Securities and Exchange Commission
Litigation Release No. 18551 / January 22, 2004
Accounting and Auditing Enforcement Release No. 1947 / January 22, 2004
SEC CHARGES RICHARD A. CAUSEY, FORMER ENRON
CHIEF ACCOUNTING OFFICER, WITH FRAUD
Securities and Exchange Commission v. Richard A. Causey, , Civil Action No. H-04-0284 (Harmon) (S.D. Tx.)
The Securities and Exchange Commission ("Commission") today charged Richard A. Causey, the former Chief Accounting Officer of Enron Corp., with violating, and aiding and abetting the violation of, the antifraud, periodic reporting, books and records, and internal controls provisions of the federal securities laws. [Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5, 12b-20, 13a1, 13a-13, 13b2-1 and 13b2-2] The Commission is seeking disgorgement of all ill-gotten gains, civil money penalties, a permanent bar from acting as a director or officer of a publicly held company, and an injunction against future violations of the federal securities laws. The Commission brought this action in coordination with the Justice Department's Enron Task Force, which filed related criminal charges against Causey.
As alleged in the Complaint, Causey, along with others at Enron, engaged in a wide-ranging scheme to manipulate Enron's publicly reported earnings through a variety of devices designed to produce materially false and misleading financial results. As alleged, Causey and others fraudulently manipulated Enron's merchant asset portfolio; improperly used "off-balance-sheet" special purpose entities ("SPEs"); manipulated Enron's "business segment reporting" to conceal losses at Enron's retail energy business, Enron Energy Services ("EES"); manipulated expenses to conceal losses at Enron's broadband unit, Enron Broadband Services ("EBS"); and manipulated reserves in Enron's wholesale energy trading business to conceal earnings volatility and losses. The Complaint also alleges that Causey, and others, made false and misleading statements concerning Enron's financial results and the performance of its businesses, and that these misrepresentations also were reflected in Enron's public filings with the Commission.
Specifically, the Commission's Complaint alleges as follows:
- Manufacturing Earnings by Fraudulently Manipulating Asset Values. Causey and other senior Enron managers artificially increased the book value of certain assets in Enron's "merchant asset portfolio" to manufacture earnings needed to meet Enron internal budget targets. Because the portfolio included many energy-related businesses that were not publicly traded, Enron valued the businesses according to its own internal accounting "models." Enron then manipulated these models in order to produce results necessary to meet internal budget targets. For example, under the direction of Causey and others, Enron personnel fraudulently increased the value of one of the largest of Enron's merchant assets, Mariner Energy, Inc., by $100 million in the fourth quarter of 2000.
- Use of SPEs to Manipulate Reported Financial Results. Causey and others entered into fraudulent transactions with LJM Cayman, L.P and LJM2 Co-Investment, L.P. (collectively "LJM"), two "off-balance sheet" SPEs created and managed by Andrew Fastow, Enron's then-Chief Financial Officer, to manipulate Enron's reported financial results. These transactions primarily took the form of purported "asset sales," which were used to manufacture earnings for Enron and conceal debt. The transactions were not arm's-length and could not have been accomplished using legitimate independent counterparties. In many instances, the transactions were conducted pursuant to an undisclosed side agreement between Causey and Fastow that LJM would be guaranteed against loss in certain of its transactions with Enron, and that other losses to LJM would be made up through other transactions with Enron.
In addition, the Commission's Complaint describes Causey's role in the infamous "Raptor" transactions. Beginning in the spring of 2000, Enron and LJM engaged in a series of financial transactions with four SPEs called Raptor I, Raptor II, Raptor III and Raptor IV (collectively referred to as the "Raptors"). Raptor I was designed to protect Enron from having to report publicly decreases in value in large portions of its energy "merchant asset portfolio" and technology investments by allowing Enron to "hedge" the value of those investments with an allegedly independent third party, known as Talon. The Raptor I structure, however, was invalid under applicable accounting rules because, among other things, (i) Talon was not independent from Enron and LJM's investment in Talon was not at risk, and (ii) Causey and Fastow had entered into an oral side agreement that LJM would receive its initial investment in Talon ($30 million) plus a large profit ($11 million) from Enron, all prior to Talon engaging in any of the hedging transactions. To satisfy the side deal, Causey, Fastow, and others manufactured a transaction between Enron and Talon that generated a $41 million payment to LJM. Causey and others caused Enron to purchase a "put" on its own stock that had no business purpose, but instead was designed to ensure that LJM was returned its initial investment plus its promised profit. After satisfying the side deal, Enron used Raptor I to hedge the value of Enron's already-inflated assets. Causey and Fastow also used Raptor I to fraudulently misrepresent Enron's financial position by back-dating a hedge so that Enron could capture the all-time high stock value of one of the Enron assets at a time when they knew that the value had already declined.
- Concealing EES Failures. Causey and others concealed massive losses at EES by fraudulently manipulating Enron's "business segment reporting." At the close of the first quarter of 2001, Enron, with Causey's approval, "reorganized" its business segments and moved a large portion of EES's business into Enron North America ("ENA"), part of Enron's wholesale energy business segment. The "reorganization" was fraudulently designed to conceal hundreds of millions of dollars of losses at EES, Enron's heavily touted retail energy trading business, which it would otherwise have had to disclose. Enron moved the losing portion of EES's business into ENA because, as Causey and others knew, ENA had ample earnings, including large reserves accounts as described below, and could cover the EES losses while continuing to meet Enron's internal budget targets.
- Concealing EBS Failures. In the first quarter of 2001, Causey and others concealed losses at EBS by fraudulently manipulating EBS's expenses. Causey manipulated EBS's expenses to ensure that EBS did not record first-quarter losses that exceeded the annual losses that Enron had budgeted for EBS and to achieve Causey's dictated first quarter 2001 financial result.
- Manipulating Reserves to Conceal Earnings Volatility and Losses. During 2000 and 2001, Enron's wholesale energy trading business, primarily its ENA business, began generating extraordinary trading profits as a result of rapidly rising energy prices in the western United States, especially in California. In order to mask these earnings and preserve them for later use, Causey and others fraudulently created and used reserve accounts within ENA both to conceal the extent of ENA's trading profits and to avoid reporting large losses in other areas of its business.
The Commission brought this action in coordination with the U.S. Department of Justice Enron Task Force. The Commission's investigation is continuing.
SEC Complaint in this matter