Riley: Providence, Ken Lay and the Securities Exchange Commission

Riley: Providence, Ken Lay and the Securities Exchange Commission

On November 8, 2001 Enron announced that earnings would be restated for every quarter back to 1997. By the time that announcement was made the SEC was investigating analyst and shareholder concerns regarding unusual accounting. The stock had already plummeted from $85 to  $8 on its way to zero and bankruptcy.

Did anyone see this coming?

The accounting restatements on November 8, 2001 reduced earnings by roughly $500 million dollars over 5 years. The market value of Enron shares dropped from $86 billion to $8 billion before Moody’s, Fitch and Standard and Poor’s decided to lower Enron Debt ratings to “junk”.

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John Olson of Sanders Morris Harris wasn’t fooled. He had been warning for years that Enron was engaging in aggressive and unusual accounting. He was the only \one of 17 analysts who rated Enron overvalued and a “sell”. As a result of his opinions, the management of Enron refused to talk to him. Here’s what Olson told the New York Times in January 2002:

“Those who did not join the chorus of praise for Enron, he said, could be punished. ''There was a strong mandate, unwritten, unspoken, at Enron that if you the investment banking house ever wanted to do business with Enron, your analyst had to have a strong buy on the stock,'' he said. ''I was continually at war with investment bankers.''”

Providence Officials Act like Ken Lay

John Olson wasn’t the most followed analyst or highest paid analyst, but he was an independent thinker who did his own work. Nor was he swayed by the legion of analysts willing to accept the garbage Enron was dishing out and then repeat it to investors as though they fully understood what the company was saying. Olson never did understand the accounting and spent years asking questions only to be ignored and laughed at by mainstream analysts. Ken Lay as Enron’s CEO didn’t understand the accounting either but was happy to “sign off” quarter after quarter on phony numbers and misleading reports.   The seeming success of Enron helped his status and reputation. Ken Lay did not need to engage in illegal accounting or fraud he just needed to ignore warning signs and sign off on the numbers and was prosecuted for those actions.

In the Providence Pension Scam of 2000 thru 2015 at least four Providence mayors have played the role of Ken Lay. The outrageous accounting scams of World Com, Enron and others resulted in legislation known as Sarbanes Oxley. Put simply, a CEO has a responsibility to know what’s going on in his own governance. When a CEO” signs off” on numbers he is responsible for those reports.

In Providence this is especially true because the Mayor sits as Chairman of the Investment Commission that is responsible for investing pension contributions for the benefit of Pension Plan participants. The role of Chairman of the Investment Commission is a fiduciary role subject to fiduciary standards and anything that is not in the best interests of plan participants is a severe violation. 

Since at least 2006 Providence has produced materially misleading pension accounting numbers and has engaged in purposely overstating assets. It is not in the interest of plan participants to have contributions delayed for investment and instead used for operations of the Government. It is not in the best interest of plan participants to lend money to the City to ease  “cash flow” problems. It certainly wasn’t in the best interests of plan participants to have the Cities actuary “write off” $62 million in Pension assets that had been carried on the books for 15 years, without members of the plan and even the pension investment commissioners being aware. Yet this is exactly what just happened. On June 30,2015 actuary Segal Co. decided that placing an asset on the pension books called “other” and a current liability on the balance sheet every year for 20 years without ever paying off the original “loan” could no longer be referred to as a “current liability “ or as an “asset”. It was really a nonperforming loan extended from the Providence Pension plan to the city of Providence. Initial Questions arise.

So many unanswered questions

•    Who authorized the loan? 
•    How the loan was renewed every year?
•     Who authorized renewals? 
•    Who originated the loan and what were the terms of the agreement including interest rate and maturity?
•     Can the city negotiate a loan from its pension plan?

Mayor Elorza is certainly aware of the situation and has chosen to be silent on the recent default and accounting irregularities and thus joins Angel Taveras and David Cicilline as being primarily responsible for knowingly producing false and misleading financial statements to the Municipal Securities markets. They each have not informed or disclosed questionable loans to investors, taxpayers, ratings agencies or plan beneficiaries. They have each grossly violated their roles as fiduciaries of the pension plan. When Ken Lay did this, Sarbanes Oxley did not yet exist, but Lay was nonetheless sentenced to prison.  Elorza, Cicilline and Taveras appear responsible for the same offense: signing off on documents that contain misleading accounting practices and materially overstating assets. Should the punishment be any less for these Providence Mayors who specifically and knowingly violated the public trust?

Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity, and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC News, Yahoo TV, and CNBC.