What the Dog Saw [68]
Enron introduced all kinds of twists into the SPE game. It didn’t always put blue-chip assets into the partnerships — like oil leases that would reliably generate income. It sometimes sold off less-than-sterling assets. Nor did it always sell those assets to outsiders, who presumably would raise questions about the value of what they were buying. Enron had its own executives manage these partnerships. And the company would make the deals work — that is, get the partnerships and the banks to play along — by guaranteeing that, if whatever they had to sell declined in value, Enron would make up the difference with its own stock. In other words, Enron didn’t sell parts of itself to an outside entity; it effectively sold parts of itself to itself — a strategy that was not only legally questionable but extraordinarily risky. It was Enron’s tangle of financial obligations to the SPEs that ended up triggering the collapse.
When the prosecution in the Skilling case argued that the company had misled its investors, they were referring, in part, to these SPEs. Enron’s management, the argument went, had an obligation to reveal the extent to which it had staked its financial livelihood on these shadowy side deals. As the Powers Committee, a panel charged with investigating Enron’s demise, noted, the company “failed to achieve a fundamental objective: they did not communicate the essence of the transactions in a sufficiently clear fashion to enable a reader of [Enron’s] financial statements to understand what was going on.” In short, we weren’t told enough.
Here again, though, the lessons of the Enron case aren’t nearly so straightforward. The public became aware of the nature of these SPEs through the reporting of several of Weil’s colleagues at the Wall Street Journal — principally John Emshwiller and Rebecca Smith — starting in the late summer of 2001. And how was Emshwiller tipped off to Enron’s problems? The same way Jonathan Weil and Jim Chanos were: he read what Enron had reported in its own public filings. Here is the description of Emshwiller’s epiphany, as described in Kurt Eichenwald’s Conspiracy of Fools, the definitive history of the Enron debacle. (Note the verb scrounged, which Eichenwald uses to describe how Emshwiller found the relevant Enron documents. What he means by that is downloaded.)
It was section eight, called “Related Party Transactions,” that got John Emshwiller’s juices flowing.
After being assigned to follow the Skilling resignation, Emshwiller had put in a request for an interview, then scrounged up a copy of Enron’s most recent SEC filing in search of any nuggets.
What he found startled him. Words about some partnerships run by an unidentified “senior officer.” Arcane stuff, maybe, but the numbers were huge. Enron reported more than $240 million in revenues in the first six months of the year from its dealings with them.
Enron’s SPEs were, by any measure, evidence of extraordinary recklessness and incompetence. But you can’t blame Enron for covering up the existence of its side deals. It didn’t; it disclosed them. The argument against the company, then, is more accurately that it didn’t tell its investors enough about its SPEs. But what is enough? Enron had some three thousand SPEs, and the paperwork for each one probably ran in excess of a thousand pages. It scarcely would have helped investors if Enron had made all three million pages public. What about an edited version of each deal? Steven Schwarcz, a professor at Duke Law School, recently examined a random sample of twenty SPE disclosure statements from various corporations — that is, summaries of the deals put together for interested parties — and found that on average they ran to forty single-spaced pages. So a summary of Enron’s SPEs would have come to a hundred and twenty thousand single-spaced pages. What about a summary of all those summaries? That’s what the