FYI


October 25, 2001

Enron Ousts Finance Chief as S.E.C. Looks at Dealings

By FLOYD NORRIS

The Enron Corporation (news/quote), its stock battered by a sudden loss of investor confidence, yesterday ousted its chief financial officer, Andrew S. Fastow, whose involvement in complicated transactions with Enron has drawn the scrutiny of the Securities and Exchange Commission.

"In my continued discussions with the financial community, it became clear to me that restoring investor confidence would require us to replace Andy as C.F.O.," Kenneth L. Lay, Enron's chairman and chief executive, said in a statement announcing the change. Only one day before, Mr. Lay had told investors in a conference call that he and the Enron board "continue to have the highest faith and confidence in Andy."

The company said that Mr. Fastow had taken a leave of absence, but it also named his successor, Jeffrey McMahon, the head of Enron's industrial markets group and a former corporate treasurer.

Enron said none of the officials were available for interviews last night.

The move came after the close of trading on the New York Stock Exchange, where Enron's shares fell $3.38, to $16.41. The price has been cut in half since Oct. 16, when Enron reported its third-quarter earnings. A $1.2 billion reduction in shareholder equity brought on by ending some relationships with partnerships that Mr. Fastow had headed was not disclosed in the earnings news release. Mr. Lay briefly mentioned it in the conference call that followed, but some analysts thought he was referring to a separate $1 billion write-off that was disclosed in the earnings document, and were angered when they later learned about it.

On Tuesday, when both Mr. Fastow and Mr. Lay discussed the company with analysts on the conference call, neither was willing to discuss details of the transactions between Enron and the partnerships formerly controlled by Mr. Fastow. Mr. Lay cited the S.E.C. inquiry in declining to discuss the details of the transactions.

The fact the transactions took place has been known for a year, but Enron's disclosures have been widely criticized for being impossible to understand.

By structuring the deals as involving forward commitments to deliver Enron stock, it appears that Enron was able to assure that losses on them would not lead to reported losses, but instead to reductions of shareholder equity that had no effect on the income statement. That is one of the issues the S.E.C., whose inquiries were disclosed Monday by the company, is expected to address.

Concerns have also grown this week over whether Enron will face losses from complicated financing strategies that kept billions of dollars of debts off its balance sheet but left the company responsible for paying - either in cash or with stock - if things went wrong. On Tuesday, Mr. Fastow assured investors that the company "expects to continue to have sufficient liquidity to meet normal obligations," and said it had bank credit lines that were more than adequate.

Mr. Fastow was viewed as one of the architects, with Jeffrey K. Skilling, the former Enron chief executive who resigned in August, of the change in business strategy that turned Enron from a gas-pipeline company into a an energy trading powerhouse that developed a large Wall Street following. Its stock price peaked in the summer of 2000 at $90.75.

According to a person close to the company, while Mr. McMahon, Mr. Fastow's successor, was Enron's treasurer, he told Mr. Skilling, who at the time was the chief operating officer, that he thought the partnerships involving Mr. Fastow presented a conflict of interest. After that discussion, Mr. McMahon moved to a different job at the company, this person said.

Shares of Enron traded as low as $15.51 yesterday afternoon, the lowest price for the stock since early 1995, before recovering. In after- hours trading, they fell to $16.14.

One of the factors that hurt the stock yesterday was a decision by M. Carol Coale, an analyst at Prudential Securities, to drop her rating to "sell" from "hold." She had lowered the rating to "hold" from "buy" on Monday.

"After the S.E.C. inquiry was announced," she said in an interview yesterday evening, "Enron should have addressed it by delivering a scapegoat, as a gesture to the Street. Now they are replacing him today. The timing is a little late, but I think it will be received positively by the Street."

But she said that investor sentiment might work the other way. "People could fear that if you remove Fastow from the management team, you'll never get any answers."

 
Copyright 2001 The New York Times Company