Updated from 11:48 a.m. EST
was never much more than a mirage.
A 2,100-page report filed late Wednesday by the special examiner in the Enron bankruptcy reveals that in 2000 -- the year Enron's stock peaked at $90 a share -- the company generated nearly all its income through "financial engineering," in a maze of deals that were put together by some of Wall Street's biggest investment firms.
In the report, Atlanta attorney Neal Batson found that without these so-called structured-finance deals -- many of which violated standard accounting rules and were used to report earnings Enron hadn't achieved -- the energy-trading firm actually earned $42.3 million in 2000. Back in 2000, Enron had reported earning $936.7 million.
The Batson report had been a much-anticipated document because it is the most exhaustive review of the dozens of off-balance-sheet transactions Enron used to juice its earnings and bring about the most infamous corporate accounting scandal in history.
The report said that the structured-finance transactions also were used to improperly transfer more than $11 billion in debt off Enron's balance sheet -- a move that enabled Enron to report just $10 billion in debt rather than the $22 billion in debt it actually was carrying. The deception enabled Enron to paint a false picture for investors and help the Houston-based company maintain its lofty credit rating.
But anyone expecting the report to point a finger at the Wall Street firms that put together these deals will be disappointed. While the report discusses the role that banks like
J.P. Morgan Chase
Credit Suisse First Boston
had in arranging these deals, it doesn't seek to lay blame at their doorsteps.
That blame game could come in a subsequent report Batson is expected to file later this year. And in preparation for that report, Batson has begun serving subpoenas on individual Wall Street bankers, seeking their testimony.
First on the hot seat will be a group of seven investment bankers from CSFB, a division of
Credit Suisse Group
. Batson, on the same day he filed his report, served a subpoena seeking to take testimony from those bankers. One of the bankers Batson seeks to question is Laurence Nath, the head of CSFB's structured finance group, which helped put together two of Enron's biggest off-balance sheet entities: Whitewing and Osprey. The Batson report devotes more than 400 pages of analysis to these two off-balance sheet deals that sold billions of dollars in bonds to institutional investors.
Nath and his team of bankers had worked on most of these deals while they were at
Donaldson Lufkin & Jenrette
, a firm that CSFB acquired in 2000. Nath also was one of a dozen CSFB investment bankers who invested $1 million of their own money into a venture called OA Investments -- a deal that Nath and his associates specifically arranged for LJM2, the $394 million off-balance sheet partnership run by Andrew Fastow, the former Enron chief financial officer whose been indicted for fraud in the Enron mess.
Batson also seeks to compel testimony from CSFB energy analyst Curt Launer, who was one of the last Wall Street analysts to maintain a "buy'' recommendation on Enron's stock. Launer also was one of the more bullish analysts on
The New Power Company
, an Enron spin-off that CSFB took public in November 2000 and since has followed Enron into bankruptcy.
CSFB on Thursday downplayed the subpoena. A bank spokesman said that Batson is expected to eventually seek testimony from individual bankers at other Wall Street firms as part of his inquiry.
"The examiner has informed CSFB that he intends to take testimony from eight investment banks including CSFB and we have and will continue to cooperate with his investigation," said Pen Pendleton, a CSFB spokesman. "This is merely a procedural matter."
The Batson reports (the examiner filed a 158-report earlier last year) are expected to play a critical role in the bankruptcy case, in helping to decide which creditors are entitled to Enron's remaining assets.
The latest report states as much as $5 billion in assets may have been improperly moved off Enron's balance sheet and into an array of special purpose entities and other structured financing devices. It concludes those assets should be returned to Enron to be divided up between the company and its creditors, which include many of the same Wall Street banks that put those deals together in the first place.
But more important, the series of reports will provide a roadmap for Enron's beleaguered shareholders in the pending class action suit in a Texas federal court. Those shareholders are seeking to hold Enron's bankers accountable for some of the $20 billion in damages that they seek. In December, the judge in the class action dealt a blow to Wall Street when she refused to dismiss the shareholders' fraud claims against the investment banks.
Meanwhile, the Batson report's analysis of Enron's structured finance deals appears destined to become a must read for anyone seeking to understand just how Enron managed to pull the wool over so many people's eyes. The examiner found that most of Enron's deceptive structured finance deals included an assortment of tax shelters, prepaid oil and gas contracts, off-balance sheet trusts and deals involving Fastow's LJM2 partnership.
Some of the deals discussed in the Batson report are ones that should be familiar to an investors whose been following the Enron saga. The report, for instance, spends nearly 200 pages discussing the prepaid oil and gas deals that Citigroup and J.P. Morgan arranged for Enron. Those transactions were the subject of a well-publicized Senate hearing last summer and a bitter court battle between J.P. Morgan and 11 insurance companies.