As CFO.com reported last week, Andrew Fastow, CFO of Enron Corp., has been replaced by Jeff McMahon, head of the energy producer’s industrial markets group and former corporate treasurer of its parent company. McMahon joined Enron in 1994 and spent three years in the London office as CFO of the company’s European operations. Upon returning to the United States, McMahon assumed the post of EVP of finance and treasurer for Enron Corp. In 2000 he was named president and COO of Enron Net Works, where he focused on E-commerce activities.
Fastow’s departure comes in the wake of an SEC inquiry at Enron — an inquiry that has touched off shareholder lawsuits against the company. Reportedly, the SEC is looking into off-balance-sheet transactions that Fastow allegedly conducted with two limited partnerships. In particular, the commission appears to be interested in LJM, a private equity fund formed by Fastow. According to Enron, LJM was a source of equity financing for the company’s projects and investments. The likely thrust of the SEC inquiry: whether related party transactions with LJM constituted a conflict of interest for the finance chief.
Fastow has denied any wrongdoing. Early last week, management at Enron noted that both internal and external auditors and attorneys reviewed the related party arrangements, and that the company’s board was fully informed of — and approved — the arrangements. Management also pointed out that the third-party arrangements were disclosed in the company’s SEC filings.
Nevertheless, on Wednesday, following a big slide in the company’s share price, Enron subbed McMahon in for Fastow. “In my continued discussions with the financial community, it became clear to me that restoring investor confidence would require us to replace Andy as CFO,” said Kenneth Lay, Enron’s chairman and chief executive, in a statement.
The ousting of its chief financial officer, and the resignation of chief executive Jeff Skilling in early August (after just six months on the job), have not helped restore stability to Enron. The company’s stock market performance has been abysmal of late. Indeed, after peaking at $90.75 per share in the summer of 2000, Enron’s share price tumbled to $16.41 last week — its lowest point in six years. Shareholders have endured a $13 billion plunge in market capitalization since Enron disclosed a $638 million loss in the third quarter.
What’s more, company management was also forced to write down shareholder equity by $1.2 billion following the termination of a structured finance vehicle in which LJM was an investor. The hedging vehicle was established to mitigate volatility associated with some of Enron’s merchant investments, including a stake in The New Power Company. In September the company terminated those vehicles, resulting in the reduction of shareholders’ equity.
The write-down of shareholder equity probably cost Fastow his job, although Enron terms his departure “a leave of absence.” Either way, the $1.2 billion write- down will not sit well with investors, who have reportedly been selling off their Enron shares in droves over the past few days. Analysts also appear to be getting increasingly disenchanted with Enron. According to a recent report in Reuters, some Wall Street analysts have become frustrated with the tumult at the company, as well as difficulties in deciphering Enron’s earnings statements. A number of analysts told Reuters that Fastow’s replacement was a step in the right direction, but was by no means a panacea for Enron’s ills.