KUHN CAPITAL Monday, October 23, 2017
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Is Skilling Telling the Truth? (quotes Kuhn Capital's Ryan Kuhn)

Washington (Bloomberg) -- Former Enron Chief Executive Jeffrey Skilling should have known better, according to professors at Harvard Business School, his alma mater.

Skilling repeatedly told a congressional panel Tuesday, "I'm not an accountant,'' when he was asked about his role in partnerships that hid debt and more than $1 billion in losses.

Skilling should have known the risks of propping up partnerships with Enron stock, said Bruce Scott, a Harvard professor who taught a required course in business, government and the international economy while Skilling worked on his master's of business administration in the late 1970s.

"This is not rocket science,'' said Scott, who doesn't remember Skilling as a student. "If the price of the stock is going down, the collateral is going down."

Shares of Enron, once the largest trader of natural gas and electricity, fell from a high of $90 in August 2000 to below $1, losing more than $70 billion in market value. The stock plunge compounded losses from the partnerships, forcing Enron to file the largest bankruptcy ever in December.

Skilling's background became a focus when he told the Senate Commerce Committee he didn't know that accounting rules prevented him from using Enron stock as collateral without reporting losses from the partnerships on the company's financial statements. As CEO, "you have to decide does it make sense financially for the organization,'' said Robert Kaplan, a Harvard accounting
professor.

Professors who've never run what was once the seventh-largest corporation can't judge the former CEO, said Judy Leon, a Skilling spokeswoman. "It's very easy for all the experts to Monday morning quarterback,'' she said.

Argument of Ignorance
Skilling's Harvard professors stressed a CEO's need to keep tabs on all aspects of a business, said Ryan Kuhn, a classmate and friend of Skilling.

"The argument of ignorance at the end of the day had a hard time holding water at Harvard,'' said Kuhn, now a principal in Kuhn Capital, a Chicago-based firm that works on high tech mergers and acquisitions.

The program focuses on management's responsibility from the start. The Harvard course guide for 1977-78, the year Skilling enrolled, lists a class on "the external financial reporting process with an emphasis on the role of general management in setting accounting policies.''

In the second year, Harvard offered students 10 courses in controls to manage risk and conflicts of interest and eight finance classes.

Select Group
Harvard's MBA program attracted 4,695 applicants in 1977. Only 789 enrolled. Even in that select company, Skilling stood out, Kuhn said.

"The general impression of Jeff in school was that he was one of the brightest people we'd ever met,'' Kuhn said. "It was clear that if merit drove success, this guy would succeed.''

Jeffrey Sonnenfeld, then a management professor, recalled Skilling holding court on his free-market principles.

"He was extraordinarily tenacious,'' said Sonnenfeld, now associate dean of Yale University's School of Management.

Sonnenfeld said he recalled Skilling holding court in The Galley, a student cafe, on how the government shouldn't take the
lead in providing electricity to rural communities, leaving it to the free market. "He was passionate about energy issues.''

Lawmakers said they doubted Skilling, who resigned Aug. 14, didn't know about the faltering finances of Enron.

"You seem to know more about accounting than you let on,'' said Senator Byron Dorgan, the North Dakota Democrat who heads a commerce subcommittee investigating Enron's collapse.

More Intricate Now
Still, Skilling may not know the intricacies of accounting law regarding partnerships, accounting professors said. Major companies didn't begin weaving webs of partnerships and derivatives until a decade after he received his degree.

The accounting rules regarding partnerships become more complicated if, as Skilling has argued, they were hedges against
other Enron investments.

"If they're qualifying as hedges, this might be beyond accounting 101,'' said Robert Swieringa, dean of the Johnson School at Cornell.

Skilling's defense begins to weaken in light of the $1.2 billion in Enron losses the partnerships hid, showing they didn't
act as true hedges, said D. Quinn Mills, a general management professor at Harvard.

"He's being disingenuous,'' he said.

Kuhn said he is trying to reconcile the student he knew, whose "intellect was never being applied in less-than-ethical ways,'' with the man battling Congress from the witness table.

"I'm suspending my disbelief,'' he said. "I want to see how all the cards play out.''

--Jeff Bliss (202)624-1975 or jbliss@bloomberg.net with reporting
by Tom Contiliano. Editor: Willen, *Hendry


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