Business briefs for May 7, 2002

Tuesday, May 7, 2002 | 11:13 a.m.

Directors blame executives for scandal

WASHINGTON -- Directors of bankrupt Enron Corp., under scrutiny by a Senate investigative panel, said today that executives of the company and its auditor Arthur Andersen hid from them the information they needed to exercise oversight and deal with problems.

"We cannot, I submit, be criticized for failing to address or remedy problems that were concealed from us," Herbert Winokur, a director and chairman of the Enron board's finance committee, testified at a hearing by the investigative panel of the Senate Governmental Affairs Committee.

John Duncan, former chairman of the board's executive committee, said the directors "thoroughly executed their duties" and that management withheld significant financial problems from them.

"I do not believe that Enron's fall would have been avoided" if the directors had asked more questions, Duncan told the hearing.

But senators insisted that the directors shared responsibility for Enron's stunning collapse and failed in their duty to protect shareholders of the energy-trading company.

"The board must exercise independent judgment," committee chairman Sen. Carl Levin, D-Mich., told Winokur and the other four directors sitting before him. "The board is not supposed to be a rubber stamp for auditors or attorneys."

Enron price manipulation shown

WASHINGTON -- Enron Corp. drove up electricity prices during California's energy crisis, using names like "Death Star" and "Ricochet" to describe strategies that aimed to cash in on the power shortage, company documents show.

A memorandum, written by Enron lawyers in December 2000, outlined practices similar to those described by California officials who allege the energy trading company created phantom congestion on electricity transmission lines and engaged in sham sales among its affiliates to increase electricity prices.

Describing one such strategy called "Death Star," the lawyers wrote: "The net effect of these transactions is that Enron gets paid for moving energy to relieve congestion without actually moving any energy or relieving any congestion."

Another practice, called "Ricochet," allowed Enron to send power out of California and then resell it back into the state to avoid price caps that applied to transactions solely within California.

"To us, this is really the smoking-gun memo," said Sean Gallagher, a staff attorney with the California Public Utilities Commission. "It's Enron's own attorneys admitting that Enron is manipulating the California market."

Settlement of $217 million reached in Baptist case

PHOENIX -- Arthur Andersen LLP reached a new $217 million agreement Monday to settle civil cases stemming from the collapse of the Baptist Foundation of Arizona, which lost $570 million belonging to 11,000 mostly elderly investors.

Superior Court Judge Edward Burke accepted the settlement, which came one week into a trial where the foundation's trust was seeking $150 million in compensatory damages and more in punitive damages relating to Andersen's audit work for the foundation.

The settlement resolves the trust case as well as a class-action lawsuit and pending cases brought by state regulators and the Arizona attorney general's office.

"Andersen is willing to accept its shared responsibility and has done so with this settlement. We hope other responsible parties also act accordingly. This puts all of these cases behind us and allows the firm to move forward. We think this is fair to the investors," said Andersen attorney Ed Novak.

The Baptist foundation was created in 1948 as a nonprofit religious entity to raise money for Southern Baptist causes.

During the 1980s, the foundation and its related companies began aggressively raising money through the sale of securities and the management of individual retirement accounts.

But Arizona officials said the foundation used a web of related companies to siphon off hundreds of millions of dollars in investment funds before its 1999 bankruptcy.

The liquidation trust said Andersen ignored warnings signs of foundation fraud, including whistle-blowers and a series of newspaper articles. It also alleged Andersen concealed huge losses on financial statements that would have alerted investors to the foundation's troubles.

Analyst settlement expected

ALBANY, N.Y. -- Merrill Lynch & Co. was expected to present a settlement proposal today in an attempt to end New York Attorney General Eliot Spitzer's investigation of alleged conflicts of interest at the nation's largest brokerage.

Spitzer and the nation's largest brokerage have been negotiating a settlement for a month, after Spitzer revealed e-mails showing Merrill Lynch analysts apparently had serious doubts about stocks they were encouraging investors to buy.