Enron

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Enron

Executives at high-flying Enron Corp. (ENE ) never seemed overly concerned with how the rest of the world viewed their business practices. Earlier this year, the California Attorney General had to get a court order to collect documents in an industrywide investigation into energy price fixing. And when an analyst challenged former CEO Jeffrey K. Skilling in a conference call to produce Enron's balance sheet, Skilling called him an "ass----." Still, even some Enron executives worried that the company had gone too far with two complex partnerships set up in 1999 to buy company assets and hedge investments. With Enron's then-chief financial officer acting as general manager of the partnerships and in a position to personally benefit from their investments, the potential for a conflict of interest and backlash from investors seemed overwhelming. "Internally, everybody said this is not a good idea," says a source close to the company.

But no one could have predicted such a jaw-dropping outcome for the nation's largest and most innovative energy trader. Since Oct. 16, when Enron revealed a $35 million charge to earnings to reflect losses on those partnerships and was forced to knock $1.2 billion off its shareholders' equity, the company's stock has plunged 60%. The Securities & Exchange Commission is investigating Enron's accounting for its partnerships and whether it properly disclosed them to investors.

Suddenly the company, which brought high-tech and complex finance to energy trading, is essentially trying to avoid a run on the bank. Moody's Investors Service has already downgraded the company's debt. Enron says it is meeting with credit agencies to calm their fears, and analysts say Enron is working on a turnaround plan that would likely include accelerating asset sales, issuing shares, and obtaining new credit lines. Enron's board has set up a special committee to look into its controversial partnerships. But analysts also worry that Enron's trading partners could pull the plug if they lose confidence that it can honor its trades.

"ON CRACK?" Inside Enron, once-cocky employees are reeling. They were still puzzling over the abrupt Aug. 14 departure of CEO Skilling when the company announced on Oct. 24 that CFO Andrew S. Fastow, architect of the controversial private LJM investments--which got their name from the first initials of his wife and children--was removed from his post and on leave. In a tense meeting held at a Houston hotel after the latest financial disclosures, soft-spoken Chairman and CEO Kenneth L.

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