Thursday, 22 August, 2002, 16:59 GMT 17:59 UK

Enron scandal at-a-glance (BBC News)

The Enron scandal has far-reaching political and financial implications. In just 15 years, Enron grew from nowhere to be America's seventh largest company, employing 21,000 staff in more than 40 countries. But the firm's success turned out to have involved an elaborate scam. Enron lied about its profits and stands accused of a range of shady dealings, including concealing debts so they didn't show up in the company's accounts. As the depth of the deception unfolded, investors and creditors retreated, forcing the firm into Chapter 11 bankruptcy in December. More than six months after a criminal inquiry was announced, the guilty parties have still not been brought to justice. The investigators A chorus of outraged investors, employees, pensionholders and politicians are demanding to know why Enron's failings were not spotted earlier. And the US Justice Department is thought to be trying to charge several executives for fraud and money laundering. Prosecutors have come to a deal with one insider, Michael Kopper, who will plead guilty and spill the beans about Enron's murky finances. There is no date for a trial yet. There has already been a far-reaching investigation into the scandal by a number of congressional committees. Three key players appeared involuntarily and then refused to speak in order to avoid incriminating themselves: Andrew Fastow: Former chief financial officer, sacked as the scandal unfolded, and alleged author of the deceptive accounting practices. Kenneth Lay: Enron's former chief executive and chairman since 1986 refused to testify at the last moment after saying he had been prejudged. David Duncan: Enron's chief auditor at Andersen who shredded key documents relating to the case. It was his job to check Enron's accounts. Three senior executives did testify: Joseph Berardino: Andersen's chief executive, vigorously defended his firm's role in the affair. Jeffrey Skilling: Enron's chief executive in the first half of 2001 denied knowing that anything was wrong at the firm Sherron Watkins: Enron employee and "whistleblower" of the scandal. She claimed that Ken Lay was 'duped' and placed the blame on Jeffrey Skilling and Andrew Fastow. In line for a sell-off While investigations continue, Enron has sought to salvage its business by spinning off various assets. It has filed for Chapter 11 bankruptcy, allowing it to reorganise while protected from creditors. Former chief executive and chairman Kenneth Lay has resigned, and restructuring expert Stephen Cooper has been brought in as interim chief executive. Enron's core business, the energy trading arm, has been tied up in a complex deal with UBS Warburg. The bank has not paid for the trading unit, but will share some of the profits with Enron. Centrica, part of the former British Gas, has bought Enron's European retail arm for 96.4m. Dynegy, a smaller rival, has won a key pipeline in the US after merger talks fell through. The pipeline was then resold to Warren Buffet.

 The power project in India's Maharashtra state - the biggest foreign investment project in India - is still for sale. In line for reform That Enron's false accounting was not spotted sooner has prompted the accounting industry to take a hard look at itself. Hundreds of US firms which used so-called aggressive accounting methods to keep debts or one-off charges away from the headline figures have been affected. And Andersen, the former auditing giant, has collapsed after being found guilty of deliberately destroying evidence of its relationship with Enron. President George W Bush has passed a tough new bill aimed at cracking down on corporate fraud. And he has also ordered a review of US pension regulations, after Enron employees lost billions of dollars because their pensions scheme was heavily invested in Enron's own stock. Other issues earmarked for attention by reformers include: The role of business funds in political campaigning. The extent of energy companies' influence on national energy policy. Potential conflicts of interest between consultancy and auditing work. The need for tighter regulation on financial derivatives trading. Political implications The scandal has also entered the political realm, because of Enron's close links with the White House. Enron provided millions of dollars to finance Mr Bush's 2000 election campaign. Mr Bush was a personal friend of Mr Lay, but has been quick to distance himself from any involvement with the firm. It has also emerged that Mr Lay called two US cabinet officers before the company filed for bankruptcy late last year. And the US Treasury Department has said one of its officials felt he was asked to help Enron last year by company president Lawrence Whalley. Enron executives also met Vice President Dick Cheney and his energy task force several times to discuss the administration's energy plan. Despite much mud slinging, there is no implication of guilt as yet. UK fallout The British political repercussions of the Enron collapse centre around whether Labour's sponsorship from the company led to a change in government energy policy. Downing Street has dismissed allegations that the UK government is "enveloped in sleaze" over its links with Enron. The Conservatives and Liberal Democrats are demanding an independent inquiry into what they say could be an affair about cash-foraccess. Labour's relationship with Enron's accountants, Andersen, has also raised questions, especially as the firm was taken off the unofficial blacklist for government work, where it had been placed after the De Lorean car scandal in the early 1980s. The peer, a former Conservative energy minister, joined Enron as a non-executive director in 1994 and sat on the corporation's audit committee. Investigators say they do not believe Lord Wakeham was party to any fraud, but he could still face lawsuits from those who accuse him of failing to make public concerns about the energy giant.

Lehman Brothers' 'Repo 105' Accounting Scandal

Accounting Gimmicks or Outright Fraud?
By Adam Sharp Monday, March 15th, 2010 (www.wealthdaily.com)

Nearly 18 months after the collapse of Lehman Brothers, it looks like we might finally get some answers. The long-awaited bankruptcy examiner's report came out Friday and it's a whopper clocking in at 2200 pages. The examiner looked at 10 million emails and 20 million documents in the case. The financial world is still digesting the report, but the first scandal is already emerging. The biggest revelation so far is that Lehman was cooking their books since at least 2007. In the final quarter before filing bankruptcy, accounting tricks boosted their balance sheet by $50 billion. Let's Get Some Lipstick on This Pig Insiders called the scheme a "Repo 105." And let me tell ya, Lehman took a page straight out of Enron's playbook with this one. Here's how it worked: Lehman entered into repurchase agreements with banks in the Cayman Islands. Under the deal, Lehman would "sell" toxic assets to the other bank with the understanding that they would buy them back in a short time. The trick made Lehman Brothers look much healthier on paper, at least. These guys were desperate to fool investors and credit rating agencies. They had screwed up on a truly collosal scale, and lined their pockets all the while. If (or when) the truth got out, executives knew their careers and reputations would be at stake. But by engaging in this kind of book-cooking to cover it up, they could end up behind bars. Banks use similar repo agreements all the time. But they mark them on the books as loans, because that's what they are. Lehman marked them as sales. That might not sound like a huge deal, but the effect was that Lehman had $50b more in cash on its books, and $50b less in toxic mortgage assets. This is complicated stuff, and that's not a mistake. Scams like this are complex by design. The goal is to confuse the mark. In this case, we were all the mark. Accounting "Gimmicks," or Just Plain Fraud? The examiner's report tip-toes around the f-word (fraud) using very careful language. Not one mention of fraud in sight. They refer to "gross negligence," but that's not necessarily a crime. And media outlets are reporting on Lehman's accounting "gimmicks," "tricks," or my favorite "shenanigans." Let me get this straight: Lehman intentionally manipulated their accounting with the goal of deceiving investors, rating agencies, and possibly their regulators, leading to the largest corporate bankruptcy in U.S. history... And that's only considered "negligence"? Being negligent means you lack concern or aren't paying attention when you should be. It doesn't mean willfully lying on your financial statements. What Lehman did sounds a whole lot more fraudulent than negligent. And this type of blatant manipulation is being referred to as a gimmick? Ridiculous.

The Repo 105 scandal is just getting started, but already the accusations are flying. Dick Fuld, former CEO, is denying knowledge of the Repo 105 transactions. Not true, according to COO Bart Mcdade. When interviewed by the bankruptcy examiner, Mcdade said, "Fuld knew about the accounting of Repo 105." I'll be surprised if anyone actually goes to jail, but we should get much more information in the coming months. Expect a whole lot of "I do not recall having that conversations" when these guys are hauled up on Capitol Hill this time. One of the biggest questions is this: Were any other banks using similar tricks? And are they still cooking the books today? We don't know yet, but it wouldn't surprise me one bit. These investment banks were notorious for stealing each other's ideas. And the fact that it all took place under Tim Geithner's nose when he was president of the NY Fed is also something that needs to be explored. A Great Call Our own Ian Cooper alerted Wealth Daily readers about a possible Lehman bankruptcy back in June 2008, when the stock was still trading around $30. He warned, "It's only a matter of time before Lehman (LEH) joins the latest list of casualties." He recommended buying October $25 puts. It proved to be quite a profitable call, banking profits of 180% gains in just over a month. Readers who held onto the puts made significantly more. Just recently Ian uncovered another opportunity, and this time it's in the foreclosure market. You can read all about it and his service, Options Trading Pit, here. Stay nimble out there, Adam Sharp Analyst, Wealth Daily
(A bankruptcy examiner's report released last week revealed that Lehman Brothers hid more than $50 billion in loans by classifying them as sales. Execs and auditor, Ernst & Young, allegedly manipulated the firm's balance sheets using an accounting trick called "Repo 105.")

The Real AIG Scandal: How the Game is Rigged at Wall Streets Casino
By Lucy Komisar (www.thekomisarscoop.com) AlterNet, March 26, 2009

Congress has deftly avoided the real story of AIGs collapse, which will make a few million in bonuses seem like peanuts. Theres nothing like a grandstanding member of Congress to deflect attention from the real issues at hand by throwing a few juicy bones to the masses. Most legislators at a House Finance subcommittee hearing last week deftly avoided the real story of AIGs collapse. Instead, they homed in on the public relations disaster of hundreds of top AIG officials and staff getting $165 million (later revealed as over $218 million) in bonuses. The key issue ignored by the congressmen and women was the potential catastrophe represented by as much as $2.7 trillion in AIG derivative contracts and how AIG and the U.S. government are dealing with them. To put that number in context, weve so far provided the company only about $170 billion. An exception at the hearing was Rep. Joe Donnelly, D-Ind., who declared that naked credit default swaps were little more than gambling dreamed up by Wall Street to create additional profits, and he suggested that instead of being bailed out, when the casino goes bust, the guys who are gambling close shop. He noted that if ordinary Indiana citizens acted the same way as the titans of Wall Street had, theyd be in jail. But Donnelly never got to explain what he meant by naked credit default swaps. We did learn early at the hearing that the Federal Reserve is in charge of overseeing AIG. The Fed is strongly influenced by some of the same big banks and brokerages that are getting AIG payouts and taxpayer funding. These same firms have opposed regulating credit default swaps, other derivatives and naked short selling (which are explained below). That should have set the stage for the rest of the questions, not to mention an investigation into where, exactly, all that money that AIG received went. More Money for AIG We discovered in passing at the hearing that AIG has $1.6 trillion of derivatives left to unwind the mess remaining of the AIG derivatives debacle. Nobody asked the basic details of how the other $1.1 trillion was unwound or how the rest will be dealt with. And nobody got an answer to the question of how much more in taxpayer money it will take to finish the job, and who will benefit from this unwinding process. Or, since the U.S. government is now in the derivatives business through its financial support of not only AIG but also Citigroup ($300 billion in guarantees), and other financial companies, how much taxpayer money may be required to pay off those other firms derivatives bets. Derivatives Derivatives are financial instruments derived from something else, hence the name. In the lingo of Wall Street, nouns are turned into verbs and verbs beget nouns. If a bank or brokerage firm securitizes debt for example, turning a bundle of mortgages into financial products the resulting securities are derived from those mortgages, thus they are mortgage derivatives. They can be sliced and diced and sold and at the insistence of Wall Street powers and their representatives, the derivative transactions are unregulated. Central to AIGs demise were derivative credit default swaps (CDS), basically insurance on financial deals. Some people bought insurance against their houses burning

down. Others made bets on somebody elses house burning down. Thats an insurance policy for someone without a house at risk. The first type of contract should be seen as legitimate. But should U.S. taxpayers, who own nearly 80 percent of AIG, pay off a wager that somebody elses house would burn down in this financial casino Wall Street built out of the ashes of cut-and-burn deregulation? More importantly: Should they pay off the wager if there are indications that the game may have been rigged in the first place? Hedging the Bets Derivatives contracts on stocks can be hedged with a short sale. Short selling is selling a stock that you borrow. The short-seller hopes the price will go down in order to buy the security cheaper and transfer it back to the lender, gaining a profit from the difference in prices from the time the shares were borrowed and the time the shares were returned to the lender. Naked short selling is selling shares that were never borrowed its selling thin air, or in essence, selling counterfeit securities. Done on a large scale, this pushes down share prices across the board as the artificial supply of shares ballooned by those phantom shares outweighs demand. The Securities and Exchange Commissions real effort in stopping naked short selling has been on a par with its interest in investigating Bernie Madoff. A newly released report from the Office of Inspector General revealed that the SEC received 5,000 complaints regarding naked short selling of stocks in 2007 and 2008, which led to zero enforcement actions by the SEC. A Market Ripe for Fraud and Manipulation Heres how naked short selling relates to manipulation of CDSs. The face value of CDS contracts at one time was $60 trillion. Even Christopher Cox, who took no meaningful action on the matter as SEC chairman, got worried and acknowledged in testimony, Holding a credit default swap is effectively, or nearly effectively, taking a short position in the underlying and because CDS buyers dont have to own the bond or the debt instrument upon which the contract is based, they can effectively naked short the debt of companies without any restriction, potentially causing market disruption and destabilizing the companies themselves. This market is ripe for fraud and manipulation. This is a problem we have been dealing with, with our international regulatory counterparts around the world with straight equities (stock), and its a big problem in a market that has no transparency and people dont know where the risk lies. The most profit from these types of contracts is obtained if the security that is the asset for the contract declines to a price of zero. Derivative trades are often sham transactions between cooperating dealers designed solely for the purpose of creating shares to sell into the public market. Securities prices can be manipulated downward through naked short selling. Even though derivatives are unregulated transactions, the stock manipulation occurring from the sham transactions that create the naked short shares is regulated and is illegal under U.S. securities laws. If the derivatives contracts were hedged with a short sale by the casino operators, they have already received profit from the sale of the securities they did not own.

Where Does the Money go? Derivatives trades are generally accounted for by the big broker dealers (now getting taxpayer money) as off balance sheet transactions. They are hidden from regulators and investors, via special purpose entities (SPEs), which can be offshore and presumably are for the profit of elite special partners or clients of these same firms. More Transparency Needed So, we need to know about the claims AIG and others on Wall Street are paying out from taxpayer funds. Who made these derivative trades? Did they own the underlying assets or not? Did the parties that received money from the taxpayers write sham contracts to create shares to sell and then naked short sell securities they didnt own into the U.S. markets? Is AIG paying on losses for which no claims have yet been made? Shouldnt Congress, the Fed which is overseeing AIG and law enforcement agencies be investigating these SPEs and the money they received? Shouldnt they investigate whether it was obtained illegally? What if there are trillions of dollars in the special purpose entities that have been hidden for the benefit of a powerful few? Should the U.S. taxpayer come to the aid of the largest U.S. banks and brokerages that created these fancy off-balance-sheet financial instruments without full disclosure to at least one government agency of the monies in SPE accounts? How can Congress make intelligent regulation without understanding the scope of the problem and the trading techniques they are trying to regulate, which took down AIG and are destroying the economy especially the sham transactions designed for the purpose of creating shares of publicly traded companies? Since Congress is so focused on Wall Street salaries and bonuses that compensate obscenely paid Wall Street executives, shouldnt it be asking if these titans of business have reaped financial rewards through the use of SPEs? Beyond that, were offshore SPEs used to avoid taxes or hide improper gains? Why should we pay anything for the casino gambling debt? If there were illegal profits made on derivatives transactions that created sham shares sold into the marketplace, we should claw back that money, which could amount to a lot more than the bonuses paid to AIG officials.