cash flow.

One was a 1999 deal codenamed Project Nahanni. Enron, weeks away from the year-end, borrowed $500m in treasury securities from Citibank, sold them immediately and reported the proceeds as operating cash flow. That represented 41 per cent of the total cash flow from operations recognised by Enron in 1999. The firm swiftly repaid the loan without it ever showing up as debt on its financial statement.

Pre-pay transactions were also widely used. Enron would promise delivery of oil or gas contracts in return for an upfront payment designed, according to a memo from Mr Fastow, "to bring cash forward to match earnings". Seven such deals were facilitated by JP Morgan Chase and four by Citibank. A managing director of Citibank affiliate Salomon Smith Barney allegedly described the technique as giving "oomph to earnings".

According to the report, up to $2.1bn in assets had been moved off balance sheet as part of the SPE deals while another $2.9bn was fraudulently shifted out of the company shortly before its bankruptcy filing in December 2001.

A third report from Mr Batson is due in late June.