Losses, Conflicts Threaten Survival

Three hours later, Temple replied by e-mail, urging Duncan to tone down the memo, delete the word "misleading" and omit any reference to her, because that could be construed as a waiver of Andersen's attorney-client privilege. "If my name is mentioned it increases the chances that I might be a witness, which I prefer to avoid," Temple wrote.

A federal jury would later conclude that with that single action Temple became a "corrupt persuader" -- the term comes from the judge's instructions to the jury -- and on that basis would find Andersen guilty of obstruction of justice. Temple declined to testify, asserting her Fifth Amendment right against self-incrimination. She declined to be interviewed for this article, but her lawyer called the jury verdict unjust. "It can't be right that a lawyer's advice like that is obstruction," said Mark Hansen.

Enron's Oct. 16 news release was a masterpiece of modern business spin. The company emphasized that setting aside the $1 billion in "one-time" losses, its profits had actually risen by 26 percent compared with the year before. The company was "very confident in our strong earnings outlook," Lay said in the release.

Lay repeated that rosy prognosis in a conference call with securities analysts later that day.

"We are committed to making the results of our core energy business more transparent to investors," he said, promising to provide more detail on the $1 billion in losses "later in the call."

But Lay followed up with vague details and nearly impenetrable jargon.

He attributed the largest part of the $1 billion loss -- $544 million -- to "certain investments" in tech stocks and the "early termination in the third quarter of certain structured finance arrangements with a previously disclosed entity."

He left out important facts. The "structured finance arrangements" were the Raptor deals. The "previously disclosed entity" was LJM2, a private Enron partnership that had been run by Enron's chief financial officer, Andrew S. Fastow, until July 2001. LJM1 and LJM2 had done $2 billion worth of business with Enron.

Lay also casually mentioned -- as if it were an aside -- that the value of shareholders' equity, the company's net worth, would be reduced by $1.2 billion because of an accounting error in connection with that "early termination."

Andersen auditors had discovered the $1.2 billion equity error in August, when they were digging through old records on the Raptor transactions in response to Watkins's memo. The error was Andersen's fault. It occurred when Enron funded the Raptors with shares of its stock. Enron got a note from the Raptor funds in return and Andersen wrongly advised Enron to count the note as shareholder equity.

David Fleischer of Goldman Sachs asked the key question: "How confident can we be that these will not be, you know, the last write-offs?"

Lay's response: "If we thought we had any other impaired assets, it'd be in this list today."