U.S. Securities and Exchange Commission
Litigation Release No. 18435 / October 30, 2003
Accounting and Auditing Enforcement
Release No. 1907 / October 30, 2003
Securities and Exchange Commission v. David W. Delainey, Civil Action No. H-03-4883 (SDTX) (October 30, 2003)
SEC Charges Former Chief Executive Officer
of Enron North America and Enron Energy Services
with Violating Federal Securities Laws
Defendant Barred From Serving as Officer or Director
of Public Company and Ordered To Pay $3.74 Million;
Will Cooperate With Government Investigations
The Securities and Exchange Commission today charged David W. Delainey, the former Chief Executive Officer of Enron North America and Enron Energy Services, with violating the antifraud provisions of the federal securities laws. Without admitting or denying the allegations of the Complaint, Delainey 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, and to be barred from acting as an officer or director of a public company. As part of the settlement agreement, which is subject to the approval of the U.S. District Court, Delainey will pay nominal disgorgement of $100 and a civil penalty of approximately $3.74 million. The Commission brought this action in coordination with the U.S. Department of Justice Enron Task Force, which filed a related criminal charge against Delainey. Delainey agreed to enter a guilty plea in connection with that charge, forfeit approximately $4.26 million in unlawful proceeds, and cooperate with the government's continuing investigation.
As alleged in the Complaint, Delainey, 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. This scheme included, among other things, the manipulation of reserve accounts, concealment of losses, improper inflation of asset values and use of fraudulent devices designed to "hedge," or lock-in, inflated asset values, and use of improper accounting techniques to achieve earnings objectives and avoid large losses. The Complaint also alleges that Delainey, while in possession of material non-public information, namely, that Enron management was scheming to manipulate Enron's reported financial results, sold large amounts of Enron stock at inflated prices and reaped millions of dollars in profits.
Specifically, the Commission's Complaint alleges as follows:
- Manipulation of Reserves To Manage Earnings: During 2000, 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. Beginning in the first quarter of 2000 and continuing in increasing scope and size throughout 2000 and 2001, Enron improperly reserved (in a ledger designated "Schedule C") hundreds of millions of dollars of earnings, primarily within the ENA business unit, to conceal volatility in its energy trading profits and to use large amounts of those reserves to cover-up losses in ENA's "merchant" asset portfolio and from other business units such as EES.
- Concealment of Uncollectible EES Receivables and Losses: Enron also used reserves to conceal huge receivables that California public utilities owed to Enron, incurred during the energy crisis in California, and that Enron believed it would not collect. By December 2000, these uncollectible receivables were valued in the hundreds of millions of dollars. In the fourth quarter of 2000 and again in the first quarter of 2001, Enron and ENA senior commercial and accounting managers concealed the existence of these bad debts by booking them as reserves on the unreported "Schedule C" within ENA, even though they were in fact owed to EES. In the first quarter of 2001, Enron's senior management also concealed huge losses associated with inflated valuations of EES contracts which, if recognized as required, would have wiped out EES's profits and revealed EES to have been a failing business.
- Fraudulent Valuation of "Merchant" Assets: During the fourth quarter of 2000, senior Enron and ENA accounting and commercial managers artificially increased the value of ENA's largest merchant asset, Mariner Energy Inc., by approximately $100 million to help cover an earnings shortfall facing the Company that quarter of approximately $200 million. In the third quarter of 2000, other ENA "merchant" assets were similarly manipulated in value before being inserted into an elaborate hedging mechanism known as the "Raptors." This Raptor mechanism was not a legitimate hedge.
- Other Manipulative Devices: In 1998, Enron fraudulently avoided a loss in the hundreds of millions of dollars associated with an energy supply contract with the Tennessee Valley Authority ("TVA") by summarily removing the TVA contract from its mark-to-market accounting books. After avoiding immediate disclosure of the TVA loss, senior Enron commercial and accounting managers devised a plan to avoid later disclosure of the loss, which involved the purchase of power-plant turbines and the construction of "peaker" power plants to be used to satisfy Enron's obligations to the TVA. At year-end 1999, Enron entered into back-to-back energy trades with Merrill Lynch & Co., Inc., to sell and then repurchase energy generated from the "peaker" plants. This transaction allowed Enron to meet its year-end earnings targets. Early in the second quarter of 2000 and before any energy was exchanged between Enron and Merrill Lynch, Enron completely "unwound," or reversed, its energy trading positions with Merrill Lynch. (See SEC v. Merrill Lynch & Co., Inc., et.al., Civil Action No. H-03-0946 (S.D. Tex.) (filed March 17, 2003).
- Insider Trading: Delainey, through his participation in the fraudulent accounting scheme at Enron, knew that Enron's management was manipulating Enron's reported financial results. While in possession of this material non-public information, Delainey sold a large amount of Enron stock, reaping millions of dollars in profits.
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