As congressional committees and federal investigators examine whether Enron abused off-shore tax shelters to avoid taxes and keep debt off its balance sheet, some experts argue the company was doing just the opposite.
The Houston-based energy company, they say, was using financial sleight of hand to make debt look like income, helping push the company to No. 7 on the Fortune 500 and keeping share values high.
What shareholders didn't know was that the company was telling a different story to the Internal Revenue Service.
"Frankly, the IRS gets a more nearly correct report because most of these transactions didn't result in income," said Donald C. Alexander, a Washington attorney and former Internal Revenue Service commissioner.
Enron's statements filed with the U.S. Securities and Exchange Commission - which recorded $1.8 billion in profits from 1996 to 2000 - relied on the aggressive accounting that has characterized a series of recent Wall Street scandals, most recently at WorldCom, which misstated $3.8 billion in expenses, and Xerox.
The Enron statements were so skewed by deals that masked debt and overstated profits that the company may not have owed taxes after all, according to experts who specialize in federal income tax and corporate transactions.
Meanwhile, Enron used sophisticated tax-saving methods, including deferred taxes, stock options and nearly 900 partnerships in offshore tax havens, to pay no income taxes in four of the five years beginning in 1996 while getting $381 million in tax refunds, according to an analysis by Citizens for Tax Justice.
In one set of transactions now under scrutiny by investigators and the subject of lawsuits, Enron was able to make bank loans look like the sale of assets, allowing the company to keep the debt off its balance sheet and replace it with something that looked like earnings, according to court documents and interviews with Enron officials.
The deal involved Mahonia Ltd., an energy trading company set up in the early 1990s in Jersey, in the British Channel Islands, by Chase Manhattan Bank before it merged with J.P. Morgan to become J.P. Morgan Chase.
Enron would sell oil and gas contracts to Mahonia, often just before the end of the year, booking the deal as a trade, not a loan, and reporting the money from the sale as earnings. In some cases, the oil and gas contracts were immediately sold back to Enron through derivative transactions, creating circular deals that dispersed the losses over time and diffused their impact on Enron's balance sheet.
Over the years, the transactions got so big that Morgan needed a hedge in case Enron defaulted. The bank got 11 insurance companies, including Continental Casualty Company, National Fire Insurance Co., St. Paul Fire & Marine Insurance Co. and Citigroup Inc.'s Travelers unit, to issue guarantees, called "surety bonds," which are often used by insurance companies to ensure a financial obligation is met.
Late last year, Enron did default amid its downward spiral into bankruptcy. The insurers refused to pay the $1.13 billion to cover the transactions, and Morgan sued them in Manhattan federal court. The insurers filed a countersuit alleging that Mahonia fraudulently disguised loans as sales of natural gas and crude oil. Morgan denies the accusation and says the insurance companies were sophisticated enough to know what was going on.
In March, a judge denied Morgan's bid to force the insurers to pay and avoid a trial, singling out one of six contracts, in which Enron sold natural gas to Mahonia on December 28, 2000.
On that same day, Enron also entered into a mirror-image agreement with an entity called Stoneville Aegean Ltd. to buy quantities of gas identical to those that Enron was selling to Mahonia, according to evidence presented by the insurers.
Both the sale to Mahonia and the purchase from Stoneville were to be delivered on the same future date. Both Mahonia and Stoneville were offshore corporations set up by the same company, Mourant & Co.; they had the same director - Ian James - and the same shareholders, according to court documents.
"Taken together, then, these arrangements now appear to be nothing but a disguised loan," said Judge Jed S. Rakoff of U.S. District Court in the Southern district of New York, who is overseeing the case.
While Mahonia agreed in its contract to pay Enron $330 million for gas on the day of the contract, Enron - in its agreement with Stoneville - agreed to pay Stoneville $394 million to buy back the same quantities of gas on the same delivery schedule, but with the $394 million to be paid at specified future dates.
The Mahonia transactions are also included in a class action lawsuit filed by Enron shareholders alleging that Morgan, through Mahonia, helped Enron hide $3.9 billion in debt by disguising about $5 billion in such circular oil and gas transactions.
The bank says the insurance companies are simply trying to get out of paying a straightforward claim.