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E. J. Bean
Throwing Strike Three Our two Enron hearings, examining the role of the board and the financial institutions, had exposed wide-ranging corporate misconduct, but Senator Levin wasn’t done. His third hearing zeroed in on how Enron had used structured finance, not only to cook its books but also to dodge taxes. Months earlier, Senator Levin had asked us how Enron was finding the money to pay taxes on all the phony income it was claiming from fake asset sales and disguised loans. We told him that part of the answer was that Enron hadn’t paid any federal income taxes in four of its last five years, despite claiming large profits. We let him know that the Senate Finance Committee was already conducting a detailed investigation into Enron’s tax practices. We also told him that one way Enron had gotten out of paying taxes was by making liberal use of a legal tax dodge involving stock options. Enron was infamous for giving huge stock option grants to its executives. In his last year, for example, Enron CEO Ken Lay received stock options worth $123 million. Lou Pai, head of Enron Energy Services, had earlier sold stock from his options for $270 million. Enron claimed tax deductions for all of those stock option profits as if the company had paid the executives, even though the executives had, in fact, sold their options to third parties in the marketplace and Enron had not recorded any stock option compensation expense on its books. For years, Senator Levin had worked to change the tax treatment of stock options so that corporations could deduct only the stock option expenses actually shown on their books, but Congress hadn’t made the change. Which meant Enron could legally deduct all of the stock option profits claimed by its executives (even though it never booked the amounts as expenses) and use those deductions to lower its taxable income. Senator Levin used Enron to condemn again the nonsensical stock option tax loophole,11 but that wasn’t the subject of his third and final Enron hearing. Instead, his focus was on showing how Enron used structured finance to dodge taxes. He used Slapshot to explain.
Investigating Slapshot One day during the prepay interviews, Bob finished questioning an Enron employee earlier than expected. Rather than call it a day, he took the opportunity to ask about a transaction that had only recently appeared on our radar screens: Slapshot. The executive’s evasive answers caused us to intensify our
