Enron’s Kopper Says Loan Was Disguised as Revenue

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The New York Sun

A former Enron Corp. executive, Michael Kopper, said his ex-boss, Andrew Fastow, promised to buy back Merrill Lynch & Co.’s interest in Nigerian barges as part of a plan to falsely boost Enron’s revenue by $12 million.


Testifying today in Houston federal court, Kopper, 39, bolstered last week’s testimony by former Enron and Merrill employees that the six defendants on trial for fraud knew the barge sale was a sham. They hid the buyback because, under accounting rules, it would make the sale a loan that Enron couldn’t report as revenue, prosecutors said.


Fastow, Enron’s former chief financial officer, pleaded guilty earlier this year to fraud charges and is cooperating with prosecutors, who subsequently indicted two former Enron chief executives, Jeffrey Skilling and Kenneth Lay. Kopper, who ran off-the-books partnerships used to hide Enron’s losses, said Fastow engineered the barge deal so “he would look like a hero to Jeff Skilling.”


The criminal trial of two ex-Enron and four ex-Merrill employees is the first stemming from the accounting fraud that led to Enron’s bankruptcy, the second largest in history. The defendants, accused of taking part in the barge transaction, said they thought it was a true sale with no buyback guarantee.


Kopper, who said he paid “kickbacks” to Fastow, pleaded guilty in 2002 to wire fraud and money laundering. He was the first Enron executive to cooperate with prosecutors, agreeing to forfeit a total of $12 million for both criminal and U.S. Securities and Exchange Commission fines. He could be sentenced to up to 15 years in prison.


The secret buyback agreement with Merrill guaranteed the bank a profit on its $7 million investment in energy-generating Nigerian barges, former Enron analyst John Garrett testified last week. Enron allegedly promised to return Merrill’s investment plus a 15% profit six months after the December 1999 transaction. Mr. Garrett told prosecutors Fastow didn’t put the promise to buy back the barges in writing because Enron wouldn’t be able to record the $12 million as profit in its fourth quarter earnings statement in 1999.


The transaction is an example of larger financial manipulations that were used to hide debt and artificially boost profit at Enron, prosecutors said, ultimately leading to its failure. The trial allows the government to test evidence it will eventually use against more senior Enron officials, including Mr. Lay and Mr. Skilling, who have pleaded not guilty to fraud charges.


Kopper, Fastow, and others used “complex structures, straw men, hidden payments, and secret loans” to create the appearance that partnerships they controlled were independent of Enron, the U.S. Securities and Exchange Commission said in its civil suit against Kopper.


The deception enabled Enron to move the partnerships off its balance sheet and improve its financial results so it looked more attractive to securities analysts and credit-rating companies, the SEC suit said.


Enron lost $68 billion in market value and sought protection from creditors in December 2001, wiping out 5,000 jobs and about $800 million in employees’ pension investments.


In his plea deal, Kopper agreed that he and “others took advantage of their simultaneous influence over Enron’s business activities and the” partnerships “to generate millions of dollars for themselves, at Enron’s expense.”


Kopper held jobs at both Enron, where he was Fastow’s deputy in the Global Finance Department, and at Enron partnerships LJM and LJM2,where he was managing director. Prosecutors said Kopper used the partnerships to hide Enron debt while paying millions in illegal profits to himself and others.


Under cross-examination by Richard Schaeffer, lawyer for former Merrill investment banking chief Daniel Bayly, Kopper admitted stealing “several million dollars from Enron and its shareholders” and helping Fastow defraud shareholders.


Kopper made $10.5 million from his holding in one of the Enron partnerships, according to an investigation by a special committee of Enron’s board.


LJM2 is the entity which bought back Merrill’s equity stake in the Nigerian barges for $7.5 million, completing the secret buyback deal. The partnership allowed Enron to “misstate that it had actually sold an asset when what it was actually doing was warehousing that asset with LJM2 for, say, six months,” Kopper said.


Kopper said of Fastow that “Andy was standing in the middle” of every deal that involved off-the-books partnerships.


The New York Sun

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