U. S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18403 / October 9, 2003
Accounting and Auditing Enforcement Release No. 1894 / October 9, 2003
Securities and Exchange Commission v. Wesley H. Colwell, Civil Action No. H-03-4308 (SDTX) (October 9, 2003)
SEC CHARGES FORMER CHIEF ACCOUNTING OFFICER
OF ENRON NORTH AMERICA WITH FRAUD
Defendant Barred From Serving As Officer Or Director
of Public Company and Ordered to Pay $500,000;
Will Cooperate With Government Investigations
The Securities and Exchange Commission today charged Wesley H. Colwell, the former Chief Accounting Officer of Enron North America, with violating the antifraud provisions of the federal securities laws. Without admitting or denying the allegations of the Complaint, Colwell has agreed to be enjoined permanently from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5 and 13b2-1, and aiding and abetting the violation of Sections 13(a), and 13(b)(2)(A) and (B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-13. In addition, Colwell has agreed to be barred from acting as an officer or director of a public company, and will pay $300,000 in disgorgement and prejudgment interest and a civil penalty of $200,000. As part of this settlement, Colwell will continue to cooperate with on-going investigations into Enron Corp. by the Securities and Exchange Commission and the U.S. Department of Justice Enron Task Force.
As alleged in the Complaint, Colwell, along with others at Enron, engaged in a wide ranging scheme to defraud by manipulating Enron's publicly reported earnings through a variety of devices designed to produce materially false and misleading financial results. This scheme included the misuse of reserve accounts, concealment of losses, inflation of asset values, and deliberate use of improper accounting treatment for transactions. For example, for year 2000, Colwell and others are alleged to have deferred over $400 million in earnings into reserve accounts within Enron North America (ENA). Subsequently, during first and second quarter 2001, it is alleged that Colwell and others used reserve accounts within ENA to mask over $1 billion in losses associated with Enron's retail energy business, Enron Energy Services (EES). It is further alleged that when Enron needed earnings in third quarter 2001, Colwell and others released from ENA reserve accounts over $200 million of previously deferred trading profits. The Complaint also alleges that Colwell and others manipulated the value of Enron's largest private merchant asset, Mariner Energy Inc., and improperly avoided a write-down associated with the disposition of its subsidiary, Houston Pipeline Co.
Specifically, the Commission's Complaint alleges as follows:
- Improper Use of Reserves To Manage Earnings: Colwell and others deliberately manipulated Enron reserve accounts to smooth the volatility of earnings of its wholesale energy trading business; to conceal losses of its retail energy business; and generally to enable Enron to announce that it had met or exceeded performance expectations. For example, when ENA generated trading profits in the third and fourth quarters of 2000 that greatly exceeded Enron's internal targets, Enron placed earnings into a previously established reserve known as "Schedule C." In these quarters and others, Colwell and others improperly used amounts placed into Schedule C as necessary to fulfill internal targets and satisfy external earnings expectations. Earnings improperly reserved and improperly released by Colwell and others significantly affected Enron's financial reporting and related public disclosures. By the end of 2000, over $400 million in earnings were improperly withheld from Enron's reported earnings. When Enron later needed earnings in the third quarter of 2001, it released over $200 million from Schedule C. Colwell and others knew that Enron's use of Schedule C to manipulate reported earnings was improper and did not comply with applicable accounting standards.
- Hiding Losses Of Enron's Retail Business: Enron used reserve accounts within ENA to hide hundreds of millions of losses associated with EES, Enron's heavily touted retail energy trading business. By various means, Colwell and others concealed within ENA a significant portion of EES losses, which materially affected the first and second quarter 2001 operating results of EES and of Enron's largest business segment, Enron Wholesale Services (Wholesale). These means included transferring uncollectible EES receivables to ENA, which then would establish the necessary reserves, and by moving EES' "risk management activities" into ENA so that significant EES contract write-downs and other EES related losses would be charged against Enron's Wholesale business segment. In first quarter 2001, EES losses hidden in ENA exceeded $700 million. In second quarter 2001, additional EES losses of over $300 million were hidden in ENA.
- Fraudulently Inflating Mariner Energy, Inc.: Enron, through Colwell and others, fraudulently inflated the value of its largest private "merchant" asset, Mariner Energy, Inc., an oil and gas exploration company. In the fourth quarter of 2000, Enron needed an additional $100 million of earnings to achieve budget targets that formed the basis of its earnings-per-share objective for that quarter. To meet this need, Colwell and others fraudulently increased the recorded value of Mariner by approximately $100 million. Colwell and others knew that Mariner's fourth quarter 2000 valuation was an amount arbitrarily selected to generate fictitious mark-to-market earnings sufficient to meet Enron's targets.
- Improper Avoidance of Write-Down of Houston Pipeline Asset: In the second quarter of 2001, Enron failed to recognize a material loss relating to the impairment of assets of its subsidiary, Houston Pipeline Company (HPL). As early as the summer of 2000, Enron knew that HPL's assets were significantly impaired, i.e., their market value was significantly below their recorded value in Enron's financial statements. In these circumstances, a conventional sale of HPL by Enron would result in a significant loss. To avoid recognizing such a loss, Enron structured a transaction with a third party buyer such that certain HPL assets would be leased rather than sold. However, before executing the lease, Enron agreed to accept a single up-front prepayment rather than annual payments for the initial lease term. This change lowered the total amount of the cash payments due under the lease, reducing the lease's future cash flows to a level insufficient to allow Enron to recover the recorded value of the HPL assets. Needing to justify not recognizing an impairment loss caused by the change in the lease payments, Colwell and others employed an impairment test using a series of future "deemed" cash flows that were, in fact, never to be received. If the actual cash flows as specified in the lease had been used in the impairment test, Enron would have recorded an impairment loss of approximately $1.4 billion.
In agreeing to this settlement, the Commission took into account Colwell's continuing cooperation in the on-going investigations being conducted by the Commission and the U.S. Department of Justice Enron Task Force.
SEC Complaint in this matter