Sun, Dec 29, 2002 - Page 11 News List

Enron's hard assets may have been undervalued

DOUBLE TROUBLE The investigation into whether Enron was carrying assets on its books at inflated values developed as a result of actions taken by the firm's new managers

NY TIMES NEWS SERVICE , NEW YORK

The investigation of Lay, on the other hand, has run into complications that may make it difficult to bring charges, people involved in the case said.

Lay's lawyers have told the government that his stock sales were forced by the falling price of Enron shares he used to secure loans, leading to demands from financial institutions that he post more collateral. And because Lay sold his shares back to Enron, rather than into the open market, it becomes harder for prosecutors to demonstrate that he possessed information that the company lacked -- a key element of insider trading. No final decision has been reached, however, on whether charges will be brought, according to the people involved in the case. Investigators examining Enron's broadband division, touted by the company from 1999 to last year as being core to the company's future growth, have been moving aggressively.

In recent weeks, agents of the FBI arrived unannounced at the homes of some broadband executives, confronting them with what the agents said was potential evidence of fraud.

Some former executives have begun cooperating with the inquiry and have testified before a grand jury, people involved in the case said. They include Lawrence M. Lawyer, a former finance executive who pleaded guilty to tax violations, and Timothy N. Belden, a former senior trader who pleaded guilty to conspiring to manipulate the California energy market.

The broadband investigation began as an examination of a transaction known as Grayhawk. That deal allowed Enron to profit by taking a position in its own stock before the announcement of a big purchase of Sun Microsystems computers intended to form the backbone of the broadband unit's expansion.

Now, people involved in the case say, the investigation has broadened to look at whether Grayhawk was part of a wider effort to drive up Enron's stock price by issuing misleading statements about the broadband division's performance.

In particular, prosecutors are said to be examining statements made at meetings with Wall Street analysts in 2000 and 2001 about the prospects and performance of the division. In addition, they are looking at whether the division failed to promptly recognize reversals of income that had been booked on the basis of projections that proved to be inaccurate.

The simultaneous investigation into whether Enron was knowingly carrying assets on its books at inflated values developed as a result of actions taken by the new managers installed at the company after it filed for bankruptcy protection.

Last April, the new management filed a statement with the bankruptcy court saying that, by its estimates, the value of the assets on Enron's balance sheet would have to be written down by about US$14 billion.

Much of the reduction was the result of assets losing value in the wake of the bankruptcy filing, the new management team said. But the company's statement said there were also potential problems with "valuations of several assets the historical carrying value of which current management believes may have been overstated due to possible accounting errors or irregularities."

It did not identify those assets, but witnesses have told government investigators that primarily three Enron holdings are involved.

The largest of these assets, according to people involved in the case, is Enron's Houston Pipeline, which moves energy products throughout Texas.

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