Federal prosecutors have successfully prosecuted Enron CEOs Jeff Skilling and Kenneth Lay for what the grand jury’s indictment described as "a wide-ranging scheme to deceive the investing public … about the true performance of Enron’s businesses."
While Skilling, Lay, Chief Financial Officer Andrew Fastow, and other Enron "conspirators" have also been found guilty of fraud charges, one key accomplice has gotten a pass: federal and state government.
Without federal subsidies and complex regulations, a number of Enron’s crooked deals never could have happened. Indeed, many of the episodes highlighted in the grand jury’s 2004 indictment of Lay and Skilling (which led to last month’s conviction) have Washington’s fingerprints all over them.
The first specific charge in the federal indictment under which Skilling and Lay were convicted last month relates to the "Use of special purpose entities [SPEs] … to manipulate financial results." Specifically, the indictment discusses a bungled power-and-pipeline project in Cuiaba, Brazil — a deal whereby Enron simultaneously hid large losses while enriching Fastow personally.
While the Cuiaba project was "straining to meet budget targets" in late 1999, the Overseas Private Investment Corporation (OPIC), a federal subsidy agency, extended a $200-million subsidy credit to Enron to help it build a pipeline to the plant.
Enron prosecutors have also focused on an arrangement in which Enron sold Nigerian barges to Merrill Lynch at the end of 1999 and bought them back a few months later. The prosecutors claim that this deal was a fraud to conceal debt and inflate assets.
Enron might never have been in Nigeria if it were not for the U.S. government. Houston Mayor Lee Brown, President Bill Clinton and Commerce Secretary William Daley all visited Nigeria in the late 1990s to press the cause of American companies, including Enron. Once again, OPIC financed the project.
An Enron SPE named JEDI also surfaces in the indictment. JEDI is a reference to Star Wars, but it also stands for Joint Energy Development Initiative. Enron’s 50-50 partner in the $500-million JEDI was the California Public Employee Retirement System (CalPERS), an agency of the state government.
OPIC’s and CalPERS’s involvement demonstrate that federal and state government programs were crucial to the Enron projects that the jury found were part of a deliberate scheme to defraud investors. But the government’s role in the Enron bubble runs deeper.
Enron used an accounting method called "mark-to-market," which allowed the company more leeway in determining its profits for any year. Basically, the mark-to-market method allowed Enron to count the entire future worth of a business deal as revenue in the year the deal was signed. For example, if Enron signed a 30-year power-purchase agreement with the government of Brazil in year one, Enron’s accountants would estimate how much money the company would make over the 30-year agreement, count the contract as an asset, and book the 30-year estimate as a profit in year one.
This was an odd accounting method for an energy company to use — and investors and analysts might have looked askance at it — but the SEC in 1992 explicitly approved Enron’s use of mark-to-market. To any analyst who doubted whether mark-to-market was a legitimate way for Enron to do its books Skilling or Lay could simply say: The SEC says its fine.
In this way, the SEC served one of the functions for which politicians of both parties value it: It boosted investor confidence. Of course, boosting investor confidence was precisely one of Skilling’s and Lay’s crimes.
Attorneys for Skilling and Lay have promised to appeal. Sentencing will be September 11, and both men could effectively be sentenced to life in prison.
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