The latest reports out of Houston indicate that Michael Kopper, the former managing director of Enron Global Finance, will plead guilty to wire fraud and money-laundering charges. If true, Kopper’s plea will mark the first criminal indictment in the landmark investigation of the once-powerful energy company.
Dow Jones Business News reported that Kopper would enter pleas today to single charges of conspiracy to commit wire fraud and money laundering. The Houston Chronicle said he will also surrender $12 million in criminally derived assets.
Kopper’s plea could mean big problems for his former boss, ex-Enron CFO Andrew Fastow. Before resigning in June 2001, Kopper reportedly ran Chewco, one of the special-purpose entities Fastow engineered—allegedly to hide debt from investors and auditors.
The Chewco venture was set up in late 1997 and used to keep more than $700 million in debt, related to various energy investments, off Enron’s books. The Houston energy specialist bought out the Chewco venture in 2001, resulting in a $12.6 million payment to Kopper and his domestic partner, William Dodson.
The Chronicle reported that executives at former Enron auditor Arthur Andersen claimed they learned early last November that Kopper’s domestic partner held a stake in Chewco. And not just any stake, mind you. Apparently Dodson owned part of the 3 percent of the off-balance-sheet partnership that should have been wholly owned by investors unrelated to Enron.
Under U.S. accounting rules, a partnership only qualifies for off-balance-sheet treatment if outside investors hold a 3 percent stake in the entity. Lacking that, an off-balance-sheet partnership must be consolidated.
While Dow Jones could not determine whether Kopper’s plea was attached to an agreement to cooperate with investigators, Bloomberg News reported that Kopper, if he cooperates, would be a valuable witness in building a case against Fastow.
Bloomberg reported that some of the evidence that the Justice Department has already gathered implicating both Kopper and Fastow was made public in June when charges were filed against three former employees of British bank National Westminster Bank Plc. The bank employees were charged with skimming about $7 million from one of the Enron partnerships.
According to Bloomberg, which cited DOJ evidence, Kopper allegedly negotiated with the U.K. bankers to help them buy a piece of another Enron special-purpose entity, called Southampton Place, from NatWest. Fastow and Kopper allegedly then helped the threesome buy the bank’s share of the partnership before a hedging transaction closed.
Bloomberg also reported that when Enron’s board investigated the company’s financial collapse, they found that Kopper earned $10.5 million on a $125,000 investment in Chewco. He also apparently received $2 million in management fees from Chewco, although Enron’s board could not learn “what, if anything, Kopper did to justify the payments.”
Neither Bloomberg nor Dow Jones could get a comment from Kopper or his attorney.
On the Seventh Day, the SEC Rested
A week after the August 14 filing deadline, the Securities and Exchange Commission says it has completed processing CFO and CEO certification statements. The statements are available on the agency’s Web site.
According to the commission, 16 filers were found lacking. Some of the laggards were no surprise: several are currently embroiled in accounting scandals and controversies, including Enron, WorldCom, Adelphia Communications, and Qwest Communications International.
Other companies whose statements didn’t pass muster are—like Enron—in the energy and natural gas sector. Those companies include Dynegy, Mirant, CMS Energy, and Adams Resources & Energy.
But the SEC is also withholding approval of the statements from The LTV Corp., McLeodUSA, TruServ, ACT Manufacturing, Alaska Air Group, Consolidated Freightways, and Gemstar-TV Guide International.
The commission also indicated that the certifications from Hercules Inc.’s CEO and CFO were weak.
In all, some 947 companies are required to file onetime certifications under the SEC’s June order. More than 700 were due in mid-August. The remaining 200 corporations will have to file within 45 days of the end of their most-recent fiscal quarter.
So far, SEC chairman Harvey Pitt seems satisfied with the results of the certification process. “The certification procedures for America’s largest companies have had the desired effect,” he noted in a statement issued on Tuesday. “We wanted assurances that senior corporate executives are taking personal responsibility for their companies’ filings and personally stand behind the accuracy of their companies’ reported numbers.”
Pitt added: “We want CEOs and CFOs to seriously consider the quality of their disclosure. And we want to know in a timely manner where disclosure needed correction and improvement. These objectives were achieved. This has been an important and worthwhile exercise.”
According to a CFO.com poll, about a third of the respondents said the certification requirement would cause them to put more time and effort into assembling their employers’ financial statements.
Now that the SEC is finished with one of its highest-profile regulatory initiatives in years, the agency is not about to take the pressure off corporate executives.
At the SEC’s August 27 meeting, it will reportedly vote on a proposal that would shorten the required time for filing quarterly reports to 30 days from the current 45. The time to produce annual reports would be reduced to 60 days from the current 90. Companies with a market value of less than $72 million will not be held to the new standard.
In a similar vein, companies with revenues under $1.2 billion were not required to file certified financial statements with the SEC by the August 14 deadline. Under the recently passed Sarbanes-Oxley Act, however, CFOs and CEOs from all publicly traded companies in the United States—and all foreign companies whose shares are traded in the United States—will also have to certify their statements on a regular basis.
That requirement has angered some executives in Europe. German carmaker Porsche AG, for example, has scratched its plans to list its shares on the New York Stock Exchange because of the certification rules, Bloomberg News reported.
Porsche was booted from the Frankfurt exchange’s index of midsize companies because it refused to publish quarterly reports. Non-U.S. companies don’t have to report earnings quarterly under NYSE rules.
Porsche CEO Wendelin Wiedeking has said that quarterly reports are too costly and don’t accurately reflect the state of a business. Instead, the maker of really fast cars publishes financial reports at a more-leisurely pace: twice a year.
Depending on the number of shares a company has, a NYSE listing can cost from $150,000 to $250,000. According to Bloomberg, that’s roughly half the $400,000 retail price of a Carrera GT.
Porsche isn’t the only German company to register its dissatisfaction with the new regulatory regime in the United States. BDI Industry Association, a German trade group, has sent a letter to the SEC expressing its concerns that some of the U.S.’s new auditor-independence provisions may run afoul of German laws requiring supervisory boards to include employee representatives (see “Help Wanted: Five Clean Accountants”).
Some of the best-known names in German business have chosen not to sign the letter, however. CEOs at Deutsche Bank, Siemens, Schering, and Celanese all decided against signing.
TheFinancial Times also reported that a budding campaign by executives from several non-U.S. companies to protest the new rules has largely fizzled out.
Some 1,344 cross-border businesses are covered by the new rules, and U.K. regulators were prepared to seek exemptions for such British companies as oil giant BP Plc and the advertising holding company WPP Group Plc. But authorities in the United Kingdom apparently abandoned the idea, and both BP and WPP indicated they will certify their books.
Nevertheless, the Institute of Directors, a London-based trade association of corporate directors, is preparing a campaign against the passage in Britain of regulations mirroring corporate-governance rules recently mandated in the United States.
The Financial Times recently quoted George Cox, the group’s director general, saying, “There is no chance of a scandal like Enron Corp. or WorldCom Inc. happening here.”
- The bad news just got worse for some former Enron employees. UBS Warburg, the investment bank that bought Enron’s energy-trading operations, will cut 130 jobs (25 percent of the total workforce) from its Houston-based trading operation, the Associated Press reported.
Ever since Enron collapsed, trading volume in the energy markets has gone into a tailspin. The AP reported that transaction volume in the energy market is down 70 percent from a year ago. The sagging business has hurt almost all of the companies in that market. Williams, El Paso, and Dynegy have already laid off some of their employees.
- Harvey Kapnick, Arthur Andersen’s chairman and chief executive in the 1970s, passed away at his home near Naples, Florida, late last week, the AP reported. Kapnick surrendered the Andersen CEO post in 1979 when the firm’s partners rejected his proposal to split Andersen’s consulting and auditing practices. Kapnick, who was 77 when he died, was also credited with establishing the first independent group to monitor an accounting firm with the creation of the Arthur Andersen & Co. Public Review Board, although the panel was later disbanded.
- Management at Conseco Inc., the struggling insurance company, is negotiating with an ad hoc committee of bondholders to restructure the company’s $6.5 billion in debt, Bloomberg News reported. The company is likely to ask the bondholders to exchange their debt for equity. That would lower Conseco’s interest payments and allow the company’s management to concentrate on building its business. Earlier this month, management at Conseco indicated the insurer would miss some of its interest payments and asked lenders to restructure the company’s debt.