Message-ID: <30820502.1075841116966.JavaMail.evans@thyme> Date: Fri, 25 Jan 2002 07:47:53 -0800 (PST) From: sarah.palmer@enron.com To: sarah.palmer@enron.com Subject: Enron Mentions (major papers only) -- 01/25/02 Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: Palmer, Sarah X-To: Palmer, Sarah X-cc: X-bcc: X-Folder: \ExMerge - Martin, Thomas A.\Deleted Items X-Origin: MARTIN-T X-FileName: tom martin 6-25-02.PST THE NATION THE ENRON INQUIRY Now, the $51-Million Severance Question Pay: E= nron's Chapter 11 status may jeopardize compensation for ex-CEO Kenneth Lay= . Los Angeles Times, 01/25/2002 Accounting for Enron: Enron's Top Choice For Acting CEO Is Stephen Cooper The Wall Street Journal, 01/25/2002 ENRON'S COLLAPSE: THE COMPANY'S FUTURE Trying to Salvage What Can Be Salvaged While the Creditors Line Up The New York Times, 01/25/2002 Andersen Knew of `Fraud' Risk at Enron --- October E-Mail Shows Firm Antici= pated Problems Before Company's Fall The Wall Street Journal, 01/25/2002 October memo warned of 'heightened risk' of fraud=20 Houston Chronicle, 01/25/2002 Enron Hid Losses, Ex-Worker Says Energy: Manager warned executives $500-mil= lion deficit was attributed to another unit to create illusion of profit. Los Angeles Times, 01/25/2002 ENRON'S COLLAPSE: SELLING ENERGY Ex-Workers Say Unit's Earnings Were 'Illusory' The New York Times, 01/25/2002 Andersen Officials Grilled on Shredding; Fired Enron Auditor Declines to Te= stify The Washington Post, 01/25/2002 Judge OKs depositions on shredding=20 Houston Chronicle, 01/25/2002 ENRON'S COLLAPSE: THE CHAIRMAN An Optimist Sees the Chaos Become Surreal Spectacle The New York Times, 01/25/2002 ENRON'S COLLAPSE: THE OVERVIEW Enron Hearings Open, Focusing on Destroyed Papers The New York Times, 01/25/2002 ENRON'S COLLAPSE: THE IMPACT Bipartisan Outrage but Few Mea Culpas in Capital The New York Times, 01/25/2002 ENRON'S COLLAPSE: THE PARTNERSHIPS Investors Lured To Enron Deals By Inside Data The New York Times, 01/25/2002 ENRON'S COLLAPSE How LJM2 Tripped Up Enron The New York Times, 01/25/2002 ENRON'S COLLAPSE: MUTUAL FUNDS Many May Be Surprised To Be Enron Investors The New York Times, 01/25/2002 ENRON'S COLLAPSE Ruling Accelerates Key Depositions The New York Times, 01/25/2002 Why Bush Stiffed Enron The Wall Street Journal, 01/25/2002 Trading Charges: Lawsuit Spotlights J.P. Morgan's Ties To the Enron Debacle= --- Insurers Balk at Paying Bank Up to $1 Billion in Claims On Complex Tra= nsactions --- Update in a Glass Room The Wall Street Journal, 01/25/2002 Accounting for Enron: Former SEC Chief Levitt Reverses Stand, Calls for New= Laws on Accounting Rules The Wall Street Journal, 01/25/2002 A Renewed Call to Redo Accounting Reform: Two years after initially urging = changes in industry, a former SEC chairman has Senate panel listening close= ly. Los Angeles Times, 01/25/2002 Accounting for Enron: Grand Jury to Investigate Plaintiffs' Firm Involved i= n Shareholder Suit Against Enron The Wall Street Journal, 01/25/2002 After Enron, a Push to Limit Accountants to...Accounting The Wall Street Journal, 01/25/2002 NSC Aided Enron's Efforts; Agency Sought Lay Meeting With Indians on Plant The Washington Post, 01/25/2002 ENRON'S COLLAPSE: THE SECRETARY Army Chief Being Challenged on Ties to Company The New York Times, 01/25/2002 THE NATION With the Theater or PACs, Texans Saw Kenneth Lay as 'On Top of t= he World' Influence: The former Enron chief 'was a guy with swagger and loo= t who bought his way into whatever needed buying.' Los Angeles Times, 01/25/2002 Spreading It Around The New York Times, 01/25/2002 Enron Fraud: Appoint a Special Prosecutor Los Angeles Times, 01/25/2002 Business Spin; It's just like political spin, only not quite as dishonest. The Washington Post, 01/25/2002 ENRON'S COLLAPSE Excerpts From a House Hearing on Destruction of Enron Documents The New York Times, 01/25/2002 ___________________________________________________________________________= _____ Financial Desk THE NATION THE ENRON INQUIRY Now, the $51-Million Severance Question Pay: E= nron's Chapter 11 status may jeopardize compensation for ex-CEO Kenneth Lay= . NANCY RIVERA BROOKS; JAMES F. PELTZ TIMES STAFF WRITERS 01/25/2002 Los Angeles Times Home Edition A-1 Copyright 2002 / The Times Mirror Company Ousted Enron Chief Executive Kenneth L. Lay could get a severance package w= orth at least $25 million--and perhaps exceeding $51 million--although his = ability to collect that payday is clouded by the company's Chapter 11 bankr= uptcy filing.=20 Lay, who resigned Wednesday under fire, also could get parting gifts that i= nclude a lifetime annual pension of nearly $475,000, a $12-million life ins= urance policy and payment of taxes on any severance pay. But Lay may never see a dime because, with most of Enron Corp.'s operations= tangled in U.S. Bankruptcy Court, he slipped overnight from corporate comm= ander to yet another among the thousands of Enron creditors.=20 "I would be incredulous if he got any money, and if he did take any money h= e'd be spending the entire amount on bodyguards," compensation expert Graef= Crystal said.=20 Lay, who received more than $200 million in compensation from Enron since 1= 999, has been accused of misleading shareholders about Enron's finances as = it plunged toward ruin last year.=20 In his 15 years building Enron from a small pipeline company to the world's= largest energy trader, Lay was paid handsomely, and his severance agreemen= t and other benefits reflect that, according to documents on file with the = Securities and Exchange Commission.=20 Exactly how much Lay might receive in severance is only vaguely spelled out= in Enron's most recent proxy statement, filed with the SEC in March. Enron= representatives declined to clarify the matter and hinted that the payout = might not be a sure thing.=20 "The terms of Mr. Lay's separation are still being determined," Enron spoke= sman Vance Meyer said.=20 Three Times His Salary and Bonus, Plus=20 Lay's severance is based on payments he received in 2000, multiplied by the= three full calendar years left on his contract. That means Lay would be en= titled to a lump sum of about $25 million, or three times his 2000 salary o= f $1.3 million and bonus of $7 million.=20 That $25-million tab would be further swelled by an unspecified "long-term = grant value" received in 2000, according to the proxy statement. Compensati= on experts said that could include the $7.5 million of restricted stock and= a $1.2-million cash payment that Lay also received in 2000, which Enron ca= lled "long-term compensation."=20 If that assessment is correct, the total payout would be $51 million.=20 The SEC filing also said that Lay is entitled to a lifetime pension that wo= uld have been valued at $475,042 if Lay, 59, had stayed until 65. In additi= on, the company said it would pay all taxes on Lay's severance if the IRS r= ules that the severance package is an "excess parachute payment."=20 What is more, Lay, as of the end of 2001, owns a $12-million life insurance= policy that Enron helped him buy, according to Lay's 1996 employment agree= ment, also filed with the SEC.=20 Lay also remains as an Enron director, and they are paid at least $50,000 a= year.=20 Compensation experts said it is unlikely Lay will get his severance package= and most of his pension because all preexisting contracts are invalidated = by the bankruptcy filing and the fact that Lay technically resigned, rather= than being terminated. But the refusal of the company to rule out a severa= nce is "troublesome," Crystal said.=20 In any event, even as Enron was hiding losses in a murky series of off-the-= books partnerships and using questionable accounting on its way to the nati= on's largest bankruptcy filing, the company served another purpose that nea= rly was hidden from public view: It effectively was a personal bank for Ken= Lay.=20 The company last year provided Lay with an unusual line of credit of as muc= h as $7.5 million that he used repeatedly, often to help cover soured inves= tments he made elsewhere, his lawyer has said. This despite the fact that L= ay has received more than $200 million in compensation from Enron since 199= 9.=20 And the collateral securing the line of credit apparently was Lay's own Enr= on stock, shares of which were showered on him by the thousands either dire= ctly or through stock options that were part of his compensation package du= ring Enron's explosive growth in the late 1990s.=20 Lay typically repaid the credit line with his Enron shares, then would draw= down the loan again and repeat the process, Earl Silbert, Lay's lawyer, sa= id. Lay did this on 15 occasions between February and October, just as Enro= n's collapse was accelerating.=20 Lay Expected to Face Huge Legal Bills=20 Lay's apparent financial problems, signaled by his repeated tapping of the = credit line, are compounded by the specter of huge personal legal bills fac= ing him. Lay is the subject of more than 50 lawsuits resulting from Enron's= financial meltdown, as well as numerous federal investigations.=20 His credit line is a perk that has surprised several experts in executive c= ompensation, a field already chock-full of various stock options, bonuses a= nd other benefits paid to Corporate America's leaders.=20 To have a standing credit line for an executive who can pay back the loan w= ith stock the company has awarded him is "very unusual," said Alan Johnson,= managing director of Johnson Associates, a compensation consultant in New = York. The arrangement, approved by Enron's board, allowed Lay "to treat the= company as a personal piggy bank," he said.=20 Bill Coleman, senior vice president of compensation at Salary.com, an Inter= net compensation site, said that "there is something fundamentally odd abou= t a company loaning money to an executive and collateralizing it with the c= ompany's own stock."=20 "Why is Enron in the business of loaning money?" he asked.=20 Company Loans to Top Management=20 It is common for a company to make one-time loans to senior managers--say t= o help them relocate or to buy the company's shares. Sometimes corporations= will even waive the interest, or total repayment, as part of the executive= 's future compensation. Indeed, Enron in 1997 made a $4-million loan to Jef= frey K. Skilling, its chief executive who abruptly quit in August.=20 Also, the dollar amount of Lay's credit line isn't sizable relative to the = billions of dollars of debt that sank Enron. After a series of financial se= tbacks that sent its stock plunging and eroded investors' confidence, Enron= filed for Bankruptcy Court protection Dec. 2, citing more than $31 billion= in debt and $50 billion in assets.=20 The stock, which traded around $80 a share a year ago, now trades for just = pennies, and the options that Lay and others still have are virtually worth= less.=20 Silbert did not return calls requesting elaboration on Lay's arrangement, a= nd Enron spokesman Meyer said he could provide no further details.=20 No one has suggested that Lay's arrangement involved any wrongdoing, and En= ron's proxy statement last year disclosed--in two sentences--that the credi= t line existed. About the same time that the proxy appeared, in March, was = when Lay was starting to use the credit line repeatedly.=20 He typically repaid it by returning shares of his Enron stock to the compan= y, said Silbert, who said he made the public disclosure to offset speculati= on that Lay was aggressively dumping shares because the executive knew the = company was headed toward disaster.=20 But that disclosure--coming on top of so many other revelations, including = that some top Enron executives had financial interests in partnerships that= helped finance Enron's operations--adds to the appearance that "there is a= n awful lot of self-dealing going on in this case, and this is symptomatic = of that," said Rajesh Aggarwal, an assistant business professor at Dartmout= h College.=20 In September, at the same time Lay was using his Enron stock to support his= line of credit, he urged company employees to buy more shares only weeks b= efore Enron disclosed the worst financial results in its history.=20 The stock then was selling for about $25 a share, and two months later for = $4 a share. The stock's collapse wiped out billions of dollars of investor = holdings and the retirement savings of Enron employees who owned the stock.= =20 In general, Lay's credit-line arrangement "is not one that's shareholder fr= iendly," said Salary.com's Coleman. The whole point of executive compensati= on is to give top managers incentives to build the company and boost its st= ock price for all shareholders, he said, yet Lay's credit line gave him pro= tection from having to reach into his own wallet even when Enron's stock no= se-dived.=20 "He doesn't get hurt," Coleman said.=20 The credit line served another purpose not afforded the average Enron stock= holder, said Kevin Murphy, a finance professor at USC. Letting Lay repay hi= s credit line with Enron stock "allowed him to get liquidity out of his sto= ck that was easier than going to the open market," he said. In other words,= Lay didn't have to first sell $4 million or so of Enron shares on the stoc= k exchange--an event that likely would have depressed Enron's price on the = market--each time to pay back his Enron loans.=20 "That gives him an advantage that most stockholders don't have," Murphy sai= d.=20 The credit line also raises questions about the amount of risk Lay was pers= onally accepting at the same time he was leading Enron's fight for survival= .=20 It's unclear why, in light of his enormous compensation at Enron, he was ha= ving to repeatedly tap his credit line.=20 Besides his salary and bonuses, Lay realized $43.8 million from stock optio= ns that he cashed in during 1999, and $123.4 million from exercising option= s in 2000, according to Enron's government filings.=20 Lay sometimes borrowed from his Enron line of credit last year when he expe= cted to face margin calls from other lenders, Silbert has said. That meant = he had bought other investments partly with borrowed funds--or on "margin"-= -and now had to repay some or all of those amounts because their underlying= investments had tumbled in value.=20 Lay recently put several properties up for sale, including vacation homes i= n Aspen, Colo.=20 Now that Lay is gone, Enron is searching for a restructuring specialist to = run the company. Sources close to the company said an interim chief executi= ve will be announced in the next few days.=20 Enron reportedly has narrowed the candidates for its interim chief executiv= e, and the front-runners are three New York companies that specialize in co= rporate turnarounds, according to Bloomberg News. Those companies--Alvarez = & Marsal, Glass & Associates and Zolfo Cooper--all declined to comment.=20 *=20 Times staff writer Mark Fineman in Washington contributed to this report, a= nd Times wire services were used in compiling it. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Accounting for Enron: Enron's Top Choice For Acting CEO Is Stephen Cooper By Rebecca Smith and Joann S. Lublin Staff Reporters of The Wall Street Journal 01/25/2002 The Wall Street Journal A4 (Copyright (c) 2002, Dow Jones & Company, Inc.) Reorganization specialist Stephen F. Cooper is the front-runner to be named= acting chief executive of Enron Corp., following the resignation earlier t= his week of Kenneth Lay as chairman and CEO, people close to the matter sai= d.=20 Mr. Cooper, a managing principal of Zolfo Cooper, a 20-year-old consulting = firm that specializes in bankruptcy reorganization, is set to fly to Housto= n from New York today along with Tom Roberts, Enron's counsel at Weil Gotsc= hal & Manges, these people said. Mr. Cooper, who couldn't be reached, is scheduled to meet with senior manag= ement during the next few days. Enron's board could confirm his appointment= as soon as today, but more likely will act during the weekend. Mr. Cooper,= who has worked with Federated Department Stores Inc., Morrison Knudsen Cor= p. and a host of other companies, "is one of those guys who's done bankrupt= cies his whole life," said one person familiar with the situation. "You don= 't want somebody learning on the job with a bankruptcy this big."=20 If Mr. Cooper is named, the board next will turn its attention to finding a= chairman.=20 While Enron wants a chief executive who will manage its complicated day-to-= day operations and shepherd the firm through bankruptcy, which it entered o= n Dec. 2, the board is seeking a chairman who can play a different role. On= e person said the chairman's post -- for which there is no clear front-runn= er yet -- will be offered to someone who can act as the company's ambassado= r to Washington, where Enron is being investigated by nine congressional co= mmittees, the Justice Department and the Securities and Exchange Commission= .=20 Mr. Lay stepped down at the request of Enron's bankruptcy creditors' commit= tee after it said it had lost faith in the energy company's management. Who= ever is named as CEO is expected to work closely with Chief Financial Offic= er Jeffrey McMahon, who has been the firm's public face in recent weeks aft= er the departure of Enron's former finance chief, Andrew Fastow. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section C ENRON'S COLLAPSE: THE COMPANY'S FUTURE Trying to Salvage What Can Be Salvaged While the Creditors Line Up By NEELA BANERJEE 01/25/2002 The New York Times Page 7, Column 1 c. 2002 New York Times Company When he resigned as chairman and chief executive of Enron on Wednesday unde= r pressure from outside creditors, Kenneth L. Lay said he was stepping asid= e to ensure the survival of the company. But as Enron tries to sort through= creditors' claims and to tally the billions of dollars in debt parked off = its balance sheet, its chances of surviving, even in a greatly diminished f= orm, remain far from certain.=20 The creditors' committee, which represents the big banks and other companie= s Enron owes, wants to extract the greatest value from the assets remaining= . So do the company's own lawyers. But to do so probably will require selli= ng off most, if not all, of what the company still owns, industry analysts = and energy executives said. ''There's a high likelihood that it just gets liquidated and never gets out= of Chapter 11,'' said Andre Meade, a senior energy analyst with Commerzban= k. ''Enron doesn't have a business with a critical mass that it could be re= organized around.''=20 The company is moving quickly to hire an outside executive who specializes = in restructuring bankrupt companies, said Martin J. Bienenstock of Weil Got= shal & Manges, the law firm that is representing Enron in the bankruptcy pr= oceedings. Mr. Bienenstock declined to identify the candidates for the job.= But he said the list had been narrowed to three executives, at most, and t= hat Enron would probably announce its decision in less than a week.=20 Right now, Enron is being run day to day by Jeffrey McMahon, who was elevat= ed to chief financial officer to replace Andrew S. Fastow, who was forced o= ut last fall after his role in managing the off-the-books partnerships that= contributed to Enron's fall came to light.=20 Mr. McMahon is working alongside Raymond M. Bowen Jr., the treasurer, and S= tan Horton, who is in charge of gas pipeline operations.=20 ''The creditors' committee thinks this is a step in the right direction to = maximize value for all creditors,'' said Luc Despins of Milbank Tweed Hadle= y & McCloy, which represents the committee.=20 Exactly how Enron's value will be maximized at the hands of its lawyers and= creditors will determine the future shape of the company. When it filed fo= r bankruptcy protection on Dec. 2, Enron reported that it had $50 billion i= n assets and $31 billion in debt. But many industry experts are skeptical o= f the claims that its assets are fairly valued, given how misleading Enron'= s accounting has turned out to be.=20 Moreover, the reported debt does not include transactions that were kept of= f the books by the company to inflate its profits, Mr. Bienenstock said. Th= e $50 billion in assets includes contracts in its trading and power marketi= ng businesses, industry analysts said. But with its trading operation paral= yzed ever since the bankruptcy, no one knows what those deals are really wo= rth.=20 The sell-off at Enron has already begun. The company recently turned over i= ts energy trading business to UBS Warburg. In return for assuming the contr= acts of about 600 employees and acquiring things like computers and proprie= tary software, UBS Warburg will give Enron a third of its profits over the = next 10 years, although it has an option to buy out Enron's claim early. It= made no upfront payments.=20 Enron still owns the network of natural gas pipelines that it began with in= the mid-1980's. But that business, while profitable, is far smaller than t= he other units at the company. It also has a utility in Portland, Ore., tha= t is being sold. Enron's overseas holdings, widely considered money-losers,= include a troubled power plant in Dabhol, India, and a utility in Argentin= a.=20 ''The main business, the one anyone would really care about -- their tradin= g business -- they sold to UBS,'' said Gordon Howald, an energy analyst wit= h Credit Lyonnais. ''Their international portfolio is horrible. Their broad= band business has been disbanded. There is very, very little of value left.= ''=20 But Mr. Bienenstock contended that through a mix of asset sales and consoli= dation of remaining business, some version of Enron can still survive. Enro= n's lawyers are discussing with the creditors' committee the best way to se= ll those businesses that they think are worth the most intact while trying = to rebuild others that might bring profits and revenue in the future. Those= remaining businesses would form the core of a new company in which credito= rs would receive equity positions.=20 At the same time, Enron faces a sea of shareholder and employee losses. Mr.= Bienenstock said those suing for mismanagement of 401(k) retirement accoun= ts would have the same rights as creditors with unsecured debt. But those c= harging stock fraud would be at the back of the creditors' line, along with= Enron shareholders. Still, such plaintiffs retain the right to pursue laws= uits against Arthur Andersen and individual officers and board members of E= nron.=20 ''The creditors' committee is economically rational,'' Mr. Bienenstock said= , explaining why he does not think that Enron will melt away in a fire sale= . ''If the shares in a reorganized company are more valuable than selling t= he assets immediately, the creditors will take the shares.'' Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Andersen Knew of `Fraud' Risk at Enron --- October E-Mail Shows Firm Antici= pated Problems Before Company's Fall By Tom Hamburger and Jonathan Weil Staff Reporters of The Wall Street Journal 01/25/2002 The Wall Street Journal A3 (Copyright (c) 2002, Dow Jones & Company, Inc.) Arthur Andersen LLP analysts determined during the fall that there was sign= ificantly "heightened risk of financial-statement fraud" at Enron Corp., a = newly released document shows.=20 That determination came from a test on the Houston energy company's financi= al statements described in an Oct. 9 e-mail sent by Mark Zajac, a risk-mana= gement employee in Chicago, to Andersen auditors on the Enron account. Mich= igan Rep. John Dingell, the senior Democrat on the House Energy and Commerc= e Committee, released the e-mail as the panel's investigations subcommittee= opened hearings on Enron's collapse. At the hearing, which focused on document destruction at Andersen, firm exe= cutives acknowledged that they retained a law firm in early October in part= because they feared being sued over Enron -- but waited another month befo= re telling the Houston office to preserve Enron-related documents.=20 Andersen's lead Enron auditor, David Duncan, was fired this month for alleg= edly overseeing a massive document-destruction effort after the Securities = and Exchange Commission opened an inquiry into Enron's accounting practices= in late October. Yesterday, Andersen acknowledged that personnel outside H= ouston also destroyed documents.=20 The Zajac e-mail provides another indication that Mr. Duncan and other Ande= rsen auditors were increasingly uncomfortable with Enron's practices as it = spiraled toward collapse. The e-mail also offers a clue to Mr. Duncan's sta= te of mind as he and his subordinates were shredding documents. The e-mail = was dated a week before a previously disclosed Oct. 15 memo that recounted = Mr. Duncan warning Enron that its upcoming third-quarter earnings announcem= ent might be misleading. The Oct. 16 earnings news release characterized $1= .01 billion of losses as "nonrecurring charges," a characterization Mr. Dun= can opposed.=20 Mr. Zajac's analysis was based on a "financial statement fraud risk identif= ication" test. Such tests are routine in auditing, but the Enron results we= ren't. Mr. Zajac wrote that a complete test was impossible because sufficie= nt data about administrative expenses were lacking. But a test of the rest = of Enron's financial statements triggered a "red alert: a heightened risk o= f financial fraud." Mr. Zajac's e-mail explained that such red alerts somet= imes are false alarms, but must be taken seriously because the risk of frau= d is "significantly heightened."=20 The results were relayed to Mr. Duncan a month before Enron announced on No= v. 19 that it would restate its financial statements going back to 1997, cu= mulatively reducing earnings by nearly $600 million. "In the context of the= Enron debacle, this is tantamount to yelling that the barn door is open lo= ng after the horses have fled the scene and shown up in the next county," R= ep. Dingell wrote in a letter to Andersen Chief Executive Joseph Berardino = inquiring about the matter.=20 Andersen spokesman Charlie Leonard said he didn't know what actions its aud= itors took to address the "red alert." But he emphasized that Andersen had = been conducting the particular test referred to in the e-mail only "on an e= xperimental basis" since 2000 and that past runs "have shown that it needs = further refinement," especially when applied to companies such as Enron.=20 At the hearing, Andersen officials continued to pin responsibility for the = shredding on Mr. Duncan and his Houston team, but committee members peppere= d them with questions and evidence aimed at shifting the blame toward Chica= go headquarters.=20 Andersen's internal "investigation indicated that [Mr. Duncan] directed the= purposeful destruction of a very substantial volume of documents," said C.= E. Andrews, Andersen's global managing partner. "This is the kind of conduc= t that Andersen cannot tolerate."=20 Subcommittee Chairman James Greenwood, a Pennsylvania Republican, remained = skeptical as the hearing closed: "What I got after four hours here is a lar= ger question of whether Mr. Duncan is a fall guy for others at Arthur Ander= sen."=20 The hearing provided the most detailed chronology yet of the circumstances = surrounding the document destruction.=20 Members focused much of their questioning on the decision to hire the New Y= ork law firm of Davis Polk & Wardwell, which was retained Oct. 9 -- the sam= e day as Mr. Zajac's e-mail about financial fraud -- and now represents And= ersen in Enron litigation. Mr. Andrews said the firm was retained to help d= eal with Enron financial-reporting issues as well as "possible litigation."= By then, headquarters officials already were aware of a whistleblower's al= legations of possible fraud at Enron.=20 On Oct. 12, Andersen attorney Nancy Temple sent an e-mail from Chicago to r= emind the Houston office of the firm's document-retention policy, which cal= ls for preserving final audit papers but destroying nearly all other record= s unless litigation is "threatened." By about that time, Ms. Temple testifi= ed she had learned of the whistleblower's allegations, too, but she rejecte= d suggestions that the reminder amounted to a document-destruction order. S= he insisted she was merely responding to questions in prior conference call= s "about how to appropriately document several different matters."=20 Three days after sending that e-mail, Ms. Temple had her first discussions = with lawyers from Davis Polk about the Enron matter, which included documen= t-retention issues. That same day, Ms. Temple asked the Houston office in a= n e-mail to remove her name from a draft memo, in part because she didn't w= ant to be called as a "witness." Ms. Temple explained that she was afraid t= hat, because the memo discussed advice she offered, the inclusion of a refe= rence to her might breach attorney-client privilege.=20 On Oct. 22, the SEC announced an informal inquiry into Enron. The next day,= Ms. Temple testified, she and Mr. Duncan talked by telephone. Ms. Temple s= aid her notes indicate that Mr. Duncan said Andersen personnel were "trying= to gather all docs re transactions from around the world."=20 "Do your notes indicate that the documents were gathered and preserved or s= imply gathered?" Colorado Democratic Rep. Diane DeGette asked, prompting la= ughter. Ms. Temple responded that she understood Mr. Duncan to mean gathere= d "in one place to have it available."=20 In fact, that was the day that, according to Andersen's account, Mr. Duncan= called an urgent meeting of the Enron team that led to widespread destruct= ion of documents. Before declining to testify, he told committee investigat= ors that he provided his team with copies of Andersen's document policy but= didn't directly order document destruction, according to an account releas= ed by the panel. A follow-up memo from another Houston manager the next day= advised "everyone to do what is necessary to adhere to the guidelines" and= to work overtime if necessary to do so.=20 Buried in the Andersen officials' written testimony -- but not read aloud a= t the hearing -- was an acknowledgment that "Enron-related documents were d= estroyed by others" outside Mr. Duncan's team. Mr. Leonard, the Andersen sp= okesman, confirmed that personnel outside Houston also disposed of Enron-re= lated items -- mostly e-mails that the firm expect to recover -- but he dec= lined to say which other offices were involved or if Chicago was one of the= m.=20 It was only after Andersen received an SEC subpoena Nov. 8 that Ms. Temple = sent Houston a memo advising all employees to preserve all Enron-related do= cuments.=20 Asked why she waited so long, Ms. Temple said it was company policy to send= out such advisories whenever a subpoena was received. Otherwise, Ms. Templ= e and Mr. Andrews testified, account executives -- in this case, Mr. Duncan= -- are expected to make reasonable judgments. "The responsibility for that= rests with the engagement partner," Mr. Andrews said.=20 "I never counseled any destruction or shredding of documents," Ms. Temple t= estified. "And I only wish that someone had raised the question so that we = could have consulted and addressed the situation."=20 Rep. Billy Tauzin, chairman of the full committee, urged Andersen to recons= ider its policy of leaving such matters to auditors. "If all your policies = are to let accountants decide when it is legal to destroy documents in a pe= nding investigation, an awful lot of people are going to be in trouble down= the road," he said. "If you don't change it, I promise you, we will." Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 October memo warned of 'heightened risk' of fraud=20 Firm draws fire for delay before halt of shredding=20 Compiled from staff and wire reports=20 Jan. 25, 2002, 9:10AM WASHINGTON (Houston Chronicle) -- Some officials at Arthur Andersen were wo= rried about a "heightened risk" of fraud in Enron's books a week before the= energy company shocked stockholders with huge losses, an auditor's memo fr= om last October shows.=20 The e-mail by Andersen auditor Mark Zajac warned that a computer analysis o= f Enron's financial activities in the third quarter of last year indicated = "a red alert: a heightened risk of financial statement fraud," according to= investigators.=20 The document, released by Rep. John Dingell, D-Mich., added to mounting evi= dence that Enron's outside accounting firm had strong misgivings about Enro= n business practices.=20 "We have considerable rascality," Dingell, ranking Democrat on the House Co= mmerce Committee, summed up today on CBS's The Early Show. "We have to find= out who is at fault for what."=20 But a House hearing Thursday into the Enron Corp. collapse left lawmakers s= till certain of only one thing: Thousands of documents were destroyed by En= ron's blue-ribbon accounting firm.=20 Questions about who ordered the shredding, and whether it was intended to s= tifle government investigations, were left unresolved after a Commerce subc= ommittee concluded its first public hearing into the largest and perhaps mo= st devastating bankruptcy in history.=20 A week after the "red alert" memo, Enron reported a $638 million third-quar= ter loss and disclosed a $1.2 billion reduction in shareholder equity, part= ly because of hidden debt built up by a complex web of partnerships.=20 On the same day that Zajac wrote his memo to the head of the Enron auditing= team, Andersen also hired a law firm in anticipation of possible lawsuits = involving Enron, the Houston-based energy giant that spiraled into bankrupt= cy Dec. 2.=20 Andersen played down the significance of the computer analysis. And Zajac i= n the memo acknowledged the system produces "false alarms."=20 Lawmakers on Thursday ferociously criticized Arthur Andersen for waiting we= eks after a federal investigation was under way before halting in-house des= truction of Enron documents. Andersen executives in turn tried to blame fir= ed auditor David Duncan for sole responsibility in the shredding -- a claim= met with skepticism by House inquisitors.=20 Duncan, denied immunity by the House Energy and Commerce Committee, appeare= d briefly before the subcommittee on oversight and investigations, where he= twice invoked his Fifth Amendment right against self-incrimination.=20 "Mr. Duncan, Enron robbed the bank, Arthur Andersen provided the getaway ca= r, and they say you were at the wheel," said Rep. Jim Greenwood, R-Pa., aft= er Duncan took his seat at the witness table.=20 A tense-looking Duncan, flanked by his lawyers, informed the committee he w= ouldn't be answering any questions.=20 "I would like to answer the committee's questions, but on the advice of my = counsel I respectfully decline to answer the question based on the protecti= on afforded me under the Constitution of the United States," Duncan said.= =20 The exchange kicked off a new round of congressional hearings into the coll= apse of Enron and the involvement of its former auditors at Andersen.=20 On the other side of Capitol Hill, the Senate Governmental Affairs Committe= e was hearing from former SEC officials and academic experts on whether Enr= on's troubles should have been spotted earlier and how to strengthen curren= t safeguards.=20 The two panels are among at least nine looking into various aspects of what= lawmakers are calling the Enron debacle.=20 The Securities and Exchange Commission and the Labor Department also are in= vestigating, and the Justice Department has opened a criminal probe.=20 At the House subcommittee hearing, lawmakers repeatedly grilled Andersen at= torney Nancy Temple about why she waited until Nov. 10 to instruct employee= s to start saving Enron documents.=20 As early as Oct. 9, Andersen had hired an outside law firm in anticipation = of possible litigation in the Enron matter, lawmakers said.=20 Enron's highly public financial free fall began Oct. 15, when the company r= eported more than $600 million in quarterly losses and a $1.2 billion reduc= tion in shareholder equity.=20 Enron also had disclosed as early as Oct. 22 that the SEC was probing its b= ooks.=20 Gesturing dramatically and thumping his desk in the hearing room, Rep. W. J= . "Billy" Tauzin, R-La., chair of the committee, asked Temple why she was s= ilent for so long about the need to preserve documents.=20 "I never counseled any shredding or destruction of documents. I only wish s= omeone had raised the question," Temple said.=20 Tauzin fired back, "Does anybody have to raise it, or is it somebody's resp= onsibility in the company to raise it themselves? Whose responsibility is i= t but yours?"=20 Andersen fired Duncan last week, saying he had organized a massive destruct= ion of Enron documents beginning Oct. 23.=20 C.E. Andrews, an Andersen global managing partner who also appeared before = the committee, said it was Duncan's responsibility to protect the documents= .=20 "I cannot say it more strongly, Mr. Duncan was not following company policy= . Mr. Duncan was violating company policy," Andrews said.=20 The claim, echoed by other Andersen witnesses, drew fresh scorn from Tauzin= , who questioned why such a sensitive legal issue was left to an accountant= .=20 "I hope you're all OK, I don't know," Tauzin warned, referring to the legal= ramifications the testimony raised. "I don't know what's going to come out= of all this."=20 Several lawmakers said they suspect Andersen is making a scapegoat of Dunca= n, when it appears many employees may have been involved in destroying Enro= n documents.=20 In an internal, Oct. 24 Andersen document the committee released Thursday, = a manager instructs staff to use overtime if necessary in complying with th= e company's policy, which at the time called for destruction of all but the= final auditing documents.=20 Noting that retaining documents is largely a passive act, Greenwood asked w= hy complying with the Andersen policy would require staff to use overtime.= =20 "If the emphasis is on retaining documents, it doesn't seem to us that a wh= ole lot of overtime is required," Greenwood said.=20 Tauzin added that investigators believe documents may have been destroyed b= y Andersen in both the Houston and Chicago offices.=20 Andersen, which is rewriting its policy on document retention, called a hal= t to the destruction of Enron materials on Nov. 10, the day after the SEC s= ubpoenaed the auditing firm.=20 "My mother would say your policy was dumb like a fox," Greenwood told the A= ndersen executives.=20 Dorsey Baskin, managing director for Andersen, said the firm took decisive = steps to remedy the issues surrounding the document shredding.=20 "We certainly are not proud of the document destruction, but we are proud o= f our decision to step forward and accept responsibility," Baskin told the = committee.=20 Although the committee had originally subpoenaed Andersen CEO Joseph Berard= ino, they accepted Baskin as a substitute to answer questions about company= wide policy and the firm's response to the Enron crisis.=20 Subpoenas also were issued to Temple and Andersen manager Michael Odom, whi= ch investigators said would give them legal cover in the event of future li= tigation involving Enron.=20 Odom, an Andersen employee since 1969, was moved out of management duties i= n Houston the day Duncan was fired. Odom told lawmakers Andersen officials = didn't specify why he, Odom, was being disciplined.=20 "I asked what the reason was and I was told the firm felt it had to make so= me bold moves to restore confidence in the Houston community," Odom said.= =20 Rep. Gene Green, D-Houston, a member of the committee, told lawmakers that = Enron's collapse had devastated the city.=20 Hearing the stories of former employees, "literally, the tears would come t= o your eyes," Green said. "Clearly the insiders knew what was going on."=20 Lawmakers in the coming weeks will be expanding the probe of document destr= uction, and also looking at the financial and other problems that brought a= bout Enron's historic collapse.=20 Several said that changes in the law or federal regulations may result from= various issues illuminated through testimony.=20 It was unclear whether any of the four who testified Thursday would return = for more questioning when hearings resume in the House committee next month= .=20 Duncan's request for immunity from prosecution is not likely to be granted = by the committee, since it could later impair the Justice Department's ongo= ing criminal probe.=20 Duncan, who also was subpoenaed by the committee, began cooperating with Ho= use investigators the day after he was fired from Andersen. Since then, his= immunity request has cast a chill on his relationship with investigators.= =20 Greenwood complained that Duncan's ongoing silence could impede the committ= ee's work -- including unraveling the mysteries surrounding the fired audit= or.=20 "I still haven't made up my mind on whether Mr. Duncan was a rogue employee= or whether Mr. Duncan was set up as a scapegoat," Greenwood said.=20 Business; Business Desk Enron Hid Losses, Ex-Worker Says Energy: Manager warned executives $500-mil= lion deficit was attributed to another unit to create illusion of profit. LEE ROMNEY and WALTER HAMILTON TIMES STAFF WRITERS 01/25/2002 Los Angeles Times Home Edition C-1 Copyright 2002 / The Times Mirror Company A former Enron Corp. manager warned top company brass in August that more t= han $500 million in losses from the firm's energy services unit were being = hidden in another division so the unit could misleadingly report profit to = Wall Street, a copy of her e-mail reveals.=20 The allegations by former employee Margaret Ceconi were made in an Aug. 29 = e-mail to Chairman Kenneth L. Lay, who Wednesday resigned from the empire h= e built. Ceconi's e-mail apparently wasn't connected to another whistle-blower memo = sent by Vice President Sherron S. Watkins to Lay in mid-August.=20 Although Watkins warned that losses hidden in off-balance-sheet partnership= s could cause Enron to "implode in a wave of accounting scandals," Ceconi's= concerns focused on the juggling of losses within Enron units. A copy of h= er e-mail was obtained by The Times.=20 According to Ceconi, whose allegations were reported Thursday in the Housto= n Chronicle, losses of more than $500 million were transferred from Enron E= nergy Services to Enron Wholesale Services--the firm's lucrative trading un= it--in a financial sleight of hand to deceive investors and analysts.=20 Until last spring, the energy services unit was co-headed by Thomas E. Whit= e Jr., who now is Army Secretary. He could not be reached for comment Thurs= day.=20 "EES has knowingly misrepresented EES' earnings," Ceconi wrote. "This is co= mmon knowledge among all the EES employees, and is actually joked about. Bu= t it should be taken seriously."=20 Ceconi wrote the e-mail--a rambling memo in which she lashes out at Enron m= anagement--after she was fired from EES. She complains in the memo that she= was "fraudulently" recruited with misleading information about EES and the= n unfairly let go.=20 Enron spokesman Mark Palmer could not be reached Thursday. In the Chronicle= he characterized Ceconi as a "disgruntled" employee, but would not comment= on the specifics of her memo.=20 Ceconi could not be reached for comment. But her attorney, Demetrios Anaipa= kos, said her concerns about the accounting practices outweighed her person= al beefs with Enron. "She felt that EES was being portrayed as a money-maki= ng operation when it was exactly the opposite," he said.=20 EES provided energy services to commercial and industrial firms, promising = them predictable long-term energy supplies and improved energy efficiency. = Enron touted the unit as having huge growth potential.=20 According to a filing with the Securities and Exchange Commission, Enron re= vamped the EES unit last year, moving some commodity "risk-management activ= ities" to the Wholesale unit.=20 As part of the restructuring, Enron restated its second-quarter 2000 result= s for EES. Originally, the unit had revenue of $840 million and operating i= ncome of $24 million. After the restatement, revenue was cut in half to $42= 0 million, but profit almost doubled to $46 million.=20 The restructuring could have been "an attempt to move a money-losing operat= ion into a segment that was more profitable," said Randy Beatty, dean of th= e accounting school at USC, who reviewed the SEC document for The Times.=20 Some analysts said Enron repeatedly restructured operations to boost the fi= nancial results of individual units. "They kept restructuring the business = segments so they could shift earnings from one section to another," said Pr= udential Securities analyst Carol Coale.=20 Accounting experts said companies can freely restructure their operations, = thus altering the reporting of profits and losses. But, said William Kinney= , an accounting professor at the University of Texas in Austin, such reorga= nizations should be done for valid business purposes, not just to "move thi= ngs around."=20 "It's subject to abuse if you're trying to hide bad performance," Kinney sa= id. But proving intent is difficult, he said.=20 Anaipakos said Ceconi, who left a senior job at GE Capital to join Enron in= late 2000, received a call from someone in human resources after she sent = the e-mail. "She was told her allegations were being taken seriously, [but]= I can say she never heard from them again," he said.=20 Ceconi, now employed by a Houston consulting firm, also contacted the SEC b= y phone twice in August and September to voice her concerns, Anaipakos said= .=20 "Some would say the house of cards [is] falling," Ceconi wrote in the e-mai= l to Lay, which also complained of favoritism and discrimination at the com= pany.=20 "You have to decide the moral or ethical things to do, to right the wrongs = of your various management teams. I wish you luck." Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section A ENRON'S COLLAPSE: SELLING ENERGY Ex-Workers Say Unit's Earnings Were 'Illusory' By ALEX BERENSON 01/25/2002 The New York Times Page 1, Column 5 c. 2002 New York Times Company A major division of the Enron Corporation overstated its profits by hundred= s of millions of dollars over the last three years, and senior Enron execut= ives were warned almost a year ago that the division's profits were illusor= y, according to several former employees.=20 The division, Enron Energy Services, competed with utilities to sell electr= icity and natural gas to commercial and industrial customers. It was run by= Lou L. Pai, who sold $353 million in Enron stock over the last three years= , more than any other Enron executive, and Thomas E. White, who left Enron = to become secretary of the Army last June. Energy Services accounted for a small part of Enron's revenue but was promo= ted by the company as a big growth opportunity. Unlike the complex partners= hips and other entities that Enron used to move debt and losses on outside = investments off its books, this unit was a real business with more than 1,0= 00 employees and customers like J. C. Penney.=20 But former employees, including three who were willing to be identified, su= ggest that Energy Services used shoddy accounting practices to create ''ill= usory earnings,'' in the words of Jeff Gray, who joined Enron in 2000 and w= orked at the division for most of 2001.=20 For example, by estimating that the price of electricity would fall in the = future, Enron could book an immediate profit on a contract.=20 The employees' allegations raise fresh questions about Mr. White's role at = Enron, where he was an executive for 11 years. In a disclosure last May, ju= st before he became Army secretary, Mr. White reported that he owned more t= han $25 million of Enron stock and would be paid $1 million in severance fr= om Enron.=20 Because he went from the Army to Enron and back to the Army, Public Citizen= and others have voiced concerns about potential conflicts. While he was at= Energy Services, it sold a $25 million contract to the Army. As secretary,= he said that he would move energy services at bases to private companies, = like Enron.=20 A spokesman for Mr. White did not return repeated calls for comment. Mr. Pa= i, the former chairman, and a spokesman for Enron also did not return calls= . Peggy Mahoney, a spokeswoman for Energy Services, said the division's fin= ancial results had accurately reflected its business. ''It was no pie in th= e sky,'' she said.=20 Enron created Energy Services in 1997 to take advantage of the deregulation= of electricity markets nationally. It promised to cut its clients' energy = costs by installing energy-saving equipment and finding cheaper natural gas= and electricity.=20 Energy Services operated as essentially a freestanding company, but its res= ults were included in Enron's financial statements, which were audited by A= rthur Andersen. Energy Services organized itself so that it could use a fin= ancial reporting technique called mark-to-market accounting, which Mr. Gray= and other former employees said the division had abused to inflate its pro= fits.=20 Under traditional accounting, companies book profits only as they deliver t= he services they have promised to customers. But Energy Services calculated= its profit very differently. As soon as it signed a contract, it estimated= what its profits would be over the entire term, based on assumptions about= future energy prices, energy use and even the speed at which different sta= tes would deregulate their electric markets.=20 Then Energy Services would immediately pay its sales representatives cash b= onuses on those projections and report the results to investors as profits.= By making its assumptions more optimistic, the division could report highe= r profits.=20 As a result, the sales representatives and senior managers pressed the mana= gers who made the central assumptions about deregulation and energy prices,= said Glenn Dickson, a manager at Energy Services who was fired in December= .=20 ''The whole culture was much more sales driven than anything else,'' Mr. Di= ckson said. ''The people that were having to sign off on the deals with a g= un to their head knew that it wasn't a good deal.''=20 Mr. Dickson and other former employees said senior executives at Energy Ser= vices knew that their assumptions were unreliable. At the same time, expens= es ballooned as Energy Services found that the costs of managing its contra= cts were higher than it had projected.=20 ''They knew how to get a product out there, but they didn't know how to run= a business,'' said Tony Dorazio, a former product development manager at E= nergy Services.=20 In 1999 and 2000, under the leadership of Mr. Pai and Mr. White, Energy Ser= vices would sign almost any deal, a former employee said. But by the end of= 2000, the executives were no longer paying much attention to daily operati= ons, Mr. Dickson said.=20 None of the former employees said they knew whether Mr. Pai or Mr. White we= re aware of any accounting lapses at Energy Services. With Energy Services = hemorrhaging cash in 2000, even as it began to report profits to investors,= the unit began reviewing some of the contacts to determine whether it had = overstated its profits. But publicly, Enron continued to promote Energy Ser= vices' prospects. A year ago, Jeffrey K. Skilling, Enron's president at the= time, told Wall Street that the division was worth about $20 billion.=20 ''They said at one point they expected it to be as large as wholesale,'' sa= id Jeff Dietert, an analyst at Simmons & Company in Houston. Enron's wholes= ale trading division, which bought and sold electricity and natural gas wor= ldwide, was the source of most of its profits.=20 The division generated $165 million in operating profit on $4.6 billion in = sales in 2000, in contrast to a loss of $68 million on sales of $1.8 billio= n in 1999, according to Enron's 2000 annual report.=20 Even as Enron promoted the division's potential, it accelerated its review = of the contracts and brought in new management. By February 2001, Enron had= transferred Mr. Pai out of the division and named David Delaney, who came = from the wholesale business, as its top executive. A former brigadier gener= al, Mr. White remained until he became secretary of the Army.=20 A former employee said that in February or March 2001, senior managers with= in Energy Services spoke to Richard A. Causey, Enron's chief accounting off= icer, to discuss potential losses associated with a handful of large contra= cts. The potential losses on those deals topped $200 million, the employee = said.=20 About the same time, Mr. Delaney discussed the potential losses with Mr. Sk= illing and other top corporate executives, this employee said.=20 Sales slowed last year as Mr. Delaney forced the division to use more conse= rvative and accurate projections when deciding on a contract, Mr. Dickson s= aid. The move frustrated some sales representatives, but stemmed losses, he= said.=20 Although Energy Services publicly reported profits until Enron collapsed, i= t continued to lose money last year because of the unprofitable contracts, = employees said.=20 Margaret Ceconi, a former sales manager, sent a letter in August to Kenneth= L. Lay, then Enron's chairman, saying that Enron had hidden losses on its = contracts by putting them in the wholesale division.=20 ''It will add up to over $500 million that E.E.S. is losing and trying to h= ide in wholesale,'' Ms. Ceconi wrote in her letter, which was previously re= ported in The Houston Chronicle.=20 Today, Energy Services is essentially a shell. After filing for bankruptcy = Dec. 2, Enron walked away from many contracts, an action allowed under bank= ruptcy rules.=20 Energy Services' decision to exit so many contracts, including its largest,= a $2.2 billion contract signed only last year with Owens-Illinois, the gia= nt glass and plastic maker, is proof of the problems at the division, forme= r employees said.=20 ''They kept telling me, and I heard it many a time, that it was a sound bus= iness plan,'' Mr. Dorazio said. ''After being in this business for 21 years= , it didn't seem sound to me.'' Chart: ''Many Variables, One Profit'' Enron Energy Services sold contracts = to provide natural gas and electricity to companies for long periods. The c= ompanies found the prices attractive. But when it had the chance in bankrup= tcy court, Enron walked away from many of the contracts, a tacit acknowledg= ement that they were not profitable. A HYPOTHETICAL 10-YEAR ENERGY CONTRACT= 1. Enron would agree to provide electricity and natural gas at a fixed pri= ce for 10 years. 2. It then used a computer model to project the cost and p= rofit of providing this service. Among the many variables that Enron consid= ered were the prices of power in states that were deregulating, the expecte= d dates when states would deregulate power supplies and the expected demand= , based in part on the installation of energy-saving devices at the company= . Such factors are very hard to project. ENRON'S ACCOUNTING: 10 YEARS IN ON= E 3. Even though most of Enron's contracts were unprofitable at first, and = would only become profitable later if its projections proved accurate, Enro= n could book those profits as soon as it signed them under mark-to-market a= ccounting.(pg. C6)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 A Section Andersen Officials Grilled on Shredding; Fired Enron Auditor Declines to Te= stify Robert O'Harrow Jr. and Kathleen Day Washington Post Staff Writers 01/25/2002 The Washington Post FINAL A01 Copyright 2002, The Washington Post Co. All Rights Reserved House members probing the sudden demise of Enron Corp. pressed executives a= t the company's auditor, Arthur Andersen, yesterday on why they didn't do m= ore to preserve Enron audit documents last fall, after they learned that fe= deral regulators were investigating the energy trader's finances.=20 Lawmakers cited an e-mail showing that an Andersen official in October had = urged auditors on the Enron account in Houston to work "overtime" to follow= the company's rules on document retention and destruction. The e-mail did = not specifically say to retain documents. One committee member said he inte= rpreted the memo as a veiled suggestion to destroy documents. Another Andersen document said a computer analysis of Enron financial activ= ity showed that the company warranted a "red alert" of possible fraud. It w= as dated Oct. 9, a week before Enron announced a large loss.=20 Andersen officials played down the significance of the fraud warning, sayin= g later that the software was unreliable.=20 The Andersen witnesses staunchly defended the firm's actions, saying they s= ent out a detailed reminder to preserve documents as soon as the big accoun= ting firm received a subpoena in November. They blamed the shredding on Dav= id B. Duncan, the lead Enron auditor, who was fired last week.=20 Duncan, citing the advice of his attorney, declined three times to answer q= uestions in a brief appearance before the committee. He invoked his Fifth A= mendment privilege against self incrimination.=20 "Mr. Duncan, Enron robbed the bank," said Rep. James C. Greenwood (R-Pa.), = chairman of the House Energy and Commerce Committee's subcommittee on overs= ight and investigations. "Arthur Andersen provided the getaway car. And the= y say you were at the wheel."=20 Greenwood questioned after the hearing whether Duncan was "a villain or a s= capegoat."=20 C.E. Andrews, a global managing partner at Andersen, tried to deflect respo= nsibility from others at the accounting firm. "Destruction of documents dur= ing that period was wrong, and we admitted that," he said. "I cannot say mo= re strongly Mr. Duncan was not following company policy."=20 Andrews acknowledged that others at Andersen also destroyed Enron-related d= ocuments, although he said the volume and circumstances were different.=20 Andrews said the document policy was later suspended because it was not cle= ar enough. It was dropped Jan. 10 when Andersen first announced that some o= f its employees had destroyed Enron-related documents.=20 As House lawmakers sought to determine exactly what Andersen knew about the= shredding -- and when the firm knew it -- Federal Reserve Board Chairman A= lan Greenspan made pointed statements about the potential impact of Enron's= accounting practices in an appearance before the Senate Budget Committee.= =20 A visibly passionate Greenspan said that if "everybody did what is alleged = in the Enron accounting system, our [economic] system could not work" becau= se investors have to be able to rely on the information they receive. He re= ferred to Enron's use of off-balance-sheet partnerships to conceal a large = amount of corporate debt as "an egregious act."=20 While saying that he is not worried that Enron's collapse will hinder inves= tment in U.S. companies or cause interest rates to rise, he said the case "= is going to create a really major rethinking in a lot of people about wheth= er there is a spin game going on with respect to information coming out of = business into the investment community."=20 An Enron hearing before the Senate Governmental Affairs Committee also took= a broader view of the issues raised by the nation's largest bankruptcy. Se= n. Joseph I. Lieberman (D-Conn.), chairman of the committee, said his panel= 's examination will include questions about whether industry regulators and= agencies such as the Securities and Exchange Commission tracked Enron's ac= tivity closely enough. "And if not, why not?" Lieberman added.=20 One Senate witness, former SEC chairman Arthur Levitt Jr., chided an array = of people, including analysts, rating agencies and government regulators, f= or failing to do enough to prevent the Enron debacle.=20 "Enron's collapse did not occur in a vacuum," Levitt said, adding that it w= as partly a result of a "culture of gamesmanship" among go-go businesses th= at believe "it's okay to bend the rules."=20 Yesterday's hearings were part of nearly a dozen congressional investigatio= ns into Enron's collapse and allegations that it misled investors and, alon= g with Andersen, tried to hide questionable business practices.=20 The Justice Department is investigating Andersen's document destruction as = part of its criminal probe of Enron's collapse. In Houston yesterday, FBI a= gents were inside Enron's headquarters investigating the shredding of docum= ents there, which was disclosed earlier this week.=20 In remarks after the four-hour House hearing, Rep. W.J. "Billy" Tauzin (R-L= a.), chairman of the House Energy and Commerce Committee, said more people = than previously disclosed knew about document destruction by Andersen, "per= haps in Chicago," at the company's headquarters.=20 Greenwood scoffed at the idea of Andersen employees working overtime to uph= old the document-retention policy. "It doesn't seem to us it takes a lot of= overtime to retain documents," he said.=20 The testy House session demonstrated the complexity, disagreement and postu= ring that are quickly coming to characterize the widening investigations of= Enron's fall.=20 Lawmakers from both parties have pledged to examine how the energy trader c= ollapsed, the allegations of corporate fraud and coverups, and the impact o= n thousands of investors who lost billions of dollars when Enron's share pr= ice dropped to less than a dollar in recent months.=20 Greenwood opened the House subcommittee hearing by calling it "just the fir= st step in a thorough and rigorous investigation." He and other panel membe= rs were aggressive in their questioning -- and openly skeptical of the resp= onses of Andersen executives.=20 A focus of much of the questioning was the role of Nancy Temple, an Anderse= n lawyer who wrote an Oct. 12 memo that she said was meant to remind Duncan= and others about the company's policy, which calls for the retention of so= me documents and the destruction of others. Temple told lawmakers her memo = was not intended as a directive to shred documents.=20 The 35-page policy statement said that under normal circumstances, employee= s were to retain only final work papers supporting client audits, and to th= row out drafts, but that if litigation was anticipated, all documents were = to be retained. In her testimony, Temple said she meant employees to unders= tand that they were to retain documents.=20 "Your memo was interpreted, as you know, as a shredding order," said Rep. E= dward J. Markey (D-Mass.). Duncan's attorneys say he interpreted it to mean= he should destory Enron-related documents.=20 Temple's testimony also revealed that she contacted Andersen's outside lega= l advisers, Davis Polk & Wardwell, before sending an Oct. 16 e-mail to Dunc= an asking that he delete her name and other references to legal advice from= a memo he had written about potentially misleading statements in an Enron = news release about its earnings.=20 She said the outside lawyers recommended she do that so that if Andersen wa= s sued or investigated over its Enron auditing, discussions between Duncan,= Temple and other lawyers would be protected by attorney-client privilege.= =20 Andrews said Davis Polk had been retained by Arthur Andersen on Oct. 9 beca= use of "potential litigation" stemming from Enron's troublesome financial s= tatements.=20 Tauzin and other lawmakers yesterday questioned why Andersen's general coun= sel or compliance officer didn't issue clear instructions that day about pr= eserving documents.=20 Temple said she e-mailed an explicit directive to preserve Enron audit docu= ments on Nov. 10, in response to a subpoena the company had received two da= ys earlier from the SEC. Temple said she called Duncan directly the day bef= ore to underscore the message. After that call, Duncan's assistant sent out= an e-mail to other secretaries in the Houston office saying "no more shred= ding."=20 Among the questions Duncan would not answer yesterday was why, if he though= t the Oct. 12 memo was a directive to destroy documents, he waited 11 days = to accelerate the process.=20 Temple also told lawmakers about a Sept. 28 telephone conversation among An= dersen partners to discuss Enron and the possibility of problems and errors= in the company's past financial statements. She said one partner brought u= p the idea of deleting a sentence acknowledging that the firm had given inc= orrect accounting advice. She testified that she told the partners they sho= uldn't do that.=20 Tauzin said he is troubled that an accounting partner at Andersen would eve= n suggest such a thing, and that Temple didn't seem surprised by it, even t= hough "she did the right thing" by forbidding it.=20 Tauzin said "the clear picture we're getting at this hearing is that somebo= dy felt it was a good idea to get rid of an awful lot of documents . . . an= d it's not a pretty one."=20 Staff writers John M. Berry, Susan Schmidt and Jackie Spinner contributed t= o this report. http://www.washingtonpost.com=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Judge OKs depositions on shredding=20 Order for 6 includes fired Andersen auditor=20 By ROSANNA RUIZ=20 Copyright 2002 Houston Chronicle=20 Jan. 24, 2002, 8:59PM A federal judge has approved an order allowing attorneys for Enron stockhol= ders to take depositions from one former and five current employees of the = company's auditing firm concerning document destruction.=20 This settles a dispute raised by defense attorneys who asked to delay the p= rocess, mainly because their clients are facing inquiries from so many inve= stigations.=20 U.S. District Judge Melinda Harmon's order, issued late Wednesday, states t= hat depositions may begin after Arthur Andersen completes its internal repo= rt about the shredding of Enron-related documents. The report is due within= three weeks.=20 "We're glad we persisted. We're glad we prevailed," said Bill Lerach, a San= Diego attorney representing Amalgamated Bank. "We look forward to taking t= he testimony under oath of the officials at Andersen who destroyed document= s."=20 The New York-based bank is one of several plaintiffs suing Andersen and 29 = former and current Enron executives and board members. The suit alleges the= insiders were aware of accounting problems that led to Enron's inflated ea= rnings and higher stock prices.=20 Rusty Hardin, attorney for the accounting firm, opposed allowing deposition= s of David Duncan, the lead auditor fired by Andersen last week; four Ander= sen employees on administrative leave, and Andersen's in-house attorney, Na= ncy Temple. Hardin argued that the depositions might interfere with investi= gations by Congress, the departments of Labor and Justice and the Securitie= s and Exchange Commission.=20 The four Andersen employees placed on administrative leave -- Thomas H. Bau= er, Michael Lowther, Michael Odom and Stephen Goddard Jr. -- must also answ= er plaintiffs attorneys' questions about the shredding or deletion of Enron= documents.=20 "We hoped those depositions would be put off because those people are being= pulled in so many directions. But we don't have any problems with the orde= r," Hardin said.=20 Duncan, identified by Andersen as the organizer of the unauthorized destruc= tion of Enron documents when the SEC began its investigation, invoked his F= ifth Amendment privilege Thursday before the House Energy and Commerce Comm= ittee. He may do the same when he is deposed.=20 Temple, based in Chicago, will be deposed about an ambiguous Oct. 12 e-mail= she wrote regarding the company's document-retention policy.=20 During her appearance before the House panel Thursday, Temple denied that t= he e-mail advised Andersen employees to destroy any documents.=20 Hardin said he could not predict whether Duncan or the others would provide= answers during the depositions. That decision, he said, rests with them an= d their attorneys.=20 "I thought the plaintiffs would have a better chance of getting detailed in= formation if they waited a while, but they didn't want to," Hardin said.=20 Lerach argued this week that the depositions ought to be taken now while me= mories are fresh.=20 Harmon's order states that each deposition will last up to eight hours and = cover only the "document and data retention, storage, removal, deletion and= attempts to restore or recover deleted or destroyed materials. No document= s need be produced in connection with these depositions."=20 The six may also be deposed at a later date about the document destruction.= =20 Andersen must allow experts hired by the plaintiffs' attorneys an opportuni= ty to evaluate the company's efforts to recover or reconstruct Enron-relate= d documents that were destroyed or deleted.=20 The plaintiffs' attorneys will also be given access to Andersen's document-= storage facilities to ensure appropriate security measures are in place.=20 Business/Financial Desk; Section C ENRON'S COLLAPSE: THE CHAIRMAN An Optimist Sees the Chaos Become Surreal Spectacle By JIM YARDLEY 01/25/2002 The New York Times Page 7, Column 1 c. 2002 New York Times Company HOUSTON, Jan. 24 -- In the last days before his resignation, Kenneth L. Lay= was up there on the 50th floor, above the city that once lionized him, a f= allen king barricaded atop his silver tower. Mr. Lay, a friend said, had hi= red a security guard to protect himself against death threats. Employees go= ssiped that he arrived by private car in the loading dock and was whisked t= o his office on a freight elevator, all to avoid attention.=20 He must have struggled to recognize the new, chaotic world below. His compa= ny, Enron, had collapsed. His days, according to another friend, were fille= d with lawyers. His pal, the president of the United States, who had once r= eferred to him affectionately as Kenny Boy, complained that his mother-in-l= aw had taken a bath on Enron stock. The Rev. Al Sharpton showed up calling for justice. The Rev. Jesse Jackson,= who in November shared a private prayer with Mr. Lay, returned this evenin= g in the midst of the crisis. That Mr. Lay merited the ministrations of Mr.= Jackson, who is known to gravitate toward catastrophe, was only one indica= tion of the surreal spectacle that his precipitous fall had become.=20 ''I do not think he's ever had a failure,'' said Bonnie Bourne, his older s= ister, who lives in Columbia, Mo. ''My father was eternally optimistic. I s= ee that in Ken: things are going to work out. And it has."=20 Until now. By stepping down Wednesday evening, Mr. Lay ends his tenure as E= nron's chairman and chief executive and begins his new career -- that of a = defendant in lawsuits, a witness before Congressional committees and a pote= ntial target of criminal investigations. The questions now facing Mr. Lay a= bout Enron's partnerships and accounting practices represent the ultimate W= ashington endgame: what did he know, when did he know it and did he betray = the trust of his employees and shareholders?=20 Mr. Lay, 59, gathered top Enron executives and employees in a conference ro= om on Wednesday to deliver the news that he was leaving the company, just a= s he had earlier told Enron's board via a conference call. He had been aske= d to resign by the court-appointed creditors committee, but he had floated = the idea himself as far back as November when the company was negotiating i= ts failed merger with its energy rival, Dynegy.=20 ''When the Dynegy deal was taking place,'' said Thomas A. Roberts, a lawyer= for Enron in New York who is serving as a liaison to the creditor's commit= tee, ''he at that point thought if his presence as an officer of the compan= y was going to cause a problem, he would consider resigning.''=20 Mr. Lay had been thinking about resigning, on his own terms, even before En= ron's troubles emerged.=20 In August, when his hand-picked successor, Jeffrey K. Skilling, unexpectedl= y resigned as chief executive, Mr. Lay, then only the chairman, had told fr= iends and family that he was easing toward retirement. But Mr. Skilling's a= brupt departure, coupled with the steady decline in the company's stock pri= ce, prompted Mr. Lay to reassume the chief executive position.=20 ''He came home for a family reunion in August,'' Ms. Bourne said. ''Skillin= g had just resigned. I said, 'I thought you were ready to get a boat and ta= ke to the sea.' And he said, 'Well, not yet.' "=20 Mr. Lay called a meeting of employees on Aug. 16, two days after Mr. Skilli= ng's departure, and was greeted with a standing ovation. For many Enron emp= loyees, the unpretentious, folksy Mr. Lay represented the moral ballast of = a company that they felt had spiraled out of control. He was a former chair= man of the local United Way; a branch of the Y.M.C.A. was named after him.= =20 Even today, some workers who have lost their jobs refuse to blame Mr. Lay.= =20 ''He had an almost cultish following,'' said one Enron executive who was am= ong the more than 4,000 workers laid off on Dec. 3, the day after the compa= ny filed for Chapter 11 bankruptcy.=20 But Mr. Lay could not work miracles, and a string of recent disclosures hav= e raised questions. He said in August that questions about the partnerships= used to inflate profits were ''way over my head,'' yet that same month he = met with a vice president who detailed her concerns.=20 At the same time that Mr. Lay was learning about these potential problems, = he was encouraging employees to buy more Enron stock and reassuring them th= at the company would rebound. He continued to sell shares himself in Septem= ber and October, a decision his lawyer has attributed not to a lack of conf= idence in his company but to pressure to pay off millions of dollars in loa= ns.=20 Either way, Mr. Lay's legacy is more than tarnished for many employees. Fir= ed employees have printed T-shirts that read ''Layd Off,'' and howled after= the company paid $55 million in retention bonuses while giving a $4,500 se= verance to those who were let go. The retirement funds of many employees ha= ve been wiped out.=20 ''It's clear to people with Enron that the paternal figure he represented -= - that died a long time ago,'' said the executive who was among those laid = off. ''He should have left last year.''=20 Those who have spent time with Mr. Lay say he has expressed frustration but= not anger. Mr. Jackson said that when he met with Mr. Lay in November: ''W= hen I did talk with him, and did have prayer with him, he seemed to be daze= d by all these revelations. He seemed unaware of what all had happened.''= =20 Robert Mosbacher, the former secretary of commerce who served on Enron's bo= ard during the 1980's, said he spoke briefly with Mr. Lay before Christmas.= ''It was sort of a little telephone hug to say, 'I'm sorry,' '' said Mr. M= osbacher, who initiated the call. ''He didn't sound great, but I don't thin= k you or I would be any better.''=20 Others checked in, too. Mr. Lay's friend and fund-raiser, Sue Walden, said = she spoke with him on Tuesday about his frustrations with the press coverag= e of Enron's collapse. He felt it was one-sided, she said, and ''he seemed = very upset that any of his political ties and his friendship with the presi= dent could be used to hurt the president.''=20 But few people talked with Mr. Lay as much as Mr. Roberts, the Enron lawyer= who is liaison to the creditor's committee. He said they often talked five= times a day.=20 He said Mr. Lay was usually upbeat and surprisingly optimistic, mentioning = that he and his wife ''pray over this regularly.'' On Wednesday, Mr. Robert= s listened to the conference call as Mr. Lay told the board of his resignat= ion. He said Mr. Lay then broke the news to top executives and staff member= s.=20 Later, after the news was out publicly, Mr. Roberts said he called one fina= l time, at 10:30 p.m. Eastern time. Mr. Lay, he said, told him, ''This has = not been a good day.''=20 He is certain to face more of them. Photo: Kenneth L. Lay, who resigned Wednesday as chairman and chief executi= ve of Enron, now faces questions about the company's partnerships and accou= nting practices. (Reuters)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section A ENRON'S COLLAPSE: THE OVERVIEW Enron Hearings Open, Focusing on Destroyed Papers By RICHARD A. OPPEL Jr. and STEPHEN LABATON 01/25/2002 The New York Times Page 1, Column 6 c. 2002 New York Times Company WASHINGTON, Jan. 24 -- Lawmakers investigating the Enron Corporation said t= oday that new evidence showed that the company's auditors, Arthur Andersen,= destroyed documents knowing that they might be relevant to criminal and ci= vil investigations.=20 At a hearing this morning before a House subcommittee examining the collaps= e of Enron, lawmakers heard evidence that two weeks before Andersen executi= ves in Houston began destroying documents the accounting firm retained a la= w firm to prepare to defend itself in cases that could arise from Enron's p= roblems. A document released by lawmakers also shows that on the same day the law fi= rm was hired, Oct. 9, some Andersen officials were worried that there was a= ''heightened risk of financial statement fraud'' with Enron's books.=20 In addition, the subcommittee released copies of an e-mail message received= by Andersen employees a day after government regulators announced their in= vestigation of Enron. Lawmakers said employees construed the message as a d= irective to begin destroying records.=20 David B. Duncan, an Andersen partner until he was fired after acknowledging= that he took part in destruction of records, declined to respond to questi= ons from House lawmakers, invoking his Fifth Amendment right against forced= self-incrimination. [Excerpts from Congressional hearings, Pages C8-9.]=20 The hearings brought together many elements of American political and econo= mic life: the partisan battle over the proper role of government regulation= , the bursting of the financial bubble of the 1990's and the quarrel over t= he influence of money in politics.=20 And the sessions were yet another indication of the mounting impact on Wash= ington of Enron's collapse, the largest corporate bankruptcy in history. Ev= en as the White House spokesman, Ari Fleischer, argued that the company's c= ollapse was a corporate scandal, not a political one, its political effects= were visible in Congress and at the White House.=20 Controversy over large political contributions from Enron helped House memb= ers fighting to overhaul the nation's campaign finance laws to move their l= egislation closer to a floor vote, with Mr. Fleischer saying a Bush veto wa= s unlikely. All the attention focused on the millions donated by Enron to m= embers of the two parties has intensified the pressure on Mr. Bush and othe= r political leaders to back change.=20 There were other signs of how Enron's fortunes had intersected with politic= s. Associates of Karl Rove, Mr. Bush's top political adviser, said he had r= ecommended a lucrative consulting contract with Enron for Ralph Reed, the R= epublican strategist, as Mr. Bush was weighing whether to run for president= . The associates said the arrangement helped keep Mr. Reed's allegiance to = the Bush campaign without putting him on any payroll.=20 A new computer analysis of campaign finance records showed that of the 248 = senators and House members on the 11 Congressional committees that are inve= stigating the Enron affair, 212 had received contributions from Enron or Ar= thur Andersen. The donations from the two companies have been so pervasive = that all the Senate's top 20 recipients of Enron donations are serving on a= t least one panel investigating Enron. Because many lawmakers who accepted = Enron donations were Democrats, the burgeoning scandal has created bipartis= an discomfort.=20 Among those testifying today was Arthur Levitt, the former chairman of the = Securities and Exchange Commission, who had tried with limited success to i= mpose tough conflict-of-interest restraints on the accounting industry.=20 ''Too many elements of the system are not trustworthy today,'' Mr. Levitt t= old the Senate Governmental Affairs Committee. ''They have failed us becaus= e of self-dealing and self-interest.''=20 The House and Senate committees conducting today's hearings include members= who had beaten back earlier proposals for tougher conflict-of-interest rul= es for auditors and who had supported legislation in the 1990's that made i= t harder for investors to sue unethical accountants and easier for corporat= ions to put out misleading financial projections.=20 Mr. Levitt proposed a number of changes to eliminate the possible conflicts= of interests of Wall Street analysts and accountants and make corporate bo= ards more independent-minded. He also suggested the adoption of a new rule = that required companies to change auditors every five to seven years ''to e= nsure that fresh and skeptical eyes are always looking at the numbers.''=20 He also suggested that the recent proposals by his successor at the agency,= Harvey L. Pitt, were weak. Mr. Pitt, whose proposals have come under heavy= criticism since they were announced last week, has proposed that a group d= ominated by outside experts should discipline the accounting industry.=20 Some lawmakers, including members who had received donations from Enron and= the accounting industry, said the collapse demonstrated the need for chang= ing campaign finance laws.=20 ''Because Enron has made substantial political contributions to members of = Congress and the executive branch, some will question the independence in l= aunching such an investigation,'' said Senator Joseph I. Lieberman, the Con= necticut Democrat who heads the Governmental Affairs Committee. ''There are= two things we in Congress can do to overcome that skepticism and rebuild p= ublic trust: conduct completely independent investigations of Enron and pas= s campaign finance reform.''=20 The committee's ranking Republican, Senator Fred Thompson of Tennessee, agr= eed.=20 ''We have an opportunity to do some good here on a bipartisan basis,'' Mr. = Thompson said as he outlined issues raised by the scandal. ''In the process= , we may even finally decide that allowing huge amounts of soft money contr= ibutions to public officials is not such a good idea.''''=20 In the House hearing, Representative Billy Tauzin, the Louisiana Republican= who heads the the Energy and Commerce Committee, which will hold a hearing= on Feb. 6 focusing on Enron, said ''scores and scores'' of Andersen employ= ees were engaged in document destruction.=20 ''It's clear to us that our investigation, and other investigations, have b= een impeded by this policy,'' he said.=20 The ranking Democrat on the committee, Representative John D. Dingell of Mi= chigan, said Andersen's actions were ''either criminally stupid, or stupidl= y criminal or both.''=20 Lawmakers said it appeared plain that senior Andersen officials were aware = by early October, when the firm hired the law firm of Davis Polk & Wardwell= , that lawsuits were possible, yet they did nothing to ensure that crucial = documents were preserved, waiting until receiving a subpoena on Nov. 8 to i= nstruct employees to ''stop the shredding.''=20 This was a major mistake, lawmakers said, and it contradicted recent commen= ts by Andersen's chief executive, Joseph F. Berardino, who said Sunday on '= 'Meet the Press'' on NBC that Andersen's policy was ''not to shred document= s, not to eliminate documents if you have a reasonable basis to anticipate = an investigation.''=20 This morning, the first witness, Mr. Duncan, strode to the hearing table fl= anked by his two lawyers, Robert Giuffra and Vince DiBlasi. Wearing a dark = blue suit, Mr. Duncan, 42, rose and was sworn under oath, but he invoked hi= s Fifth Amendment right against self-incrimination, and he was dismissed by= the subcommittee chairman, Representative James C. Greenwood, Republican o= f Pennsylvania.=20 Mr. Greenwood said he was frustrated by Mr. Duncan's refusal to testify and= told him: ''Enron robbed the bank. Arthur Andersen provided the getaway ca= r, and they say you were at the wheel.'' But speaking with reporters later,= Mr. Greenwood said he remained concerned that ''Mr. Duncan and others were= the fall guys'' for a firm that sanctioned document destruction when they = knew litigation was likely.=20 Andersen officials at the hearing said Mr. Duncan orchestrated the shreddin= g without direction from superiors, and a firm spokesman, Patrick Dorton, p= layed down the timing of the hiring of the outside law firm. ''It would not= be unusual for this firm or any company to seek the advice of outside coun= sel in a situation like this,'' Mr. Dorton said.=20 An Andersen spokesman dismissed the document that discussed the risk of ''f= inancial statement fraud,'' saying it stemmed from an experimental computer= model Andersen was using that often registered false results.=20 In a statement after the hearing, Andersen said that it had ''deep regret f= or the disturbing actions of several of its employees on the Enron engageme= nt'' but that the testimony ''further demonstrates the firm's complete reso= lve to learn the facts, make them known to the government and the public, a= nd take every appropriate action against the individuals involved.''=20 Four Andersen officials testified today, but the committee saved its sharpe= st questioning for Nancy Temple, a lawyer in the firm's Chicago office who = by early October was working closely with Andersen partners in Houston who = were reviewing what they viewed as Enron's increasingly troubled accounting= .=20 On Oct. 12, Ms. Temple had sent to auditors in Houston a copy of e-mail sho= wing the firm's document-retention policy, which some lawmakers said amount= ed to a green light to destroy documents. Mr. Duncan and other Andersen off= icials interviewed by the committee's investigators have called her e-mail = unusual.=20 Lawmakers also were critical that notes she took during an Oct. 23 conferen= ce call with Mr. Duncan and other partners involved with the Enron account = did not indicate that preserving documents was mentioned. Her notes read, i= n part: ''AA trying to gather all docs re transaction from around the world= .''=20 ''And those notes don't say anything about preservation, do they?'' Represe= ntative Diana DeGette, Democrat of Colorado, asked.=20 Ms. Temple also drew the ire of the subcommittee when she characterized as = ''positive'' an October report by Enron's outside law firm, Vinson & Elkins= , on Enron's accounting.=20 Mr. Tauzin told her: ''We're trying to get the facts here. But if you will = characterize a report that indicates a decline in the value of Enron's stoc= k and a serious risk of adverse publicity and litigation as a positive repo= rt from the attorneys, we are going to have trouble with your testimony tod= ay.'' Photo: David B. Duncan, center, declined to testify at a hearing on Enron. = His lawyer, Robert Giuffra, was at left. (Stephen Crowley/The New York Time= s)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section C ENRON'S COLLAPSE: THE IMPACT Bipartisan Outrage but Few Mea Culpas in Capital By DON VAN NATTA Jr. 01/25/2002 The New York Times Page 5, Column 1 c. 2002 New York Times Company WASHINGTON, Jan. 25 -- The Enron scandal has grown so large that it took no= t one but two hearings on Capitol Hill today for the politicians to begin s= orting through the mess, while also carefully sidestepping their own role i= n it.=20 Anyone who tried to watch or listen to both proceedings simultaneously hear= d a bipartisan chorus of outrage about shredded documents and empty retirem= ent accounts. ''Enron robbed the bank. Arthur Andersen provided the getaway car, and they= say you were at the wheel,'' Representative James C. Greenwood of Pennsylv= ania, the Republican chairman of the House Energy Committee's subcommittee,= told David B. Duncan, the dismissed Arthur Andersen partner who led the ac= counting firm's audit of Enron and who invoked his Fifth Amendment right to= day against self-incrimination.=20 Senator Richard J. Durbin, Democrat of Illinois, said: ''When the corporate= insiders at Enron realized the ship was sinking, they grabbed the lifeboat= s and left the women and children, their workers and investors, to drown.''= =20 While politicians were quick to blame Enron's accountants for allowing the = giant energy trading company to collapse, few on either panel were prepared= today to accept any blame for the role Congress played.=20 The White House, meanwhile, once again insisted today that the company's fa= ilure was a business scandal -- not a political one.=20 White House officials adopted the stance of outraged victim and vengeful co= p. ''Nothing is going to stop the president and this administration from pu= rsuing justice,'' said Ari Fleischer, the White House spokesman.=20 Vice President Dick Cheney continues to refuse to release a list of people = who met with his energy task force last year, even though more senators hav= e called for its release. Mary Matalin, a counselor to Mr. Cheney, said tod= ay that the administration felt the list should be withheld to protect the = participants' privacy.=20 On Capitol Hill, some of the members posing the toughest questions today ha= d in earlier years voted for legislation that deregulated commodities marke= ts. They also blocked several attempts to toughen accounting standards. Tho= se decisions helped make it easier for Enron to escape the scrutiny of gove= rnment regulators.=20 Several senators sitting on the Governmental Affairs Committee, like Senato= r Robert G. Torricelli, Democrat of New Jersey, pressured the Securities an= d Exchange Commission in 2000 to abandon a proposed rule that would have ba= rred accounting firms from performing auditing and consulting work for the = same client, as Andersen did for Enron. He was one of 13 senators who inter= vened to quash the plan.=20 Yet Mr. Torricelli offered one of the day's only mea culpas. Addressing Art= hur Levitt Jr., the former chairman of the Securities and Exchange Commissi= on who had pushed for the rule and testified today, Mr. Torricelli said: ''= We were wrong. You were right.''=20 Both at the White House and in Congress, the message is simple: Punish thos= e responsible for the Enron debacle, and do everything possible to make sur= e another Enron does not happen. There is not much appetite on either end o= f Pennsylvania Avenue for the news media or the public to dwell on any role= the legislative or executive branches may have played in creating an envir= onment to allow Enron to flourish.=20 ''After all of the sound and fury of these investigations, the bottom line = questions are: Is Congress willing to amend the law to rein in the greed of= the next Enron?'' Mr. Durbin asked. ''Are we willing to concede that the g= enius of capitalism can result in ruthless behavior without our oversight a= nd the protection of law?''=20 Just as the White House has tried to avoid any political fallout from the E= nron debacle, members of Congress have tried to escape any collateral damag= e from the scandal. So the House Energy Committee resembled a bipartisan co= rporate tribunal. Members acted as both prosecutors and judges and the accu= sed, Arthur Andersen L.L.P., was left with almost no defense.=20 But many of the 11 House and Senate investigations into the scandal plan no= t only on looking back, as was today's chore, but also on trying to draft l= egislation that will prevent another Enron. Whether that includes the campa= ign financing laws that have helped give the public the impression that man= y legislators have been tainted by contributions from Enron or the accounti= ng firms remains to be seen.=20 ''They are going to hit the easy targets first and hit the easiest bad guys= first,'' said Larry Noble of the Center for Responsive Politics. ''But the= y are going to have to deal with the tougher questions, too, about their ow= n role in this.''=20 Senator Joseph I. Lieberman of Connecticut, one Democrat who has come under= scrutiny for his role in accounting legislation, has vowed his committee w= ill recommend changes in the law and regulations.=20 The inquiries are reminiscent of the role played by Congress during the sav= ings and loan crisis of the 1980's. Some lawmakers touched by the scandal, = most notably Senator John McCain of Arizona -- who took contributions from = Charles Keating, the operator of a failed thrift, and spoke on his behalf -= - were deeply affected by that experience and made campaign finance overhau= l a signature issue. Mr. McCain said of the Enron scandal, ''It's clear the= re is a taint out there on all of us.''=20 As Mr. McCain's campaign finance bill regains momentum on Capitol Hill, it = is unclear whether the Enron debacle will have a similar effect on House me= mbers and senators who once sided with Enron and the accounting industry.= =20 One candidate is Representative Billy Tauzin, the Republican chairman of th= e House Committee on Energy and Commerce. On July 20, 2000, in a letter co-= signed by 20 House members, Mr. Tauzin opposed any toughening of accounting= rules. In the previous five years, Mr. Tauzin had received nearly $150,000= from accounting firms.=20 As chairman of Congress's most aggressive committee investigating Enron, Mr= . Tauzin has hammered away at the accounting profession.=20 His spokesman, Ken Johnson, said the case had changed Mr. Tauzin's view of = auditor independence. Two years ago, Mr. Tauzin was convinced Mr. Levitt's = plan was ''a solution to a problem that didn't exist,'' Mr. Johnson said. '= 'Now we know there's a problem. It's time to fix it.'' Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section A ENRON'S COLLAPSE: THE PARTNERSHIPS Investors Lured To Enron Deals By Inside Data By KURT EICHENWALD 01/25/2002 The New York Times Page 1, Column 4 c. 2002 New York Times Company Enron executives enticed wealthy individuals and institutions to invest in = one of the partnerships that helped wreck the company by dangling the prosp= ect that inside knowledge could potentially help them double their money in= a matter of months, according to partnership records and prospective inves= tors.=20 In dozens of pages, the confidential records of a partnership called LJM2 d= escribe the inner workings of an entity at the heart of the Enron debacle. = The records show company executives wearing two hats, offering banks, insur= ance companies, Wall Street firms and wealthy investors inside knowledge ab= out Enron and its off-the-books holdings -- information that they denied co= mpany shareholders. The Securities and Exchange Commission is investigating whether Enron's acc= ounting for its partnerships violated the law, though details of its inquir= y have not been disclosed.=20 Under pressure from the S.E.C. investigation, Enron began disclosing detail= s of its partnerships last fall and started down what turned out to be the = road to collapse.=20 The records show that Enron disclosed to potential investors the conflicts = of interest posed by Enron executives' playing a dual role, but sought to a= llay concern over them.=20 The LJM2 partnership was run by Andrew S. Fastow, who at the same time was = Enron's chief financial officer. It was set up, in part, to invest in entit= ies that Enron controlled and to purchase investments that Enron did not wa= nt on its books.=20 Mr. Fastow and other Enron executives who managed the partnership had a dut= y to maximize returns for Enron shareholders, the documents note, even as t= hey were offering a separate set of lucrative deals to banks, Wall Street f= irms and wealthy individuals who owned stakes in the partnerships.=20 According to the documents, the spectacular returns were possible because t= he partnerships would be investing in deals originated by Enron, then in it= s heyday as a swashbuckling global pioneer of energy deregulation. The inve= stments would draw on confidential, nonpublic information developed by the = energy company, the documents explained.=20 ''Enron frequently has access to investment opportunities that are not avai= lable to other investors,'' the private placement memorandum for LJM2 said.= =20 Securities experts say that knowledge of the investment plans and strategie= s of hot companies, like Enron was at the time, is a coveted commodity on W= all Street because it can provide investors a leg up.=20 The records show that investors in LJM2, which set out to raise $200 millio= n and ultimately took in $349 million, were given more information about En= ron's financial situation than the company's shareholders.=20 For example, documents sent to potential investors in 2000 revealed that En= ron controlled about 50 percent more assets than disclosed in Enron's secur= ities filings. The difference -- $34 billion versus $51 billion, as of June= 30, 1999 -- was the value of assets moved off Enron's books through variou= s partnership deals.=20 The disclosures created conflicts for Wall Street firms, as well. For examp= le, the investment banking arm of Merrill Lynch & Company, which underwrote= the LJM2 offering, was aware of the off-balance-sheet figures for Enron; i= ndeed, Merrill's name is on the cover page of the offering containing the d= ata.=20 But because the numbers were confidential, that information could not be sh= ared with Merrill brokerage clients who were investing in Enron stock. Joe = Cohen, a Merrill spokesman, declined to comment.=20 Merrill was not alone. Dozens of other banks, brokerage firms, pension fund= s and other institutional investors were approached to invest in LJM2 just = over two years ago, and all were provided with the confidential data about = the extent of Enron's off-balance-sheet dealings.=20 Enron's shareholders learned little of these deals until the company restat= ed its financial results last fall, erasing nearly $600 million in profits = over five years, and provided additional, but still fragmentary, details.= =20 Wall Street firms are supposed to maintain a so-called Chinese wall to ensu= re that customers of their brokerage operations are not made privy to insid= e information gleaned by their investment bankers. In this case, securities= experts said, the intent of those laws was undermined.=20 The transactions ''followed the legal norms to produce a perverse result,''= said John C. Coffee Jr., a securities law expert at Columbia University. '= 'It's a case where the Chinese wall is working to injure public investors, = rather than benefit them.''=20 At the same time, analysts of the Enron stock were provided little informat= ion about the partnerships.=20 John Olson, an analyst with Sanders Morris Harris in Houston who was long a= skeptic on Enron stock, recalled that he once questioned company executive= s about their partnerships.=20 ''They told us, 'We can't discuss it, it's confidential, and we are enjoine= d from disclosing anything about it,' '' Mr. Olson said.=20 Among the investors in LJM2, according to court records, are Citicorp, the = American Home Assurance Company, the Travelers Insurance Company, and an in= vestment partnership affiliated with Morgan Stanley.=20 The partnership documents made clear to potential investors the magnitude o= f the conflicts of interest created by the dual roles of the executives. ''= One of the most challenging due diligence issues for the partnership is the= potential for conflict as a result of the principals' dual positions as En= ron employees and principals of the partnership,'' the offering memorandum = said.=20 A separate document disclosed last week by Congressional investigators said= that Enron's board waived the company's code of ethics to allow Mr. Fastow= to serve as LJM2's general partner. Investors were told that Richard A. Ca= usey, who is still Enron's chief accounting officer, was assigned responsib= ility for monitoring the partnership and mediating conflicts of interest.= =20 The partnership documents -- including sales presentations made by Mr. Fast= ow to potential institutional investors in LJM2 -- describe in detail the w= orkings and performance of several partnerships that have gotten the most a= ttention since the Enron scandal began to unfold.=20 Among them are limited partnerships known as JEDI I and JEDI II, an acronym= with a ''Star Wars'' glint that stood for Joint Energy Development Investm= ents.=20 The records said that investors in those partnerships initially were promis= ed returns of 15 percent and 20 percent, respectively. By the time LJM2 was= being marketed, JEDI I had returned 23 percent annually for its life, and = JEDI II -- which was still in operation -- was expected to return 194 perce= nt annually.=20 For the LJM2 partnership, according to internal records and marketing mater= ials, the Enron executives were expecting a minimum annualized return of 30= percent. But sales agents also emphasized the earlier partnerships' result= s.=20 ''The implication of their pitch was very clear,'' said one person who hear= d it. ''At least 30 percent could mean well over 100 percent or more.''=20 As of last March 31, according to confidential partnership records, three o= f the four largest investments in LJM2 brought in returns of more than 100 = percent. The lowest return, from an investment in another Enron entity call= ed Raptor I, was 58 percent over four months; the highest, in Raptor II, wa= s 212 percent in just over three months.=20 In the first quarter of last year, the partnership distributed $75 million = to investors -- or about 44 percent of the total of $171 million that was i= nvested in the partnership by the end of 2000. Photo: Andrew S. Fastow was Enron's chief financial officer while also mana= ging its LJM2 partnership. (Associated Press)(pg. C4) Chart: ''Hidden Asset= s'' Prospective investors in the LJM2 partnership were told that Enron's to= tal assets, including those moved off of its balance sheet, far exceeded th= e assets reported to shareholders. Graph tracks assets including those held= off balance sheet and assets disclosed by Enron, measured in billions, fro= m 1990 to 1998. (Source: LJM2 offering document)(pg. C4)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section C ENRON'S COLLAPSE How LJM2 Tripped Up Enron By Dylan Loeb McClain 01/25/2002 The New York Times Page 4, Column 4 c. 2002 New York Times Company When Enron restated its earnings last year, reducing its profits from 1997-= 2001 by almost $600 million and shrinking its shareholder equity by more th= an $1.2 billion, it said that the reason was partly its deals with a partne= rship named LJM2. According to Enron, the partnership was independent of th= e company, but the top executives of LJM2 were also top executives at Enron= -- a connection highlighted in the partnership offering papers as one reas= on LJM2 would be a desirable investment. Here is one way that the partnersh= ip became a problem. Dylan Loeb McClain Chart SENIOR EXECUTIVES INCLUDED Andrew S. Fastow Chief financial officer M= ichael J. Kooper Managing director Enron Global Equity Markets Group Ben Gl= isan Jr. Vice president Enron Global Equity Markets Group LJM2 FORMED: Oct.= 1999 OUTSIDE INVESTORS Included Citicorp, American Home Assurance Company, = American International Group, Travelers Insurance, Morgan Stanley GENERAL P= ARTNERS Mr. Fastow, Mr. Kooper, Mr. Glisan Raptor Subsidiary partnerships c= reated to invest in Enron holdings. 1. Enron lent $1.2 billion of its stock= to the Raptor partnerships. Enron also promised to issue more stock if the= value of the Raptor investments fell, thus ensuring the solvency of the pa= rtnerships. 2. LJM2 invested millions of dollars in the Raptor partnerships= . 3. Raptor invested in some of Enron's assets, like power plants and gas p= ipelines. It also bought some of the stocks that Enron had invested in, par= ticularly New Power Holdings, a company Enron had spun off. What went wrong= 4. The interests of LJM2 and Enron were at odds. At one point, in Septembe= r 2000, LJM2 entered into an agreement that obligated it to buy Enron stock= at a fixed price anytime Enron wanted to sell over the next six months. Th= is was a way for Enron to protect itself against a decline in its stock pri= ce. But LJM2 asked to settle the contract early when it could pay less for = the stock than its current price, thereby making $10 million. 5. Selling so= me of its stockholdings and assets to the Raptor partnerships insulated Enr= on against a decline in their value. But, when the value of those assets de= clined precipitously, Enron was obligated to provide more of its own stock = to keep the partnerships solvent. Worse, as its own stock declined, it beca= me necessary to issue more and more stock, further diluting the value of th= e stock held by its shareholders.=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section C ENRON'S COLLAPSE: MUTUAL FUNDS Many May Be Surprised To Be Enron Investors By GRETCHEN MORGENSON 01/25/2002 The New York Times Page 1, Column 3 c. 2002 New York Times Company In the last year, more than 50 mutual funds and insurance companies, includ= ing some of the largest and best known in America, invested in a trust crea= ted by Enron in 1997 to finance the operations of several of the energy com= pany's shadowy partnerships. As a result, many individual investors -- thro= ugh these funds -- unwittingly owned a piece of an entity that was used to = finance some of the partnerships that contributed to Enron's failure.=20 In September 2000 the trust, called the Osprey Trust, raised $2.4 billion f= rom institutional investors in a so-called private placement of notes due i= n January 2003. Within the last year, mutual fund and financial services co= mpanies like Putnam Investments, the Vanguard Group, Travelers and Prudenti= al have bought Osprey debt. By last fall, when Enron's troubles started to surface, prices on the Ospre= y debt began to drop. Since they were ultimately backed by Enron shares, th= e securities appear to have lost 60 percent of their value for any fund or = investor still holding them.=20 Osprey seems to have been a central fund-raising entity for several of Enro= n's partnerships, including LJM and Whitewing L.P., a partnership created b= y Enron that invested in energy-related projects in Europe and South Americ= a, including an electric distribution company in Brazil. Whitewing allowed = Enron to realize cash from the partnership's investments, while keeping the= partnership's debt obligations -- including the $2.4 billion it raised fro= m large investors -- off Enron's balance sheet.=20 Enron had included Whitewing in its consolidated financial statements in 19= 98 but removed it in March 1999, arguing that since it was owned jointly by= Enron and Osprey it no longer belonged in Enron's reports. But when Enron'= s fortunes started to decline last autumn, it became clear that Enron's sha= reholders were ultimately responsible for the debt raised by Osprey. In a c= onference call with analysts and investors on Nov. 14, Jeffrey McMahon, who= had only recently been appointed Enron's chief financial officer, disclose= d that Osprey's assets, which had carried a book value of $4.7 billion, had= declined in value by $600 million.=20 Mr. McMahon also disclosed for the first time that the Osprey debt was back= ed by 50 million shares of Enron common stock and that the company had an a= dditional obligation to issue more shares if the assets held in Osprey and = the common shares were insufficient to repay the debtholders in 2003.=20 Robert McCullough, a consultant to the electric utility industry at McCullo= ugh Research in Portland, Ore., calculated that the value of Osprey today i= s roughly 60 percent lower than its $4.7 billion book value stated last fal= l. His calculation takes into account the $600 million write-down disclosed= by Mr. McMahon last November as well as the fact that the Enron stock back= ing the assets is now practically worthless.=20 ''That means exposing the Osprey owners to a large discount from book value= as well,'' Mr. McCullough said.=20 But it is not clear whether those left holding Osprey notes have written th= eir values down appropriately. In documents dated as recently as this month= , Mr. McCullough found several funds still valuing their Osprey holdings at= levels that do not appear to reflect the diminished value of those positio= ns.=20 Owning a piece of Osprey may come as a surprise to some holders of bond mut= ual funds. Investors who buy bond funds are typically more conservative tha= n those who buy stock funds. Bond investors usually seek income and preserv= ation of their capital; some buy funds which limit their holdings to securi= ties issued by the United States government or high-grade corporations, whi= le others take on more risk by purchasing lower-grade bonds that carry high= er yields.=20 Private placements, like the one Osprey used to raise money from investors,= are offered only to large institutional investors with more than $100 mill= ion under management. As such, they are initially exempt from registration = with the Securities and Exchange Commission. Although Osprey's securities s= hould have become registered automatically with the commission six months a= fter they were offered, no Osprey filings could be found in the course of s= everal searches of S.E.C. documents.=20 Among the largest buyers of the debt was the AXP Bond Fund, an American Exp= ress Financial Advisers fund, which held $10 million worth in 2001. Several= Prudential funds were big holders of Osprey; the Prudential Series Fund he= ld more than $17 million of the debt. The Putnam Income Fund held $6.6 mill= ion in Osprey. To be sure, such holdings are minuscule when compared with t= he assets under management at these funds.=20 The Osprey notes carried high yields even before Enron began its decline. O= ne investor who owned the debt last year said that the holdings yielded aro= und 13 percent before trouble struck. As Enron's fortunes sank last fall, b= ut before the company filed for bankruptcy, the notes' yields climbed to 24= percent.=20 Alan Papier, an analyst at Morningstar in Chicago, said that private placem= ent debt, like the Osprey notes, are common holdings in mutual funds, espec= ially those seeking high levels of income. ''These securities might have a = little bit higher yield because by design there cannot be as wide an audien= ce for them,'' he said.=20 Delaware Investments, a money management concern in Philadelphia with $84 b= illion under management, bought and sold a small amount of Osprey debt seve= ral times the last 18 months. The firm, a subsidiary of the Lincoln Financi= al Group, owned roughly $6 million of Osprey notes in several of its mutual= funds, which had assets totaling $2.4 billion.=20 Matt Stephens, an analyst at Delaware, explained that he bought the Osprey = notes because they were backed by assets owned by Enron but which the compa= ny had decided were not a part of its core business and had moved into the = Osprey trust. That trust, Mr. Stephens explained, was set up to operate the= assets and liquidate them over time.=20 ''We looked at it as a secured way to play the Enron credit story, and we u= sed it as a trading vehicle,'' he said. Mr. Stephens added that the Osprey = notes carried a higher yield than Enron's corporate debt and that made the = investment attractive as well.=20 Delaware lost money on its Osprey holdings, but not nearly as much as it wo= uld have if it had held on through Enron's bankruptcy filing. During the co= urse of the last 18 months, the firm bought Osprey notes at $950 to $1,000 = (or face value). It sold them at roughly $835 in November, after Enron exec= utives had a conference call with investors and analysts outlining some of = the company's problems. Mr. Stephens said the conference call created doubt= s at his firm about Enron's credibility. ''When we lose faith in management= , it is a clear sell signal to us,'' he said.=20 Other Osprey investors declined to comment on whether they still held the d= ebt or whether they had written down its value in their funds. Spokeswomen = for Prudential, Vanguard and Putnam all said their firms' policies were not= to comment on individual holdings. Chart: ''Osprey's Noteholders Osprey was a central financing trust for a gr= oup of Enron-related entities. Holders of Osprey debt within the last year = were mostly well-known mutual fund and insurance companies that put the Osp= rey debt into their bond funds. COMPANY: Prudential TOTAL INVESTMENT: $48,4= 63,986 COMPANY: American Express TOTAL INVESTMENT: 28,551,783 COMPANY: USAA= TOTAL INVESTMENT: 14,000,000 COMPANY: Putnam Investments TOTAL INVESTMENT:= 13,908,769 COMPANY: Blackrock TOTAL INVESTMENT: 13,420,289 COMPANY: Divers= ified Investors TOTAL INVESTMENT: 12,000,000 COMPANY: Principal Financial T= OTAL INVESTMENT: 10,000,000 COMPANY: SEI Institutional Investments TOTAL IN= VESTMENT: 9,456,000 COMPANY: First American TOTAL INVESTMENT: 8,094,000 COM= PANY: Travelers TOTAL INVESTMENT: 6,502,125 COMPANY: Smith Barney TOTAL INV= ESTMENT: 5,350,000 COMPANY: Lincoln National TOTAL INVESTMENT: 5,025,819 CO= MPANY: All American TOTAL INVESTMENT: 4,000,000 COMPANY: Keynote TOTAL INVE= STMENT: 4,000,000 COMPANY: Firstar TOTAL INVESTMENT: 3,750,000 COMPANY: Del= aware Investments TOTAL INVESTMENT: 2,503,524 COMPANY: Fischer Francis Tree= s & Watts TOTAL INVESTMENT: 2,329,798 COMPANY: General Electric TOTAL INVES= TMENT: 1,575,663 COMPANY: American United Life Insurance TOTAL INVESTMENT: = 1,544,386 COMPANY: Federated Investors TOTAL INVESTMENT: 1,541,445 COMPANY:= Valic TOTAL INVESTMENT: 1,395,000 COMPANY: MMA Praxis TOTAL INVESTMENT: 1,= 224,000 COMPANY: Northern Institutional TOTAL INVESTMENT: 847,000 COMPANY: = Consulting Group Capital Markets TOTAL INVESTMENT: 750,000 COMPANY: Baird T= OTAL INVESTMENT: 500,000 COMPANY: Vanguard TOTAL INVESTMENT: 436,706 COMPAN= Y: Oppenheimer TOTAL INVESTMENT: 368,117 COMPANY: Hartford TOTAL INVESTMENT= : 362,500 COMPANY: Pioneer TOTAL INVESTMENT: 358,176 COMPANY: Mainstay TOTA= L INVESTMENT: 83,087 COMPANY: Pimco TOTAL INVESTMENT: 79,296 (Source: McCul= lough Research)(pg. C6)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section C ENRON'S COLLAPSE Ruling Accelerates Key Depositions The New York Times 01/25/2002 The New York Times Page 5, Column 5 c. 2002 New York Times Company HOUSTON, Jan. 24 -- A federal judge overseeing lawsuits against Enron and i= ts executives lifted certain trial rules today, allowing lawyers to interro= gate quickly some partners from the company's accounting firm, Arthur Ander= sen, about the destruction of documents.=20 Under the order, handed down by Judge Melinda Harmon of the Federal Distric= t Court in Houston, the lawyers could schedule depositions in as little as = three weeks from David B. Duncan, who was the lead partner in charge of the= Enron account, as well as four other partners and an in-house lawyer. Ande= rsen fired Mr. Duncan on Jan. 15. Mr. Duncan could invoke his Fifth Amendment right to decline to testify in = a civil trial, as he did before a Congressional panel, but civil lawyers sa= id they could use such a decision to insinuate that he had something to hid= e.=20 ''It can be a very powerful weapon,'' said Joseph A. McDermott, a lawyer re= presenting Staro Asset Management, an investment firm in the Midwest that h= olds Enron bonds. A lawyer for Mr. Duncan, Robert Giuffra, said he had not = received the judge's order and declined to comment. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Why Bush Stiffed Enron By Virginia Postrel 01/25/2002 The Wall Street Journal A18 (Copyright (c) 2002, Dow Jones & Company, Inc.) Enron Corp. gave the Bush campaign lots of money. When Enron got in trouble= , cabinet secretaries took its calls. But they did nothing to save it.=20 What are we to make of this peculiar chain of events? What, after all, is t= he point of handing out corporate money to politicians if the company can't= get favors when its life is on the line? Was there a secret bailout deal t= hat hasn't made the papers? Or were administration officials just doing wha= t was good for the country? It would be nice to conclude that the Bush administration turned down Enron= 's entreaties because of its deeply held free-market principles. But the mo= st likely explanation is more complex and cynical. In any Republican admini= stration, there are three forces (sometimes organized in factions, sometime= s operating within the same individuals) determining economic policy: pro-b= usiness instincts, pro-market principles, and political considerations. Get= two of the three on one side, and chances are that side will win.=20 Enron's problem, then, was exactly what Bush opponents tend to think of as = its greatest strength. It was a Houston-based oil company. Enron, in other = words, represented just the sort of voters President Bush can take for gran= ted. In a reelection campaign, there's no way he would lose Texas. Indeed, = many observers believe he lost the 2000 popular vote because he didn't work= hard enough to get a large turnout in his home state.=20 So Enron had no electoral clout, giving the Bush administration no politica= l reason to sacrifice its economic principles to help save the company. By = helping Enron, the administration could only lose, angering free market sup= porters and embroiling itself in a business mess. A bankrupt Enron couldn't= even promise future campaign funds. If only Enron had been based in Pennsy= lvania or West Virginia. Then things would have been different.=20 Just ask the steel industry. There, the Bush administration has pursued a d= angerously protectionist policy, jettisoning not only its own stated princi= ples but American leadership in breaking down barriers to free trade.=20 To help ailing steel companies, the administration initiated what is known = as a section 201 action. This allows the government to establish import quo= tas or tariffs for five years, limiting competition while the domestic indu= stry tries to get its act together. Under this law, the protected industry = doesn't have to show that foreign producers get any unfair advantages from = their own governments or even that imports are the main source of its probl= ems. The industry merely has to demonstrate that it's hurt by foreign compe= tition. Since any competition makes business tougher, that's an easy case f= or a struggling industry to make.=20 So the free-trade president has adopted a blatantly protectionist position,= raising prices for everyone who buys or makes anything that uses steel. Bi= g Steel is now demanding 40% tariffs and a bailout of $12 billion to cover = lavish retirement benefits, particularly health costs. Steel retirees, who = are, of course, already covered by Medicare, outnumber steel employees abou= t 5 to 1.=20 Why is the administration that wouldn't try to save Enron entertaining such= pro-business, anti-market ideas? It's a simple political calculation. Pres= ident Bush won steel-producing West Virginia (and, arguably, the presidency= ) by a mere 40,000 votes. He lost steel-producing Pennsylvania by only 200,= 000 votes. He doesn't have to worry about carrying Texas. He does have to w= orry about the swing states of the steel belt.=20 That sort of calculation is nothing new in American politics. The first Pre= sident Bush also denied the oil industry federal help while extending steel= quotas.=20 Nor is the split a purely Republican phenomenon. Back in the early 1970s, e= conomic historian Gavin Wright took a careful statistical look at New Deal = largess. He found that the Roosevelt administration directed money not at t= he poorest states, which were in the solidly Democratic South, but at the s= wing states of the West. After controlling for how rural states were, Mr. W= right found that 80% of the variation in spending could be explained by fac= tors that defined political swing states.=20 In a democracy of concentrated interests, some votes clearly count more tha= n others. But, to look at the bright side, at least sometimes predictable v= otes lead to principled policies. The Bush administration dodged a bigger E= nron scandal because it could take Texas for granted.=20 ---=20 Ms. Postrel is the author of "The Future and Its Enemies: The Growing Confl= ict Over Creativity, Enterprise, and Progress" (Free Press, 1998). Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Trading Charges: Lawsuit Spotlights J.P. Morgan's Ties To the Enron Debacle= --- Insurers Balk at Paying Bank Up to $1 Billion in Claims On Complex Tra= nsactions --- Update in a Glass Room By Jathon Sapsford and Anita Raghavan Staff Reporters of The Wall Street Journal 01/25/2002 The Wall Street Journal A1 (Copyright (c) 2002, Dow Jones & Company, Inc.) When J.P. Morgan & Co. set up an energy-trading business in the British Cha= nnel Islands a decade ago, the tiny venture barely caused a ripple at the g= iant bank.=20 The operation, called Mahonia Ltd., consisted of just a small office with l= ots of phone lines. But the Jersey-based business grew over the years to tr= ansact billions of dollars of natural-gas contracts with other energy compa= nies. Mahonia's trading followed a simple pattern: Many of its transactions= took place just before year-end. Often, the deliveries of natural gas and = oil were sold right back to those who delivered them through complex deriva= tive transactions. And about 60% of Mahonia's trades were with just one com= pany: Enron Corp. The point of the choreographed trading? People familiar with Mahonia say En= ron used the transactions to manage tax liabilities by transferring losses = in one financial reporting period to another. As Enron's troubles mounted, = the Houston company eventually turned to Mahonia as a sort of surrogate ban= k, these people say, using it to raise at least $2 billion in financing ove= r the years.=20 For J.P. Morgan, the arrangement was lucrative -- at least at first. The ba= nk received as much as $100 million in revenues. It also thought it had ins= urance in place to cover any default by Enron.=20 But in the wake of Enron's collapse and bankruptcy-court filing, Mahonia co= uld cost the nation's second-largest bank as much as $1 billion. Several in= surers have alleged in a lawsuit in New York federal court that the trading= transactions were shams, thereby negating the insurance contracts. The ban= k, now known as J.P. Morgan Chase & Co., disputes the court allegation. Cre= dit-rating concern Standard & Poor's cited J.P. Morgan's overall exposure t= o Enron as one reason it is reviewing the bank's credit rating for a possib= le downgrade. J.P. Morgan, which acted as a lender, underwriter and merger = adviser to Enron, says the energy concern owes it a total of $2.6 billion.= =20 The Mahonia arrangement -- which J.P. Morgan hadn't disclosed to investors = until last month's suit -- represents just a sliver of the many complicated= ventures Enron participated in. But unlike the hundreds of partnerships En= ron constructed on its own to keep debt off its books, this venture was con= ceived, launched and operated by J.P. Morgan. Though many Wall Street firms= helped finance Enron -- acting as traditional lenders, underwriters and ad= visers -- the fact that J.P. Morgan set up the partnership suggests that Wa= ll Street may have played a more active role in the Enron scandal.=20 J.P. Morgan won't comment on some key aspects of the dispute, citing pendin= g litigation. A spokesman says that "many companies routinely raise funds u= sing pre-paid commodity forward contracts. The benefits vary from client to= client, including pricing advantages and diversity of credit sources."=20 Enron spokesman Mark Palmer says the trades were "perfectly legitimate and = proper transactions" made as part of the normal course of trading commoditi= es.=20 Many things about the operation remain mysterious. It is unclear, for insta= nce, who owns Mahonia. According to records from the Jersey Financial Servi= ces Commission, the company was incorporated on Dec. 16, 1992. It has two n= ominee shareholders, Lively Ltd. and Juris Ltd., who represent undisclosed = owners.=20 "The question is: Was Mahonia a conduit on behalf of Enron or a conduit on = behalf of J.P. Morgan?" says Manfred Knoll, a managing director for Germany= 's Westdeutsche Landesbank, which issued a $165 million letter of credit to= J.P. Morgan to guarantee against losses. He says Mahonia legally was a con= duit of J.P. Morgan. But in practice, "it was a conduit that was set up to = transact a variety of financial transactions for Enron."=20 On Tuesday, a New York bankruptcy-court judge ruled that Enron will have to= make available documents relating to Mahonia to the German bank, people fa= miliar with the matter say.=20 As part of its broad investigation into Enron, the Securities and Exchange = Commission is reviewing J.P. Morgan's multifaceted relationship with Enron,= people familiar with the matter say. Among other things, investigators are= examining whether the bank, through vehicles such as Mahonia, helped Enron= draw a misleading financial picture for investors.=20 People close to the matter say Enron told J.P. Morgan the trades were for t= ax purposes. Tax experts say it is common for companies to manage tax liabi= lities by, for instance, deferring certain losses from a bad year, when the= tax bill might be low, to a future period when they can be used to offset = high earnings. There's nothing inherently illegal about trying to minimize = corporate tax bills. Enron hasn't paid corporate income tax in four of the = past five years, a spokesman says.=20 The Mahonia maneuvers may draw additional scrutiny now, however, in light o= f admissions by Enron that it used a series of outside partnerships to hide= losses.=20 Whatever the ultimate goal, the transactions worked like this: J.P. Morgan = would pay Enron between $150 million and $250 million for the future delive= ry of natural gas or crude oil. This was constructed as a "trade," not a lo= an. So Enron would report this as earnings that would cancel out, temporari= ly, losses on Enron books.=20 But Enron had to eventually deliver the oil or gas, usually in regular inst= allments with the value of $10 million to $20 million, the people familiar = with Mahonia say. With each delivery, the losses began again to appear on E= nron's ledger. These deliveries would begin the following year, so the loss= es were carried from one year to the next, without showing up clearly on En= ron's books.=20 The result: Enron kept those losses in reserve in case Enron had any profit= windfall on which it might pay tax, the people familiar with the matter sa= y. If it did, it would use those losses to cancel out profits, and thus low= er its tax burden. Or if Enron didn't have big profits to hide, it would ju= st roll the losses over again to the next fiscal year -- by going back to J= .P. Morgan and selling it another gas contract. Two tax experts contacted f= or this article described the technique as unusual but potentially very eff= ective. "It certainly makes sense as a tax strategy," says Doug Carmichael,= a professor of accounting at New York's Baruch College.=20 The whole process fed on itself. As one Wall Street banker put it, the arra= ngements "practically guaranteed" Enron would come back to J.P. Morgan for = more.=20 What was in it for Morgan? The deals generated, over the decade, fees and i= nterest measuring as much as $100 million. In paying for future delivery of= gas to Mahonia, J.P. Morgan got the gas at a discount -- reflecting the in= terest rate Enron would have paid were it getting a straightforward loan. I= n the summer of 1999, this amounted to somewhere between 7% and 8%, or roug= hly $7 million to $8 million for every $100 million J.P. Morgan channeled t= o Enron under the Mahonia arrangement. (That revenue, of course, was offset= in part by the bank's funding costs.) The bank often got a small fee for a= rranging the financing.=20 The arrangements were for years a source of pride within the bank's small c= ommodities division, which directed the trades. Dinsa Mehta, one of J.P. Mo= rgan's senior commodity traders, praised the deals to colleagues, saying th= at while Enron put out its other commodity financing needs for all of Wall = Street to bid on, Enron kept coming back to J.P. Morgan for trades that wou= ld carry its losses forward. Mr. Mehta, contacted through a spokeswoman, de= clined to comment.=20 In a basic way, the trading pact is a throwback. Prepaying for future deliv= ery of a commodity is known as a "gold trade," because it is the way gold b= ullion has been trading for centuries. In recent years, trading companies, = whether from Houston or Wall Street, have been making more use of this stru= cture to buy and sell oil, natural gas and other commodities. Some commerci= al banks, including Chase Manhattan, a predecessor of J.P. Morgan, had to s= et up part of these trades overseas because their banking charters wouldn't= allow them to take delivery of commodities.=20 J.P. Morgan also bought commodities contracts from a number of other energy= companies. Yet by far Mahonia's biggest customer was Enron, accounting for= roughly 60% of its business, people familiar with the matter say.=20 Over the years, the size of the transactions grew and the repayment periods= stretched out further and further into the future.=20 Mahonia's business with Enron jumped sharply in 1999. Oil prices were weak,= causing concerns over the future profitability of the energy industry. The= stock and bond capital markets had become reluctant to finance energy comp= anies, leaving J.P. Morgan's offshore arrangements one of the few places th= is industry could raise money.=20 In the summer of 1999, Enron officials contacted Morgan with requests to do= bigger and bigger trades, including a large arrangement of $650 million in= one trade. It was a far cry from earlier trades in the range of $150 milli= on, and suggested to some people within the bank that Enron was no longer m= erely interested in tax avoidance, but was actively using the arrangement t= o meet its financing needs.=20 J.P. Morgan officials couldn't do the business without hedges. The firm wou= ld be on the hook for a large chunk of cash if Enron defaulted before it de= livered the natural gas. These arrangements, after all, presented the same = default risk as any loan to Enron. J.P. Morgan effectively had been paying = a portion of its earnings to other banks in exchange for their guaranteeing= portions of the arrangement. This move shifted some of the risk to other b= anks like ABN Amro Holding NV or West LB.=20 It wasn't enough. By this time, companies including Enron wanted to raise m= ore through Mahonia than the banking syndicate was willing to handle amid t= he oil-price slump. So Enron, if it wanted more money, needed to find new p= layers to share the risk of financing the gas payments.=20 Enron turned to 11 insurance companies -- including National Fire Insurance= Co., Safeco Insurance Co., St. Paul Fire & Marine Insurance Co. and Citigr= oup Inc.'s Travelers unit -- to issue "surety bonds." These are financial g= uarantees insurance companies commonly issue to ensure a project is complet= ed, whether it's a bridge or Hollywood movie. Enron arranged these contract= s for J.P. Morgan -- and paid the insurance companies for it -- so that the= bank would feel more comfortable making increasingly large trades with the= energy company, according to a person familiar with the arrangement.=20 As Enron's trades grew bigger and bigger, the bank was also financing other= energy companies, and the accounting on these trades became a source of co= ncern within the bank. On Aug. 5, 1999, Vice Chairman Marc Shapiro and seni= or credit officer David Pflug convened a meeting in a glass room off the ba= nk's commodity trading floor.=20 As part of that briefing, the group went through a lengthy history of the b= ank's trading with energy companies. The managers were told one reason comp= anies like Enron were entering the complex trades was to carry forward loss= es and lower tax burdens, a person familiar with the briefing said. This pe= rson said Mr. Shapiro reviewed the trades and said they were fine. Mr. Shap= iro declines to comment. Mr. Pflug, confirming the meeting, said it was cal= led to discuss another client and commodity derivative contracts in general= .=20 Two years later, the arrangement was still functioning as Enron's troubles = deepened. Both Enron and J.P. Morgan kept looking for other institutions to= share the risk as Enron kept running new trades through Mahonia.=20 That's when Enron and Morgan turned to the German bank for more comfort. On= Sept. 10, 2001, Enron and Morgan arranged to obtain a $165 million letter = of credit from West LB to guarantee derivatives trades between Mahonia and = Enron North America, according to Mr. Knoll, the bank managing director.=20 In an unusual move underscoring Morgan's keen interest in the letter of cre= dit, the legal documents were reviewed by Philip Levy, Morgan's associate g= eneral counsel. Mr. Levy didn't return a call seeking comment.=20 Enron's woes deepened further. After a planned merger with rival Dynegy Inc= . fell through, Enron filed for Chapter 11 bankruptcy protection on Dec. 2.= After the filing, Morgan requested to be paid under the letter of credit, = Mr. Knoll says. So far, West LB has refused to pay, depositing the $165 mil= lion in an escrow account which it says it will make available when the Mah= onia transactions underlying the lending facility are proved proper.=20 It was only after the bankruptcy filing that investors first got a whiff of= Mahonia. Morgan's insurers, due to make a payment on the surety bonds by a= Dec. 21 deadline, refused to pay. Morgan sued in New York federal court. T= he insurers filed a counterclaim, alleging that Mahonia was a fabrication m= eant to disguise loans in the forms of commodity trades.=20 In court papers, the insurers say they were led to believe the arrangements= were meant to "actually supply natural gas and crude oil by Enron to Mahon= ia." But the insurers refuse to pay the guarantees because the arrangements= "were not intended to be fulfilled," the insurers' complaint alleges. It a= dds that Mahonia was a "mechanism to obtain surety bonds to secure loans to= be made to Enron in the guise" of trades.=20 J.P. Morgan says the insurers' claims are without merit, noting that the su= rety contracts say the insurance liability is "absolute and unconditional."= =20 The case is pending. But the spat already has dented Morgan's credibility. = Morgan Chief Executive Officer William Harrison called his board shortly af= ter the Enron bankruptcy filing and told them the bank had some $500 millio= n in unsecured exposure and some other secured exposures, including loans o= f $400 million backed by pipeline assets.=20 But after the insurers refused to honor their commitments on the surety bon= ds, Mr. Harrison had to hit the phones again to directors, and raise the nu= mber to $2.6 billion -- with roughly $1 billion of the additional exposure = directly related to Mahonia.=20 Morgan has been defending its position ever since. Last week, the bank repo= rted a fourth-quarter loss of $332 million, partly because of its exposure = to Enron.=20 Meanwhile, Mr. Shapiro, the vice chairman, asserts that Morgan has known al= l along the extent of its Enron vulnerability. "It's not an issue of what w= e knew," he said late last month "but what was appropriate to disclose."=20 ---=20 Michael Schroeder contributed to this article. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Accounting for Enron: Former SEC Chief Levitt Reverses Stand, Calls for New= Laws on Accounting Rules By Michael Schroeder Staff Reporter of The Wall Street Journal 01/25/2002 The Wall Street Journal A4 (Copyright (c) 2002, Dow Jones & Company, Inc.) WASHINGTON -- Former Securities and Exchange Commission Chairman Arthur Lev= itt, reversing an earlier stand, told Congress that the collapse of Enron C= orp. uncovered systemic accounting problems that can be fixed only through = legislation.=20 "The environment today calls for very different remedies, very different ac= tion," Mr. Levitt told the Senate Governmental Affairs Committee. "If you w= ould have asked me a year ago whether a legislative solution was desirable,= I would have said `no.' " With Enron, "the smoking gun has exploded," he said, adding. "That's often = what it takes for a wake-up call."=20 Congress needs to authorize a new, independent oversight board for the acco= unting industry, he said. He also told lawmakers that the SEC needs to adop= t new accounting standards to better track the effect of executive stock op= tions and to require full disclosure of off-balance-sheet "special purpose = entities," which Enron formed to conceal losses.=20 Mr. Levitt was joined by Lynn Turner, former SEC chief accountant, who call= ed for an overhaul of the Financial Accounting Standards Board, the industr= y's independent rule-making body, as well as an overhaul of accounting rule= s as well.=20 "What is reflected here is a shared sense of outrage," said Committee Chair= man Joseph Lieberman (D., Conn.). He said the committee would do a thorough= investigation and hold more hearings, with "a shared desire to end this in= vestigation with serious proposals for reform."=20 In the aftermath of the Enron bankruptcy filing, Mr. Levitt has been upstag= ing his SEC successor, Harvey Pitt, in promoting needed reforms. He applaud= ed Mr. Pitt's recently announced proposal for a new private-sector oversigh= t board, but questioned whether it went far enough. Mr. Levitt proposed tha= t Congress approve and fund a new board that is completely independent of t= he accounting industry.=20 Messrs. Levitt and Turner said that FASB, which is responsible for creating= accounting standards, fails to approve needed changes because they are blo= cked by board members appointed by the securities and accounting industries= .=20 For instance, the SEC first asked the FASB to improve the standards for rep= orting special purpose entities in 1985. The end result was a "weak set of = rules," Mr. Turner said. Because of growing problems, the SEC called for ne= w stiffer rules in its 2000 report to Congress. "We cannot afford to wait a= nother 15 years," Mr. Turner said. "If the FASB were unable to resolve this= by the end of 2002, then I would urge the SEC to act promptly."=20 Also in testimony yesterday, University of San Diego law professor Frank Pa= rtnoy said he has independently gathered information that Enron manipulated= its derivatives trading revenue. "In a nutshell, it appears that some Enro= n employees used dummy accounts and rigged valuation methodologies to creat= e false profit and loss entries for the derivatives Enron traded," Mr. Part= noy said.=20 Mr. Partnoy, who formerly worked as a derivatives salesman at J.P. Morgan, = said Enron's extensive use of derivatives was a major cause of the company'= s financial downfall. Enron reported more than $16 billion in gains from de= rivatives over the three years to 2000.=20 Vance Meyer, an Enron spokesman, said he hadn't seen the testimony and as a= general rule Enron wouldn't offer a counterpoint to testimony from Washing= ton hearings. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business; Business Desk A Renewed Call to Redo Accounting Reform: Two years after initially urging = changes in industry, a former SEC chairman has Senate panel listening close= ly. EDMUND SANDERS TIMES STAFF WRITER 01/25/2002 Los Angeles Times Home Edition C-1 Copyright 2002 / The Times Mirror Company WASHINGTON -- Two years ago, Arthur Levitt couldn't muster much support for= a proposal to make accounting firms more independent by limiting their abi= lity to sell consulting services to their audit clients.=20 Amid strong opposition from the accounting industry, corporations and membe= rs of Congress, the then-chairman of the Securities and Exchange Commission= backed down. On Thursday, however, the same proposal held the rapt attention of a roomfu= l of fawning senators and caused Levitt to be mobbed by reporters after his= testimony.=20 "So do you feel completely--or just absolutely, totally--vindicated?" quipp= ed Sen. Mark Dayton (D-Minn.).=20 In another sign that government priorities have changed as a result of the = Enron Corp. bankruptcy, the Senate on Thursday held its first full committe= e hearing to examine why the energy giant collapsed and what the government= could have done to prevent the loss of billions of dollars by employees an= d investors.=20 The hearing set the stage for what is certain to be a vigorous debate in th= e coming months over sweeping regulatory proposals to rein in financial mar= kets, retirement funds, campaign fund-raising and the energy industry.=20 Sen. Joseph I. Lieberman (D-Conn.), who chairs the Senate Governmental Affa= irs Committee, promised Thursday to lead an aggressive nonpartisan investig= ation into the Enron debacle, seeking answers from government agencies incl= uding the Commodity Futures Trading Commission and the White House.=20 "We will follow the facts wherever they lead us," Lieberman said.=20 Among the questions Lieberman hopes to answer are: How did Enron hide its d= ebts and losses from SEC oversight? Could the Labor Department have interve= ned to prevent Enron employees from losing their retirement savings? Are Wa= ll Street analysts providing objective analysis of stocks? Did regulatory g= aps allow Enron's problems to slip through the cracks?=20 But Republicans warned against rushing to new regulations. Only a year ago,= the Bush administration and the Republican Party were vowing to slash gove= rnment rules in many of the same areas currently under a microscope.=20 The blame for Enron's bankruptcy filing Dec. 2--less than a month after it = restated earnings to account for $586 million in previously unreported loss= es--may ultimately rest with illegal activity of individuals, not a breakdo= wn in regulation, said Sen. Fred Thompson (R-Tenn.), the ranking Republican= on the committee.=20 "No system known to man can prevent unscrupulous and clever individuals fro= m manipulating the system and even getting away with it for a period of tim= e," Thompson said.=20 He also warned Democrats not to try to take political advantage of the inve= stigation by focusing on "titillating" issues, such as the contacts between= Enron officials and the Bush administration.=20 Levitt called upon Congress to pass new laws to tighten regulation of finan= cial markets, which he said have been eroded by a "culture of gamesmanship = that says it's OK to bend the rules, tweak the numbers and let obvious and = important discrepancies slide."=20 In addition to renewing his call for limits on the types of consulting work= accounting firms can perform for an audit client, Levitt said companies sh= ould be required to change audit firms every five to seven years; stock exc= hanges should require that a majority of directors on company boards be ind= ependent; and analysts should be forced to disclose how their compensation = is affected by their firms' investment relationship with companies they cov= er.=20 Levitt and Lynn E. Turner, the SEC's former chief accountant, said a new ac= counting oversight board is needed with independent members, reliable fundi= ng and a mandate to move quickly and aggressively to eliminate accounting l= oopholes and gimmicks.=20 Turner said it has taken the Financial Accounting Standards Board longer to= approve new rules for special-purpose entities--the kind of off-the-books = partnerships used by Enron to mask its problems--than "it's taken my childr= en to get through high school."=20 Derivatives trading is another area ripe for government regulation, said Un= iversity of San Diego law professor Frank Partnoy, who told the committee T= hursday that Enron's heavy reliance on the high-risk market rivaled that of= the Long-Term Capital Management hedge fund, which failed in 1998.=20 In fact, Partnoy said, Enron reported earning more money from trading deriv= atives in 2000 than Long-Term Capital Management made in its history.=20 "Enron makes Long-Term Capital Management look like a lemonade stand," said= Partnoy, a former derivatives trader who is writing a book about Enron's c= ollapse.=20 Derivatives, used by sophisticated investors as a risk-management tool, are= complex financial instruments whose value is based upon a future variable,= such as interest rates or gas prices.=20 Though some derivative trading occurs on regulated exchanges, the vast majo= rity--more than $95 trillion a year--take place on over-the-counter markets= that were exempted from regulation in 2000 under the Commodity Futures Mod= ernization Act.=20 Enron used derivatives in two ways. First, they were key to structuring Enr= on's controversial partnerships, which allowed it to hide debt, mask invest= ment losses and inflate earnings. Enron used them as a kind of financial "p= lastic surgery to make itself look better than it really was," Partnoy said= .=20 Second, they were key to Enron's profit. The company used its Enron Online = division to act as a go-between for other parties wishing to trade not only= energy-related derivatives, but also contracts for such commodities as fib= er-optic bandwidth. By the time Enron filed for bankruptcy, the soaring rev= enue from the derivatives trading business was masking problems in Enron's = core energy business.=20 The lack of government oversight may have enabled Enron to smooth out profi= ts from derivatives trading to make the business appear less volatile. He s= aid that was accomplished by creating accounts that enabled Enron to carry = over trading profits from year to year.=20 An Enron spokesman could not be reached for comment on Partnoy's allegation= s. PHOTO: Arthur Levitt, former head of SEC.; ; PHOTOGRAPHER: Associated Press= =20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Accounting for Enron: Grand Jury to Investigate Plaintiffs' Firm Involved i= n Shareholder Suit Against Enron By Rick Schmitt and Jonathan Weil Staff Reporters of The Wall Street Journal 01/25/2002 The Wall Street Journal A4 (Copyright (c) 2002, Dow Jones & Company, Inc.) A noted plaintiffs' law firm, which is taking a highly visible role in a sh= areholder suit against Enron Corp., is being investigated by federal author= ities in connection with allegations that it improperly solicited investors= to file class-action suits, people familiar with the probe said.=20 The U.S. Attorney in Los Angeles has convened a grand jury to investigate M= ilberg Weiss Bershad Hynes & Lerach LLP, these people said. Officials are t= rying to determine whether the firm paid money to people to act as plaintif= fs in lawsuits, the people familiar with the probe said. Milberg Weiss, which has offices in New York and San Diego, didn't return p= hone calls seeking comment. The grand-jury investigation was reported yeste= rday by the Los Angeles Daily Journal, a legal-industry newspaper.=20 Disclosure of the probe comes as Milberg Weiss is in a pitched battle with = other plaintiffs' firms vying for the role of lead counsel in securities-fr= aud suits filed against Enron in federal court in Houston. The firm made he= adlines earlier this week marching into court with a box of shredded docume= nts carted out of Enron headquarters by an ex-employee.=20 Until recently, law firms that filed securities-fraud actions first often w= ere given control of cases -- and the chance to make the largest fees. Firm= s such as Milberg Weiss often maintained a stable of clients to help launch= the suits. The probe is looking at how Milberg Weiss identified those clie= nts, and whether they were paid.=20 Since 1995, larger, institutional investors have been taking a greater role= in securities-fraud suits, because of a change in federal law. In the Enro= n case, Milberg Weiss is representing the Regents of the University of Cali= fornia. Lloyd Lee, a university lawyer, said the regents have consulted wit= h Milberg Weiss, and "they assured us that they were cooperating fully with= the inquiry."=20 Separately, the federal judge in Houston presiding over the shareholder law= suits related to Enron's collapse, ordered Arthur Andersen LLP to make six = of its current and former officials available for depositions by next month= and provide a detailed account of document shredding that took place in it= s Houston office.=20 The order is unusual because it comes so early in the litigation. Typically= , under federal securities laws, plaintiffs' attorneys must wait until all = pending motions for dismissal have been resolved before they are allowed to= proceed with the discovery phase of a case.=20 "It is a very sensible order under these extraordinary circumstances," said= Jeff Kaiser, an attorney at Kaiser & May LLP in Houston, one of the law fi= rms representing shareholders in the Houston case. His firm also is pursuin= g a separate lawsuit against Andersen in a Galveston County, Texas, state d= istrict court.=20 The order by U.S. District Judge Melinda Harmon requires Andersen to submit= a report within 20 days cataloging the documents it destroyed, describing = any documents it has been able to recover and explaining the efforts it has= made to do so. Additionally, Andersen's report must include a description = of Enron-related materials currently in the firm's possession. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 After Enron, a Push to Limit Accountants to...Accounting By Deborah Solomon Staff Reporter of The Wall Street Journal 01/25/2002 The Wall Street Journal C1 (Copyright (c) 2002, Dow Jones & Company, Inc.) When it was flying high, energy-trading company Enron Corp. was famous for = pioneering new markets. Here is something else it is helping to develop: a = relatively new breed of shareholder proposal.=20 A number of institutional investors -- with Enron's rapid collapse in mind = -- are calling for companies to adopt "conflict of interest policies" that = would prevent their accounting firm from providing anything beyond auditing= services. Shareholder proposals seeking to limit the accounting firms' rol= es have surfaced at a wide range of companies following Enron's meltdown. A= t the heart of such proposals: concerns that accounting firms have a financ= ial incentive to sign off on overly aggressive accounting practices at comp= anies that simultaneously pay them large sums for nonaudit work. In Enron's case, the Houston company paid Arthur Andersen LLP $25 million f= or its audit and $27 million for nonauditing work, including tax-related an= d consulting services, in 2000, the last year for which figures are publicl= y available. In November, Enron restated its results for the previous four = years, wiping out $586 million, or 20%, of its previously reported earnings= . In recent testimony before Congress, Andersen officials have said they do= n't believe their independence as an auditor was compromised by the nonaudi= ting fees.=20 "It took Enron to get shareholders interested in addressing this issue, but= many investors want auditor independence," says Patrick McGurn, vice presi= dent of Institutional Shareholder Services, a proxy adviser that makes reco= mmendations for how institutions should vote.=20 Shareholders are proposing these policies for about 30 companies, including= Apple Computer Corp., Johnson & Johnson, Motorola Inc., PG&E Corp. and Wal= t Disney Co. Most of the companies are fighting the initiatives and have as= ked the Securities and Exchange Commission to rule that they don't have to = put the proposals to a vote. Corporate-governance specialists expect the SE= C to rule in favor of shareholders, putting the initiatives on the ballots = for annual meetings later this year.=20 Whether any of the proposals become policy at the individual companies is a= nother matter; rarely do shareholder proposals pass. But some who track cor= porate-governance developments say support for these new ones could be stro= ng enough to prompt companies to agree to limit the use of their auditing f= irms for other activities. "It can embarrass management," says John C. Coff= ee Jr., law professor at Columbia University. "The real success of these ki= nds of proposals is that they will lead to negotiations . . . that might pu= t restrictions on the amount of consulting that these companies can do."=20 The no-conflict-of-interest initiatives are being proposed by labor unions,= which hold shares in companies as part of pension plans and other investme= nts. The United Brotherhood of Carpenters, which controls $35 billion in pe= nsion assets, proposed the policy at several companies after reviewing the = ratio of audit to nonaudit fees. The SEC began requiring that companies dis= close that information as of the year 2000.=20 Many of the companies were paying 10 to 15 times more for nonaudit-related = services than for auditing fees. Ed Durkin, director of special programs fo= r the United Brotherhood of Carpenters, says: "The impression somebody coul= d get from looking at these numbers is that there might be issues of indepe= ndence and of the integrity of the financial-reporting system."=20 But some say a blanket policy restricting the accounting relationship isn't= necessarily going to prevent an Enron-like blow-up. "It's probably more a = matter of disclosure than limitations," says David Bowers, an analyst with = Evergreen Investment Management Co., which owns shares of PG&E. While inves= tors need to pay attention to what the accountants are doing, there is some= benefit to having a firm perform multiple duties, he says. "It's hard to p= aint it over with a broad brush and say you can't have both relationships."= =20 Companies also note that some of the fees labeled as "nonaudit" under the n= ew SEC rules are for services traditionally provided by auditors, such as w= ork done on registration statements or on taxes. Renee Parnell, a spokeswom= an for PG&E, says the company often has to use its accounting firm, Deloitt= e & Touche LLP "for things like regulatory filings," adding that PG&E is "s= eeking SEC recommendation on whether to include the proposal" in its proxy.= A spokeswoman for Disney declined to comment beyond what is written in the= proxy, which recommends that shareholders vote against the proposal. Repre= sentatives from Apple, Motorola and Johnson & Johnson declined to comment.= =20 The shareholders' proposals aren't original in this sense: Two years ago, f= ormer SEC Chairman Arthur Levitt Jr. sought to limit dual auditing/consulti= ng roles for accounting firms. But his plan met fierce resistance from the = accounting industry and its lobbyists, as well as from members of Congress,= and he backed down, settling for less-stringent limits on certain types of= nonauditing work. Mr. Levitt has said several congressmen threatened to cu= t the SEC's appropriations if he didn't back away from the tough conflict-o= f-interest rules he originally promoted. Current SEC Chairman Harvey Pitt h= as said he doesn't support the limitations sought by his predecessor, belie= ving other reforms are more relevant.=20 James D. Cox, a professor of law at Duke University who has written extensi= vely on accounting and legal issues, says shareholder proposals may be the = best way to change the rules. "There are a lot of investors out there, incl= uding financial institutions, who believe this is a good idea," he says. Be= fore the Enron debacle, "we lulled ourselves into a complacent state thinki= ng that accountants who know their client from performing nonaudit services= can better perform the audit function. I think that's a mantra that after = Enron is going to fall on deaf ears."=20 Backers of the proposals say restricting the types of services accounting f= irms perform for clients won't eliminate the potential for fraud, but can h= elp bolster confidence in public companies. "I don't think there's any bene= fit for a company if its accounting firm has a consulting relationship," sa= ys Ted O'Connor, portfolio manager at Cambiar Investors Inc., which owns sh= ares of Motorola. He expects to vote for the proposal at Motorola. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 A Section NSC Aided Enron's Efforts; Agency Sought Lay Meeting With Indians on Plant Dana Milbank and Alan Sipress Washington Post Staff Writers 01/25/2002 The Washington Post FINAL A18 Copyright 2002, The Washington Post Co. All Rights Reserved The White House's National Security Council is the president's nerve center= for international crises and strategy. For a moment last year, it also act= ed as a sort of concierge service for Enron Chairman Kenneth L. Lay and Ind= ia's national security adviser, Brajesh Mishra.=20 A June e-mail sent from the NSC said Mishra would "be willing to meet with = Mr. Lay and the bankers . . . but only at the residence. Pls. let me know y= our decision on this soonest." A second e-mail, also originating in the NSC= , added, "We are not involved in arranging any meetings for Mr. Lay. . . . = I will ask the Indians if he is invited to the dinner. Also, the Indians di= d not agree to see the lenders. I will go at them again, but if they come a= round it might be for a Friday meeting and not the dinner." The efforts to get an audience with Indian officials for Lay and the banker= s over the company's Dabhol power plant were detailed in documents released= last week by the government-funded Overseas Private Investment Corp. under= a Freedom of Information Act request. They provide a glimpse of a governme= nt function normally conducted in secret to avoid political embarrassment f= or foreign governments that face U.S. pressure on behalf of American corpor= ations.=20 Susan Schwab, a Commerce Department official from the first Bush administra= tion and now dean of the University of Maryland's School of Public Affairs,= said she was surprised that the commercial advocacy has become "one where = it's not the State Department or Commerce Department but the NSC leading th= e working group."=20 Daniel Tarullo, a Georgetown University law professor who oversaw internati= onal economics issues for President Bill Clinton's National Economic Counci= l, concurred that "the norm would have been NSC participation in a discussi= on rather than NSC chairing it."=20 That change is symbolic of the heightened government priority on aiding com= mercial interests overseas. The effort, which expanded in the first Bush ad= ministration and in the Clinton administration, is evolving to a more expli= cit link to national security as the Bush administration elevates ties betw= een the NSC and economic and commercial considerations.=20 "It's a new definition of national interest that embodies the national econ= omic interest," Schwab said. "It's not as blatant as 'what's good for Gener= al Motors is good for America,' but it's the globalized version of that."= =20 The trend grew after the end of the Cold War, when it appeared American com= panies were not competitive with the Japanese and others. "It was a sense t= hat our strategic position was at stake," said Leon Fuerth, who was securit= y adviser to Vice President Al Gore. U.S. multinationals came to be seen as= "agents of American national power."=20 Under the Clinton administration, U.S. diplomats were evaluated on their pe= rformance in cooperating with American business, according to Stuart E. Eiz= enstat, who held a senior post in the State Department. "This was a major a= ctivity and something they were expected to engage in," he said.=20 Even back then, Enron received a disproportionate share of government help = -- not necessarily because of the company's political connections but becau= se of its bold expansion into emerging markets. "With the possibility of Bo= eing, there is no U.S. company I had more interaction with, involved in mor= e projects abroad [and] had more of a call on our time than Enron," Eizenst= at said.=20 The effort, which decelerated after Sept. 11, may have peaked last year wit= h U.S. support for Enron in its dispute with India. At times it was difficu= lt to separate Enron interests from national interests. In late August, Lay= , frustrated with progress in India, told the Financial Times: "There are U= .S. laws that could prevent the U.S. government from providing any aid or a= ssistance to India going forward if, in fact, they expropriate property of = U.S. companies."=20 At the time, Enron was seeking $2.3 billion for itself and its lenders to s= ell its 65 percent interest in the Dabhol plant, which had been mired for y= ears in a dispute with its main customer, an Indian state government. "If t= hey try to squeeze us down to something less than cost, then it basically b= ecomes an expropriation by the Indian government," Lay told the newspaper.= =20 The chief minister of Maharashtra state in India decried "the strong-arm ta= ctics of Enron" he interpreted in Lay's words. Just two weeks before, the U= nited States had indicated that it might lift sanctions imposed on India fo= r earlier nuclear tests.=20 Enron issued a statement the next day saying Lay "was merely referring to U= .S. laws" and was not issuing a threat. Lay sent a letter to Indian Prime M= inister Atal Bihari Vajpayee to say "I have not asked anyone in the U.S. go= vernment to consider sanctions. I did not say that the Dabhol power issue h= ad been expropriated."=20 The administration correspondence released last week suggested various over= laps between Enron and U.S. efforts in India. A July 30 memo to the "Dabhol= Working Group" in the administration listed among the actions taken in Jul= y that "Enron Chairman Ken Lay visited India" and met various government of= ficials. The Dabhol working group's plans in August included an "Enron trip= " to a location that was blacked out on the document before the government = released the information.=20 September's actions by the Dabhol group were to include a visit by U.S. Tra= de Representative Robert B. Zoellick to India; Zoellick had been a paid con= sultant to Enron before joining the administration. Zoellick has since said= he did not raise the issue. The group also planned to make use of a visit = to the United Nations in September by Vajpayee.=20 The NSC working group coordinated a push at the highest levels of governmen= t. Vice President Cheney, as reported, brought up the matter with Sonia Gan= dhi, leader of India's Congress Party. The e-mail exchanges indicate Cheney= planned to raise the matter again on Oct. 3 with India's foreign minister.= A list of "Dabhol talking points" for Cheney's meeting with the minister w= ere "passed to Veep's staff for inclusion" by the NSC. The minister, Jaswan= t Singh, heard again from the administration in October, when Undersecretar= y of State Alan P. Larson raised Dabhol.=20 Last weekend, the State Department disclosed that Secretary of State Colin = L. Powell had discussed the Dabhol project on April 6 in a meeting with Sin= gh. According to an account provided by State, Powell told his Indian count= erpart that "failure to resolve the matter could have a serious deterrent e= ffect on other investors."=20 Before the November meeting between Vajpayee and Bush, at which Bush was to= raise the subject of Dabhol, an e-mail apparently from the NSC to the Over= seas Private Investment Corp. suggested a resolution was close. It asked: "= Do you still want to sign an MOU [memorandum of understanding] with the Ind= ians or announce one during Vajpayee's visit?" Plans for Bush to raise the = subject were scratched as Enron's problems became public.=20 The administration continues to talk about Dabhol, even after Enron's bankr= uptcy filing. Larson mentioned it with the Indians during a visit to New De= lhi last week with Powell. http://www.washingtonpost.com=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section C ENRON'S COLLAPSE: THE SECRETARY Army Chief Being Challenged on Ties to Company By CHRISTOPHER MARQUIS 01/25/2002 The New York Times Page 6, Column 1 c. 2002 New York Times Company WASHINGTON, Jan. 24 -- When Thomas E. White was chosen last spring to becom= e secretary of the Army, administration officials portrayed his nomination = as part of an effort to bring corporate discipline to the Pentagon.=20 Mr. White, who had been vice chairman of Enron Energy Services, arrived wit= h a boardroom boast that he and his private-sector colleagues were the new = ''C.E.O.'s of wholly owned subsidiaries of the Department of Defense.'' But now an advocacy group founded by Ralph Nader contends that Mr. White's = business dealings present a conflict of interest. The group, Public Citizen= , is raising questions while Congress investigates the collapse of the Enro= n Corporation, which has filed for bankruptcy protection.=20 Mr. White, through a spokesman, denied any wrongdoing.=20 Public Citizen this week accused Mr. White of taking action to benefit Enro= n within weeks of becoming Army secretary. In remarks to the media in June,= Mr. White vowed to accelerate efforts to privatize energy utilities servin= g the military.=20 The privatization effort had slowed while California's energy crisis unfold= ed, but Enron continued to promote the program. Mr. White himself had lobbi= ed on its behalf while at Enron, and in 1999 the energy division had been a= warded a contract worth $25 million over 10 years to provide energy to Fort= Hamilton in Brooklyn, Public Citizen said.=20 ''It's a huge conflict of interest,'' said Tyson Slocum, the group's resear= ch director. At the time of Mr. White's confirmation as Army secretary, Mr.= Slocum said, Enron had seven bids pending at the Pentagon.=20 A spokesman for Mr. White denied today that Mr. White had behaved inappropr= iately. The secretary had explicitly excused himself from decisions affecti= ng Enron, but he was determined to advance efforts to privatize Defense Dep= artment services and save taxpayers money, said the spokesman, Lt. Col. Rya= n Yantis.=20 As part of a government ethics agreement, Mr. White was compelled to sell h= is shares in Enron. He was given 90 days to do so, then received an extensi= on that gave him until Nov. 20 to complete the sale. He sold the last of hi= s shares for $13 each in mid-October, just before the company disclosed the= problems that led to its bankruptcy filing.=20 Mr. White acknowledged having contacts with Enron employees since last June= , including a call with Kenneth L. Lay, the chairman and chief executive, i= n September, but he called them personal in nature.=20 Administration officials voiced confidence in Mr. White, and Congress membe= rs investigating the Enron collapse say they have no evidence that he acted= in bad faith during his 11 years as an Enron executive or subsequently.=20 Mr. White, in a letter to one investigator, Representative Henry A. Waxman,= Democrat of California, noted this week that he had incurred ''significant= personal losses'' in the Enron bankruptcy.=20 In the letter, which responded to questions by Mr. Waxman, Mr. White said h= e had briefly discussed Enron with Defense Secretary Donald Rumsfeld in Nov= ember and with Secretary of State Colin L. Powell last month.=20 ''The nature of both conversations was a concern on their part for the impa= ct that the bankruptcy of Enron may have had on my personal well-being,'' M= r. White wrote. ''My response in both cases was that I had suffered signifi= cant personal losses, but that I would persevere.''=20 Mr. White also detailed the 30 contacts he had with Enron employees since l= ast June, involving both phone calls and personal meetings. The contacts in= cluded a telephone conversation on Sept. 10 with Mr. Lay.=20 Mr. White initiated the call to Mr. Lay ''to wish him luck as he assumed hi= s new duties as C.E.O. of Enron,'' Mr. White's letter said. The contacts wi= th other Enron officials, he said, were all ''personal in nature, with thei= r inquiring about my progress as Secretary of the Army and my inquiring abo= ut their personal challenges as they dealt with Enron's deteriorating finan= cial conditions.''=20 Mr. White added that ''at no time'' did Mr. Lay or any other Enron employee= ask him to intercede with federal officials on Enron's behalf.=20 Mr. Waxman, the ranking Democrat on the Government Reform and Oversight Com= mittee, is still studying Mr. White's letter, aides said, and was not avail= able for comment.=20 A review of Mr. White's financial disclosure information shows that he amas= sed a considerable fortune while working for Enron.=20 According to his filings in May, Mr. White last received a salary of $5.5 m= illion at Enron and owned homes in Naples, Fla., and Aspen, Colo., valued a= t more than $5 million each. He bought a $5.5 million penthouse in Washingt= on last June.=20 Mr. White held more Enron stock than any other senior official joining the = Bush administration. According to the disclosure forms, he held $25 million= to $50 million in Enron shares, $25 million to $50 million in stock option= s and $5 million to $25 million in a phantom stock award, which is a promis= e to pay a future bonus in appreciated stock or its cash equivalent.=20 To comply with the ethics agreement, Mr. White was compelled to sell 405,71= 0 shares of Enron. He made the sales, from June 13 to Oct. 14, 2001, as the= value of Enron stock steadily diminished. For example, he sold 92,000 shar= es at $50 in mid-June and 86,709 shares at $13 in October.=20 In his letter, Mr. White said he had sold all of his Enron stock and had re= nounced his stock options. Photo: The Army secretary, Thomas White, used to be vice chairman of Enron = Energy Services. Ethics rules made him sell Enron stock to hold office. (Pa= ul Hosefros/The New York Times)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 National Desk THE NATION With the Theater or PACs, Texans Saw Kenneth Lay as 'On Top of t= he World' Influence: The former Enron chief 'was a guy with swagger and loo= t who bought his way into whatever needed buying.' RONE TEMPEST TIMES STAFF WRITER 01/25/2002 Los Angeles Times Home Edition A-26 Copyright 2002 / The Times Mirror Company HOUSTON -- For all his clout in Washington, Kenneth L. Lay's greatest influ= ence was back home in Texas where the mirror-sheathed Enron headquarters bu= ilding glimmers above the Houston skyline.=20 Operating here in his home base, Lay--who resigned Wednesday night as chair= man of the once high-flying energy trading company he founded--was a kingma= ker who could create or crush political careers, spearhead professional spo= rts stadium drives, finance youth clubs and endow theater troupes. "This was a man on top of the world. It was well known that if you needed s= omething done you went to Ken Lay," recalled Felix Fraga, a former Houston = city councilman who has known Lay more than 30 years. "He could have run fo= r mayor, governor, or done anything he wanted."=20 As part of President Bush's celebrated "pioneers" club, Lay and his wife, L= inda, donated more than $145,000 to the national Republican Party and the B= ush campaign. The Lays also contributed $100,000 to the Bush inaugural gala= and $10,000 to the election recount fund.=20 But in Texas, where his money was less diluted, state Ethics Commission rec= ords show Lay gave $55,000 to one state Senate campaign alone. Other large = contributions graced the coffers of Gov. Rick Perry, Atty. Gen. John Cornyn= and Houston Mayor Lee P. Brown, for whom Lay sponsored a $50,000 fund-rais= er Oct. 8.=20 However, in a sign that Enron fortunes were already on a slide, Brown campa= ign finance director Sue Walden said Lay failed to show up for the fund-rai= ser and never sent a check.=20 Always the Go-To Guy=20 Over the years, Texas officeholders ranging from Houston City Council membe= rs to state railroad commissioners benefited from Lay's political largess.= =20 "Ken Lay was a guy with swagger and loot who bought his way into whatever n= eeded buying," said Texas populist politician and commentator Jim Hightower= . "He had this aura of being bulletproof, a corporate superstar who was rea= l connected to the Bushes."=20 After Lay's spectacular fall from power and grace, the extent of Lay's and = Enron's insertion into Texas government only now is surfacing.=20 The first casualty was Texas Public Utilities Commission chairman Max Yzagu= irre, a former Enron executive Lay helped get appointed as the state's chie= f utility regulator. Yzaguirre, tainted by his Enron connections, resigned = his post Jan. 17.=20 Others caught in the backwash of the Enron collapse are Perry, who received= a $25,000 contribution from Lay the day after he appointed Yzaguirre to di= rect the PUC; Cornyn, a U.S. Senate candidate who reversed an earlier posit= ion and recused himself from the state Enron investigation because of donat= ions he received from Lay and Enron; and Texas elected Supreme Court Justic= e Priscilla Owens, whose appointment by Bush to the U.S. 5th Circuit Court = of Appeals now is in jeopardy because of Enron contributions she received b= eginning in 1995 and decisions she made favoring the company.=20 According to Rice University political scientist Bob Stein, Lay displayed a= particular genius for picking out politicians on the rise.=20 "These were investments about where these guys were going, not necessarily = where they were at the time," Stein said. "Ken Lay was a big supporter of B= ush probably before Bush himself knew he was running for president."=20 According to the Austin-based watchdog group Texans for Public Justice, the= Lays personally donated $122,000 to Bush's two gubernatorial campaigns. Si= milarly, Lay was an early backer of Cornyn, even before the Republican atto= rney general announced his candidacy for the seat to be vacated by Republic= an Sen. Phil Gramm, who is retiring after this year's elections.=20 Payroll Deductions to the Company PAC=20 Gramm, whose economist wife served as a paid member of the Enron board of d= irectors, is caught up in the vortex because of the tens of thousands of do= llars he received in contributions from Enron and Lay.=20 Enron's system for political contributions operated on two fronts. Employee= s were encouraged to give money to candidates believed to be supportive of = company issues, particularly those involving market deregulation central to= the energy trading business.=20 Additionally, top executives were tapped for what amounted to a tithe to th= e Enron Political Action Committee, one of the country's biggest corporate = political PACs. A percentage of each executive's paycheck was withheld from= every biweekly pay period. For example, Joe Allen, Enron vice president fo= r state government affairs, gave $83.34 every two weeks to the Enron PAC, f= or an annual total of $2,166. Other executives gave much more.=20 The money primarily was used to fund campaigns of candidates for Congress, = particularly those with key energy-related positions. According to document= s on file with the Texas Ethics Commission, the Enron PAC collected $336,00= 0 from executives in 2001.=20 But not all of Lay's and Enron's munificence was reserved for major politic= al offices, nor was it limited to politics.=20 Spreading Wealth Among Nonprofits=20 One of the largest political contributions Lay made in 2001 was for a state= Senate race in the Piney Woods of rural East Texas. In that race, one of t= he most expensive legislative races ever undertaken in Texas, Democratic tr= ial lawyer David Marsh was pitted against Republican businessman/rancher To= dd Staples.=20 The race became a key contest for the Houston-based Texans for Lawsuit Refo= rm, a conservative movement Lay supports that seeks to limit lawsuits. Stap= les won, backed by $55,000 in contributions from Lay.=20 Even in the grandest Texas tradition of alms giving and support for the art= s, few have surpassed Lay and his company.=20 The Lays and Enron were prominent givers to virtually every important Houst= on charity ranging from a new cancer ward at the city's famous M.D. Anderso= n Hospital to support for the Houston Ballet.=20 Lay encouraged giving by offering matching funds for as much as $15,000 for= each employee. The results often were spectacular. Enron's 7,500 employees= alone, led by Lay with a $100,000 pledge, accounted for $5.5 million of th= e $75 million raised by the Houston United Way campaign.=20 "Enron was a visible leader in the charity world," said Houston Ballet mana= ging director Cecil C. Conner, whose troupe received a $10,000 gift from th= e Lays. "It helped make this city a vibrant, important city, not just an oi= l town. We have lost a leading voice."=20 Occasionally, Lay's influence went beyond money.=20 When former City Councilman Fraga, 72, a longtime social worker and promine= nt leader in the Latino community, found himself snared in a 1997 FBI bribe= ry sting operation that sent another councilman to jail, Lay was one of the= prominent Houstonians who wrote a letter in Fraga's support.=20 After returning the $2,000 offered by two undercover agents, Fraga never wa= s charged.=20 But Lay may be missed most as a civic leader. He served a term as president= of the Greater Houston Partnership, the city's influential super-chamber o= f commerce. Before that he served as head of the Board of Regents at the Un= iversity of Houston, where he received his graduate education.=20 According to political scientist Stein, Lay was instrumental in the revival= of Houston's historically moribund downtown, including the successful refe= rendums to build stadiums for baseball and basketball/hockey, the building = of a light rail line connecting Houston's renowned medical center complex t= o downtown and development of the theater district.=20 "Ken Lay was a great promoter of the city," Stein said. "His business was b= ased on attracting productive capital and labor, and when it worked, it wor= ked to make the city a more attractive place to live."=20 Scrambling for a New Look=20 But even this legacy already is fading, as Lay's and Enron's woes continue = to deepen. On a recent afternoon in Houston's gritty 2nd Ward District, the= Enron Boys and Girls Club, renovated with $500,000 in Enron donations, was= busy changing its name. The Enron logo on the center of the newly resurfac= ed basketball court was being sanded off and replaced with the new sponsor'= s name: Holt House.=20 "We've already got us a new sponsor," said club director Glen Sherrod, show= ing a reporter a roomful of new computers donated by Enron.=20 In a statement issued Thursday, Mayor Brown made no mention of Lay's role i= n rebuilding the city.=20 "My fervent hope," Brown said, "is that Enron is able to hire a CEO who can= put the company back in a position to rehire its employees and remain a vi= able part of the business community." PHOTO: Kenneth L. Lay, shown in 1999, and Enron gave to many important Hous= ton charities, from a hospital cancer ward to a ballet troupe.; ; PHOTOGRAP= HER: BRETT COOMER / For The Times=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Editorial Desk; Section A Spreading It Around By PAUL KRUGMAN 01/25/2002 The New York Times Page 23, Column 1 c. 2002 New York Times Company A bizarre thing happened to me over the past week: Conservative newspapers = and columnists made a concerted effort to portray me as a guilty party in t= he Enron scandal. Why? Because in 1999, before coming to The New York Times= , I was briefly paid to serve on an Enron advisory board.=20 Never mind that, scrupulously following the Times conflict of interest rule= s, I resigned from that board as soon as I agreed to write for this newspap= er -- making me much more fastidious than, say, William Kristol, who served= on that same board while editing The Weekly Standard. Never mind that I di= sclosed that past connection a year ago, the first time I wrote about Enron= in this column -- and also disclosed it the one time I mentioned Enron bef= ore, in a Fortune column. Never mind that the compensation I received per d= ay was actually somewhat less than other companies were paying me at the ti= me for speeches on world economic issues. And never mind that when I started writing in this column about issues of c= oncern to Enron -- in particular, criticizing the role that market manipula= tion by energy companies played in the California power crisis -- my positi= on was not at all what the company wanted to hear. (Compare this with the b= oard member Lawrence Kudlow, a commentator for National Review and CNBC. He= wrote vehemently in favor of the Cheney energy plan -- and has called this= the ''Clinton-Levitt recession,'' blaming Arthur Levitt, the former Securi= ties and Exchange Commission chairman, who tried to fight the accounting la= xity that made Enron possible.)=20 Yet reading those attacks, you would think that I was a major-league white-= collar criminal.=20 It's tempting to take this vendetta as a personal compliment: Some people a= re so worried about the effect of my writing that they will try anything to= get me off this page. But actually it was part of a broader effort by cons= ervatives to sling Enron muck toward their left, hoping that some of it wou= ld stick.=20 A few days ago Tim Noah published a very funny piece in Slate about this ef= fort, titled ''Blaming liberalism for Enron.'' (Full disclosure: I used to = write a column for Slate -- and Slate is owned by Microsoft. So I guess tha= t makes me a Bill Gates crony. I even shook his hand once.) It describes th= e strategies conservative pundits have used to shift the blame for the Enro= n scandal onto the other side of the political spectrum.=20 Among the ploys: Enron was in favor of the Kyoto treaty, because it thought= it could make money trading emission permits; see, environmentalism is the= villain. Or how about this: Enron made money by exploiting the quirks of e= lectricity markets that had been only partly deregulated; see, regulation i= s the villain.=20 And, of course -- you knew this was coming -- it's all a reflection of Clin= ton-era moral decline. Traditionally, as we all know, Texas businessmen and= politicians were models of probity; they never cooked their books or engag= ed in mutual back-scratching.=20 One doubts that the people putting out this stuff really expect to convince= anyone. But they do hope to muddy the waters. If they can get a little bit= of Enron dirt on everyone -- the Clinton administration, environmentalists= , liberal columnists -- the stain on people and ideas they support will be = less noticeable.=20 Why is Enron a problem for conservatives? Even if the Bush administration t= urns out to be squeaky clean, which we'll never know unless it starts to be= more forthcoming, the scandal threatens perceptions that the right has spe= nt decades creating. After all that effort to discredit concerns about the = gap between haves and have-nots as obsolete ''class warfare,'' along comes = a real-life story that reads like a leftist morality play: wealthy executiv= es make off with millions while ordinary workers lose their jobs and their = life savings. After all that effort to convince people that the private sec= tor can police itself, the most admired company in America turns out to hav= e been a giant Ponzi scheme -- and the most respected accounting firm turns= out to have been an accomplice.=20 You might think that the shock of the Enron scandal -- and it is shocking, = even to us hardened cynics -- would make some conservatives reconsider thei= r beliefs. But the die-hards prefer to sling muck at liberals, hoping it wi= ll stick.=20 Sorry, guys; I'm clean. The muck stops here. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 California; Editorial Pages Desk Enron Fraud: Appoint a Special Prosecutor 01/25/2002 Los Angeles Times Home Edition B-16 Copyright 2002 / The Times Mirror Company Re Enron: Let's get this straight. Fraud is fraud.=20 Enron executives have conspired with their auditors to cook the books to wi= ldly inflate profits and stock prices, failed to report illegal transaction= s, broken multiple rules of the Securities and Exchange Commission and then= instituted a cover-up by a massive destruction of files and evidence. The = result has been literally billions of dollars of losses to investors and th= e virtual destruction of employee 401(k)s, while they manipulated their per= sonal stock options and walked away with millions in illegal profits. Our attorney general, the overly pious John Ashcroft, has excused himself f= or conflicts of interest, as has the entire federal prosecutor's office in = Houston. The administration is staffed by multiple "graduates" of Enron and= is tainted by massive campaign contributions, as are large numbers of repr= esentatives and senators of both parties. Isn't it time for a special prose= cutor?=20 Malcolm D. Wise=20 Ontario=20 *=20 Regarding all the calls I see for a special prosecutor in the Enron case, w= ith its ties to the Bush administration, I can only say this: a special pro= secutor for what?=20 Until someone can make some sort of illegal connection between the two ther= e is nothing but guilt by association.=20 When a special prosecutor was assigned to the Whitewater matter, at least t= here was evidence of a shady land deal and inappropriate pressure being put= on people by then-Gov. Clinton to make improper loans, for example.=20 No linkage of this sort has been made between Enron and President Bush.=20 And until a linkage is made, all these shouts and murmurs for a prosecutor = are nothing but shameless partisanship.=20 Richard Vaczy=20 Los Angeles=20 *=20 I came away from "Why Insiders Get Rich and the Little Guy Pays" (Opinion, = Jan. 20) ashamed to be a little guy. While we're busy vilifying the fat cat= s at Enron and other larcenous corporations for sticking it to us, it might= be wise for us "littles" to examine our own culpability in the sticking.= =20 Union membership is at historical lows; we allow our representatives to gre= en-light monopolistic mergers, and we continue to elect politicians who ign= ore or undermine real campaign finance reform.=20 Until we start protecting ourselves from corporate avarice, we will continu= e to be perfect "little" victims.=20 Russell Buchanan=20 Woodland Hills=20 *=20 I fail to understand why President Bush and Vice President Dick Cheney are = trying to distance themselves from former Enron Chairman Kenneth Lay.=20 Lay is without question an exemplar of Republican values. Having taken adva= ntage of his position of privilege to maximize his personal wealth, whateve= r the consequences, this role model of Republican values is at least due a = presidential commendation.=20 Chris Hopkins=20 Los Angeles=20 *=20 Is it a coincidence that both Enron and its auditing firm Andersen started = massive document shredding operations about the same time? It may be a conc= erted effort to make sure that all the documents no longer exist. The inves= tigation will be greatly hindered without documents to support the allegati= ons, especially of criminal wrongdoing.=20 Welcome to the new economy highly touted by this administration.=20 Wimol Chanjamsri=20 Rowland Heights=20 *=20 What slays me is that high-ranking CEOs in large companies quickly learn ho= w to get big money for themselves but in actuality they do not know how to = run a profitable business. This includes successful orchestration of deregu= lation that is also for their further benefit.=20 Bad management is the bane of our existence.=20 June Cox=20 Yucca Valley PHOTO: Kenneth Lay; ; PHOTOGRAPHER: TAYLOR JONES, Augusta, Ga.=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Editorial Business Spin; It's just like political spin, only not quite as dishonest. Michael Kinsley 01/25/2002 The Washington Post FINAL A25 Copyright 2002, The Washington Post Co. All Rights Reserved How could the chairman of Enron have been telling his employees that they s= hould buy the company's stock at the same time he was selling it? How could= Ken Lay have been saying that the company was in great shape when he had a= report from one of his vice presidents saying it most definitely wasn't?= =20 Well, it might have been an innocent mistake. You don't need to believe eve= ry report that crosses your desk. If some of your own actions had slipped y= our mind, you might find them as hard to believe as anyone else would. And = you might be selling your stock for reasons other than concern that it migh= t be about to tank. So now that we've gotten the presumption of innocence out of the way, let's= consider two other possibilities. One is that he was lying. The other is t= hat he was spinning. What's the difference? It's often said that there is n= one. (Come to think of it, I've said this myself.) But there is: Lying mean= s flouting the truth. Spinning means indifference to the truth. The culture= of spin is one in which the relation between what you're saying and what h= appens to be true is a question that doesn't even arise. This doesn't make = spin less objectionable. In fact, it's more objectionable precisely because= it's culturally ingrained. We all know that it's wrong to lie. The signals= we send and receive about spin are very different.=20 The political equivalent of Ken Lay would be a politician who insisted he w= as going to win the election even though all the polls showed him heading f= or near-certain defeat. In the political world, though, spin is not merely = tolerated: It is required. It is regarded as a basic test of competence.=20 Tim Russert: Senator, you're down by 40 points in every poll. Your opponent= is openly consulting real-estate agents in Washington. Your own dog called= a news conference yesterday to demand that you withdraw from the race. Are= you going to lose?=20 Politician: No, Tim, it'll be a tough fight -- make no mistake about that -= - but I'm confident that . . . blah blah blah. And my cat is behind me 100 = percent.=20 The purpose of such exchanges is not to elicit the truth, but to see how we= ll the politician can spin. If he admits that he's probably going to lose, = he flunks. If he survives the barrage with his preposterous optimism and po= ker face unbroken, he wins.=20 But this example is entry-level spin. It shows a basic willingness to ignor= e reality, but no special effort or talent in creating an alternative reali= ty. The other difference between lying and spinning is that while lying is = often spontaneous, spinning usually involves advanced planning. There are a= few naturally gifted improvisational spinners, such as the brilliant White= House spokesman, Ari Fleischer. Characteristically, though, spin does not = wing it. Often spin production is an industrial process involving many peop= le, maybe or maybe not including the person who ultimately delivers it.=20 In recent years the Washington spin industry has invaded the corporate worl= d, as professional spinmeisters who learned their craft from politicians (o= r who actually used to be politicians) have come to realize that big compan= ies are just as spinologically needy as politicians and have more money. Of= course, the corporate world is where PR and advertising were invented -- t= wo activities that also strain the relationship between assertion and truth= . But in some ways spin, or at least untruthful spin, remains less acceptab= le in the corporate world than in politics.=20 One reason for this is that in spinning a commercial product -- which goes = by the polite name of "marketing" -- the mountain can come to Mohammed. Tha= t is, you can design the product around the spin rather than design the spi= n around the product. John Kenneth Galbraith argued 35 years ago in "The Ne= w Industrial State" that corporations often create the demand for their pro= ducts rather than satisfy hungers that already exist. Controversial at the = time, this now seems obvious. And when marketing is paramount, the product = itself is secondary. Oddly, this makes it easier for corporate spin to be t= ruthful: You can decide what you want to say and build reality around it. B= usinesspeople used to marketing sometimes trip up when they forget that rea= lity is less malleable in non-marketing situations.=20 Spin is also illegal in many corporate circumstances where it would be lega= l, acceptable and even expected in politics. If a corporate insider knows s= omething important about the company's future, he or she not only may not s= ay something that directly contradicts the truth -- in most circumstances t= hey may not even spin by silence. Imagine if politicians were under that ki= nd of legal requirement! And why aren't they? Well, obviously because money= is at stake with the business executive whereas nothing depends on the pol= itician's truthfulness except democracy.=20 In the pervasive culture of spin, it's possible that Ken Lay was describing= a reality he wanted without even considering the relation of what he was s= aying to reality as we actually experience it. If so, his mistake was forge= tting that he's not a politician.=20 Michael Kinsley, editor of Slate (www.slate.com), writes a weekly column fo= r The Post. http://www.washingtonpost.com=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section C ENRON'S COLLAPSE Excerpts From a House Hearing on Destruction of Enron Documents 01/25/2002 The New York Times Page 8, Column 1 c. 2002 New York Times Company Following are excerpts from remarks at a hearing yesterday before the House= Energy and Commerce Committee on the destruction of documents related to t= he Enron Corporation, as recorded by the Federal Document Clearing House, a= private transcription service. The speakers included Representatives James= C. Greenwood, Peter Deutsch, Billy Tauzin and Diana DeGette; the Arthur An= dersen officials C. E. Andrews, Dorsey L. Baskin and Nancy Temple; and Davi= d B. Duncan, a former partner at Arthur Andersen.=20 REPRESENTATIVE GREENWOOD -- The chair will now call the first panel.=20 Mr. Duncan, will you please come forward? Please be seated right there. Tha= nk you, sir.=20 Good morning, Mr. Duncan. DAVID DUNCAN -- Morning.=20 MR. GREENWOOD -- Mr. Duncan is here with us today under subpoena. To date, = Mr. Duncan has cooperated with this committee in our search for the facts b= y submitting to an interview last week with our committee investigator that= lasted more than four hours.=20 Yet, we received a letter from his counsel yesterday stating that Mr. Dunca= n authorized his counsel to advise the committee that he will, quote, ''rel= y on his constitutional right not to testify,'' close quote.=20 I believe that this privilege should be personally exercised by, before the= members, and that's why we have requested Mr. Duncan's appearance here tod= ay and request that he reconsider.=20 Mr. Duncan, you are aware that the committee is holding an investigative he= aring and that, when doing so, we have the practice of taking testimony und= er oath. Do you have objection to testifying under oath?=20 MR. DUNCAN -- No, sir.=20 MR. GREENWOOD -- Thank you.=20 The chair also advises you that, under the rules of the House and the rules= of the committee, you are entitled to be advised by counsel.=20 Do you desire to be advised by counsel during your testimony today?=20 MR. DUNCAN -- Yes, sir.=20 MR. GREENWOOD -- O.K. In that case, would you please rise and raise your ri= ght hand, and I will swear you in.=20 Mr. Duncan, do you swear that you will tell -- the testimony you will give = this committee is the truth, the whole truth and nothing but the truth?=20 MR. DUNCAN -- Yes, I do.=20 MR. GREENWOOD -- Thank you, Mr. Duncan. You are now under oath, and you may= give a five-minute summary of your written testimony if you choose to.=20 MR. DUNCAN -- I have no summary, sir.=20 MR. GREENWOOD -- O.K. The chair will recognize himself for questioning.=20 Mr. Duncan, Enron robbed the bank. Arthur Andersen provided the getaway car= , and they say you were at the wheel.=20 I have a specific question for you, Mr. Duncan. You were fired by Andersen = last week for orchestrating an expedited effort among the Andersen-Enron en= gagement team to destroy thousands of paper documents and electronic files = relating to the Enron matter after learning of an inquiry by the Securities= and Exchange Commission into Enron's complex financial transactions.=20 Did you give an order to destroy documents in an attempt to subvert governm= ental investigations into Enron's financial collapse? And if so, did you do= so at the direction or suggestion of anyone at Andersen or at Enron?=20 MR. DUNCAN -- Mr. Chairman, I would like to answer the committee's question= s, but on the advice of my counsel I respectfully decline to answer the que= stion based on the protection afforded me under the Constitution of the Uni= ted States.=20 MR. GREENWOOD -- Let me be clear, Mr. Duncan. Are you refusing to answer th= e question on the basis of the protections afforded to you under the Fifth = Amendment to the United States Constitution?=20 MR. DUNCAN -- Again, on the advice of my counsel, I respectfully decline to= answer the question based on the protection afforded me under the United S= tates Constitution.=20 MR. GREENWOOD -- Will you invoke your Fifth Amendment rights in response to= all of our questions here today?=20 MR. DUNCAN -- Respectfully, that will be my response to all your questions.= =20 MR. GREENWOOD -- I'm disappointed to hear that, but it is therefore the cha= ir's intention to dismiss the witness.=20 Mr. Duncan, we thank you for your attendance today and your respect for thi= s committee's process. You are dismissed, and perhaps we will see you on an= other occasion.=20 MR. DUNCAN -- Yes, sir. . . .=20 MR. GREENWOOD -- I think it is very important to lay out for the subcommitt= ee, our panel and our audience our current understanding of Mr. Duncan's re= collection of relevant events based on the committee counsel's interview of= Mr. Duncan last week.=20 It is my understanding that Mr. Duncan said that, in the September and Octo= ber time period, he participated in frequent meetings and teleconferences w= ith a group of senior-level Andersen partners in Houston and Chicago to dis= cuss matters relating to the Enron account.=20 That group included Ms. Nancy Temple from the legal group and Mr. Michael O= dom, the audit practice director, both of whom are testifying today.=20 The consultation group, which was created in late August or early September= , was fluid in membership and was formed in response to growing concerns ov= er the accounting for Enron's special-purpose entities.=20 Specifically, Mr. Duncan said that the group was formed at the suggestion o= f Mr. Odom and himself in response to, one, Sherron Watkins' allegations of= accounting improprieties on the Enron Raptor and LJM transactions; two, th= e $1 billion accounting error discovered in August by Enron and Andersen wi= th respect to the accounting for the Raptor entities; and, three, the rapid= ly declining stock price of the Enron merchant assets transferred to the Ra= ptor partnerships, which made it look like there would be a significant wri= te-down by Enron.=20 During these conference calls prior to Oct. 12, 2001, Mr. Duncan recalls re= ceiving advice from Ms. Temple with respect to the proper documentation of = Andersen's evolving position with respect to the correct accounting for the= Raptor transactions.=20 Also, prior to receiving Ms. Temple's Oct. 12 e-mail regarding compliance w= ith Andersen's documentation retention policy, Mr. Duncan recalls Ms. Templ= e, on one or two of these three group conference calls, asking him, quote, = ''How are you on compliance with the document retention policy on Enron?'' = He said that his response to her was, ''At best, irregular.''=20 Mr. Duncan then received Ms. Temple's Oct. 12 e-mail, forwarding from Mr. O= dom with a note, quote, ''More help,'' close quote. He did not know what Mr= . Odom meant by that phrase, but he viewed Ms. Temple's e-mail as a follow-= up to the question she had posed to him orally about compliance with the re= tention policy and as a device from his attorney to ensure that the entire = Enron audit engagement team was in compliance with that policy.=20 He added that he had never before, during his lengthy tenure at Andersen, b= een asked about compliance with the retention policy, nor had he ever recei= ved such an e-mail about ensuring compliance with that policy from anyone i= n Andersen's legal group.=20 Mr. Duncan does not recall the precise date, but sometime after Oct. 12, 20= 01, Mr. Duncan met with his top Enron audit partners, Mr. Tom Bauer, Ms. De= bra Cash and Mr. Roger Willard, to discuss the advice he had received from = Ms. Temple.=20 According to Mr. Duncan, the meeting participants concluded that they shoul= d call a meeting of all the Enron audit managers to discuss timely complian= ce with the retention policy.=20 Mr. Duncan does not recall when this meeting occurred but does not dispute = that his secretary sent out an e-mail on Oct. 23, 2001, calling an urgent m= eeting of the Enron managers for later that same day.=20 Just days earlier, on either Friday, Oct. 19, or Saturday, Oct. 20, Mr. Dun= can had first learned of the S.E.C. informal inquiry of Enron. He recalled = that he had discussions with the Andersen consultation group about the S.E.= C. development over the weekend, including Ms. Temple.=20 He also recalled that on Oct. 22 he and other Andersen engagement team memb= ers met with Enron chief accounting officer Rick Causey to discuss the S.E.= C. inquiry. Duncan said that Causey requested Andersen's assistance in crea= ting documents to explain the related party transactions to the S.E.C.=20 Mr. Duncan said that at the meeting he called with all the Andersen audit m= anagers on the Enron account, whenever it may have occurred, he advised the= m of the importance of compliance with the document retention policy and ha= nded out copies of the policy to participants.=20 Mr. Duncan said that he observed individuals on the engagement team activel= y complying with the firm's document policies by shredding documents, and t= hat the activity continued up until the 9th of November, when he received a= voice mail from Ms. Temple ordering the preservation of all Enron-related = documents.=20 Mr. Duncan also said that he destroyed some of his own Enron-related docume= nts in an effort to comply with Andersen's document retention and destructi= on policies.=20 Again, that is my understanding of Mr. Duncan's interview with committee st= aff.=20 Mr. Deutsch, would you agree that I have characterized our current understa= nding of Mr. Duncan's recollection of relevant events accurately? . . .=20 MR. DEUTSCH -- I would.=20 MR. GREENWOOD -- Thank you.=20 MR. BASKIN -- My name is Dorsey Lee Baskin Jr.=20 Since 1999, I have been managing director of Andersen's assurance professio= nal standards group, which has firm-wide responsibility for providing guida= nce on auditing standards, including professional standards relating to the= preservation of audit work papers and client files. I've been at Andersen = for almost 25 years, since receiving my M.B.A. from Texas A&M University in= 1977.=20 I'm here with my partner, C. E. Andrews, who is managing partner for Anders= en's global audit practice. He and I will both answer the committee's quest= ions.=20 I would like to make three essential points at the outset of our testimony.= First, as our C.E.O. has said, this is indeed a tragedy on many levels.=20 Second, the committee and the broader public should know that Andersen came= forward voluntarily and disclosed the destruction of documents by Andersen= personnel. However improper that destruction was, Andersen did not hide fr= om its obligation to do what it could to take corrective action. We promptl= y alerted all investigative authorities, including this committee.=20 Although the firm was well aware of the potentially devastating impact this= disclosure could have on our reputation, we did the right thing. We certai= nly are not proud of the document destruction, but we are proud of our deci= sion to step forward and accept responsibility.=20 Third, it bears emphasis that Andersen has cooperated fully and unreservedl= y with all of the ongoing investigations into the destruction of Enron-rela= ted documents. We are determined to get to the bottom of what happened.=20 We have publicly acknowledged, and will continue to acknowledge, mistakes t= hat we have made. We have tried, and will continue to try, to answer every = question that is put to us. And we will take whatever decisive action is ne= cessary to restore public confidence in the firm.=20 I have to tell you, in all candor, that we are limited in what we can say t= oday about the destruction of documents by Andersen personnel working on th= e Enron engagement.=20 Our investigation into that destruction is far from complete. We have not y= et had the opportunity to review all of the many relevant documents or to h= ear from all of the people who have relevant information.=20 But having said that, this is what I can tell you about Andersen's retentio= n and destruction of documents.=20 To begin with, it is the usual, routine and wholly legitimate practice of a= uditors to preserve their final working papers while disposing of drafts, p= ersonal notes and other materials that are not necessary to support the aud= it report. So far as I'm aware, this is the policy of all the large account= ing firms.=20 This policy toward document disposal reflects longstanding and sound audit = practice. It is designed to assure that the audit work papers, which are th= e principal materials reflecting and documenting the conclusions of the aud= it, unambiguously reflect the judgments that actually were reached.=20 This understanding of proper audit practice was reflected in the Andersen d= ocument retention policy in effect last fall, which provided that documents= other than work papers ordinarily should be disposed of when no longer nee= ded but that such documents should be retained when litigation has commence= d or is threatened.=20 Of course, precisely when that occurs, often we'll require the application = of informed judgment to the particular circumstances of a given case. And t= hat may well be a point on which reasonable people can differ.=20 As for the destruction of Enron-related documents, we know that on Oct. 23,= just six days after the S.E.C. requested information from Enron, David Dun= can, Andersen's lead partner on the Enron engagement, called an urgent meet= ing of the Enron engagement team, at which he organized an expedited effort= to shred or otherwise dispose of Enron-related documents.=20 This effort was undertaken without any consultation with others in the firm= or, so far as we are aware, with legal counsel.=20 Over the course of the next several days, a very substantial volume of docu= ments and e-mails were disposed of by the Enron engagement team. This activ= ity appears to have stopped shortly after Mr. Duncan's assistant sent an e-= mail to other secretaries on Nov. 9, the day after Andersen received a subp= oena from the S.E.C. telling them, ''No more shredding.''=20 Once this activity came to light, Andersen's response was immediate. Anders= en notified the Department of Justice, the S.E.C. and all relevant congress= ional committees. At the same time, the firm suspended its records manageme= nt policy and asked former Senator Danforth to conduct an immediate and com= prehensive review.=20 On Jan. 15, approximately two weeks after our C.E.O. learned about the docu= ment destruction, Andersen dismissed Mr. Duncan. The firm also placed three= other partners from the Enron engagement on administrative leave, pending = completion of the investigation into their responsibility for these events.= =20 The firm relieved four partners in its Houston office of their management r= esponsibilities, and the firm indicated that it will take disciplinary acti= on against any Andersen personnel who are found to have acted improperly.= =20 I should address the question, why Andersen took the forceful action it did= regarding Mr. Duncan. In our view, Mr. Duncan's actions reflected a failur= e of judgment that is simply unacceptable in a person who has major respons= ibilities at our firm.=20 He was the lead engagement partner for a significant client, exercising ver= y substantial responsibility within the firm. Yet our investigation indicat= ed that he directed the purposeful destruction of a very substantial volume= of documents just as the government investigation was beginning. This is t= he kind of conduct that Andersen cannot tolerate.=20 When Andersen's C.E.O., Joe Berardino, testified before Congress almost six= weeks ago, he observed that all of us here today, and many others who are = not here, have a responsibility to seek out and evaluate the facts and take= needed action.=20 We have tried to fulfill that responsibility. We uncovered the document des= truction. Our firm's management brought it to the attention of the governme= ntal authorities.=20 We already have started to implement decisive disciplinary and remedial act= ion, and we're continuing our investigation resolved to take all steps that= are necessary to restore public confidence in the integrity of our firm. .= . .=20 MR. GREENWOOD -- Let me turn it to Ms. Temple, and since I don't have any o= ther members here right now, I'll continue with the questioning.=20 We have a memo from you, Ms. Temple, that's dated, I believe, Nov. 10. . . = .=20 And that memo is very explicit and it's very clear that you took action on = that date in the form of that memo to make it crystal clear that no one was= to destroy documents.=20 Can you explain to us why it took you until Nov. 10 to issue a statement wi= th that clarity, when, a month ago, you knew that the question of retention= and destruction of documents was going to be critical to investigations an= d to litigation?=20 MS. TEMPLE -- Yes, Mr. Chairman, I'll tell you the circumstances of sending= the Nov. 10 memo and the facts, as I understood them, in the previous time= period.=20 On Nov. 10, the memo we sent, it was drafted by our outside counsel, a law = firm, Davis Polk & Wardwell.=20 MR. GREENWOOD -- When was that firm retained for this purpose?=20 MS. TEMPLE -- I did not personally retain that law firm. I know I spoke to = a partner at that law firm on Oct. 16.=20 MR. GREENWOOD -- Is your testimony that you do not know when they were reta= ined?=20 MS. TEMPLE -- I don't recall the exact date of the retention. I know I spok= e to a partner at that law firm on Oct. 16.=20 MR. GREENWOOD -- O.K., you may proceed.=20 MS. TEMPLE -- It is the legal group's practice and protocol, when Arthur An= dersen receives a subpoena or a request for documents, to send a written no= tification ----=20 MS. TEMPLE -- My recollection, the firm received a subpoena from the Securi= ties and Exchange Commission at the end of the business day on Nov. 8. And = a voice mail was distributed to the audit engagement team, notifying them o= f that the following business day. And once this e-mail was drafted, it was= circulated to the engagement team.=20 Now, moving back in time frame to the previous period that you talked about= , the firm does have a written policy that provides guidance. It is self-en= forcing, and we trust our partners to exercise their good judgment and to c= onsult with either the legal group or the practice directors as appropriate= .=20 MR. GREENWOOD -- Let me interrupt you for a second. I asked Ms. Temple when= Davis Polk was retained for this purpose, and she indicated that she, her = response was that she didn't know.=20 Mr. Baskin, Mr. Andrews, do you know when this firm was retained?=20 And I will remind you that I asked you last night to be prepared to answer = that question this morning.=20 MR. ANDREWS -- Mr. Chairman, the firm was retained on Oct. 9 and commenced = work with us on Oct. 16.=20 MR. GREENWOOD -- O.K. And what was the purpose for retaining that firm on O= ct. 9?=20 MR. ANDREWS -- Well, as if we -- just for a moment -- what was going on dur= ing that particular period of time, around that Oct. 9 time ----=20 MR. GREENWOOD -- Are they handling the potential litigation for the firm no= w?=20 MR. ANDREWS -- But what they were, are they handling it now? Yes, they are.= =20 What was going on at that particular time was that we were involved, the co= mpany was closing its third quarter. They were about to reach conclusions o= n the third quarter. There were a lot of financial reporting issues occurri= ng during that period that were obviously unusual and were concerning. So w= e engaged them to help us with the financial reporting issues and with poss= ible litigation.=20 MR. GREENWOOD -- Mr. Baskin or Mr. Andrews, or even Ms. Temple, you may wan= t to answer this question.=20 The document in Tab 29 in your binder is a copy of an Enron announcement to= its employees and others on the Enron worldwide e-mail list, which I belie= ve includes Andersen, on Oct. 25, 2001, telling them to preserve records re= lating to the related party transactions including the accounting of those = transactions.=20 Did Andersen learn about this action by Enron, which by the way also seems = rather late given that it is eight days after Enron learned of the S.E.C. i= nquiry? And if so, why didn't Andersen act right then to order its employee= s to do the same?=20 MR. BASKIN -- Well, as it pertains to --this is the first time I've read th= is memo -- but as it pertains to our actions, again, we believe that it was= the engagement partners' responsibility in this situation, given what was = occurring in that late-October period, which is the date of this memo, that= there was enough information available that, in that partner's judgment, t= he instruction and oversight of that partner would in fact cause us not to = destroy documents. And certainly, you would not convene a meeting and give = instructions, if you will -- apparently that's what happened -- to destroy = documents.=20 So we would agree that during this period it would be appropriate to, at a = minimum, seek counsel before doing such an exercise.=20 And destruction of documents in that period is wrong, and we have admitted = that. It is wrong. And once we learned of that in our investigation, we too= k firm actions. That is not Andersen, that is not what we encourage our emp= loyees to do, and it is inappropriate. . . .=20 REPRESENTATIVE TAUZIN -- The gentleman's time has expired. The chair recogn= izes himself for a round of questions.=20 First of all, I want to turn to the week of Oct. 9. Now, you've testified O= ct. 9 was the date that Arthur Andersen hired counsel, outside counsel, rig= ht? And the outside counsel firm was Davis Polk & Wardwell of New York, rig= ht? Is that correct, sir? Mr. Andrews?=20 MR. ANDREWS -- Yes, that's correct.=20 MR. TAUZIN -- My understanding is that's a litigation team, right?=20 MR. ANDREWS -- Davis Polk is a reputable firm. I'm sure they do litigation = in other things, but we hired them for purposes to help us with the financi= al reporting and possible litigation.=20 MR. TAUZIN -- And possible litigation, right?=20 MR. ANDREWS -- Yes, sir.=20 MR. TAUZIN -- This Oct. 9 -- I want to turn to you, Ms. Temple, real quickl= y. Sometime before the week of Oct. 12, in your interviews with us, you inf= ormed us that there was a conference call about the Enron engagement team's= compliance with the document retention policy.=20 Mr. Duncan says that it was you who raised the question about the retention= policy. You had some other recollections of that conversation.=20 Give us your recollections of what happened in that conference call. And wh= at date was that?=20 MS. TEMPLE -- Sure. Let me give you the context of my role in this matter.= =20 I was asked, beginning on Sept. 28, 2001, to participate in a conference ca= ll. I understood that the firm was addressing one accounting issue that had= arisen at that point in time.=20 And between that time and Oct. 12, I provided legal advice, including, afte= r consultation with my supervisor and others, about specific documentation = and retention issues.=20 MR. TAUZIN -- Ms. Temple, in that conversation, though, that occurred right= about the time that the firm was hiring other litigation counsel -- you're= the litigation attorney for the firm, isn't that correct?=20 MS. TEMPLE -- My background is in litigation, yes.=20 MR. TAUZIN -- But they just hired an outside litigation firm to advise them= on possible litigation. About the same time, there's a conference call and= there's a discussion about the retention policy. And obviously, the memo i= s sent out following it regarding that policy that includes information abo= ut destruction of documents as well.=20 You said something to our investigators about conversations in that confere= nce call, referencing changing memos and deleting information from past mem= os, substituting a memo to the file for an old memo with a new memo. Is tha= t accurate? Was that discussion held in that conference call?=20 MS. TEMPLE -- The advice I gave was different from that, Mr. Chairman. The = advice I gave was ----=20 MR. TAUZIN -- What were the questions being asked that you had to give advi= ce?=20 MS. TEMPLE -- The team was discussing a draft of a memo about a particular = accounting issue on asset impairment. The advice that my supervisor and I g= ave initially was that that memo, which was being currently drafted, needed= to be dated currently ----=20 MR. TAUZIN -- But what did they want to do that you told them they couldn't= do? What did they ask you to do?=20 MS. TEMPLE -- I don't recall with respect to that particular legal advice t= hat there was a question raised, but we pointed out to the team ----=20 MR. TAUZIN -- Was there not a request or discussion of substituting a new m= emo for an old memo and, in effect, backdating a memo to the file?=20 MS. TEMPLE -- No, there was not a question about backdating that particular= memo, but the date ----=20 MR. TAUZIN -- Was there a question about substituting it and deleting infor= mation from the memo?=20 MS. TEMPLE -- There was a question in that current memo that was raised, ca= n we delete a sentence, acknowledging that the firm had given incorrect acc= ounting advice in the first quarter of 2001 ----=20 MR. TAUZIN -- What I want to know is ----=20 MS. TEMPLE -- ---- and I said absolutely not.=20 MR. TAUZIN -- What I want to know is, essentially, you said don't do that.= =20 MS. TEMPLE -- Right.=20 MR. TAUZIN -- Is it customary that in those kind of discussions, when the f= irm finds itself in error, that anyone would suggest substituting memos or = deleting information that was in memos already in the file? Was that unusua= l conversation?=20 MS. TEMPLE -- I expect the engagement partners to raise questions about doc= umentation and seek advice, which they were doing.=20 The other legal advice that I gave on documentation was, the memos for any = prior periods, first quarter of 2001, year-end 2000, could not be changed o= r deleted.=20 MR. TAUZIN -- You're telling them no changes. I understand that. I'm asking= you, was it customary? Was this unusual for members of the firm to be talk= ing to you about changing documents, altering documents, substituting docum= ents that were on file already regards to Enron operations?=20 MS. TEMPLE -- At the time, based on my recollection, I understood that ther= e were good-faith questions that were being asked about how to properly doc= ument the firm's ----=20 MR. TAUZIN -- Was it a good-faith question to change a memo that's already = in the file with a new memo?=20 MS. TEMPLE -- I received the question and consulted with my supervisor and = others -- --=20 MR. TAUZIN -- You said, don't do it.=20 MS. TEMPLE -- ---- and gave the advice. And to the best of my knowledge, th= e advice was followed.=20 MR. TAUZIN -- Were you shocked that they would raise such a question? Were = you alarmed? Were you disturbed? Did it bother you, as litigation counsel f= or the firm, that any member would even suggest altering the record, alteri= ng documents, substituting memos to the file?=20 MS. TEMPLE -- I don't recall everything going on in my mind. I recall makin= g sure, giving advice to make sure that the written record was complete and= accurate and truthful. And I do recall seeing that my advice was followed.= =20 MR. TAUZIN -- And my time is up, but you do recall also that Oct. 16 memo, = that you did discuss with them changing that memo so that your name was not= included because you might be a potential witness. Is that correct?=20 MS. TEMPLE -- I do recall giving legal advice after consultation with other= s, including outside legal counsel, Davis Polk, that the audit partners sho= uld document the recommendations and communications he had with the client = about the client's, Enron's, draft press release.=20 And I did, after consulting with outside legal counsel, and it's our standa= rd practice in the legal group to advise the engagement team not to write d= own and discuss in their memos legal advice that the legal group might give= , because it might be a waiver down the road of attorney-client privilege.= =20 MR. TAUZIN -- Thank you, gentlelady.=20 The chair recognizes the gentlelady, Ms. DeGette, for a round of questions.= =20 REPRESENTATIVE DEGETTE -- Thank you, Mr. Chairman. . . .=20 If you can tell me very briefly, under what circumstances you believe docum= ents should be retained? When is it, what is the trigger under which docume= nts need to be retained?=20 MS. TEMPLE -- There are several provisions in the policy that address reten= tion.=20 MS. DEGETTE -- And, in fact, there's an exhibit to document No. 27 here, Ex= hibit 1, that says examples of situations to be reported, and that's a list= of examples of situations where, if you see that coming, then you treat th= at as threatened legal action under Section 2.5 of the litigation procedure= s and you retain them. Is that right?=20 MS. TEMPLE -- Yes, there is a list of examples to be reported to the legal = group that calls for notification. I don't believe ----=20 MS. DEGETTE -- And that would trigger, then, a notification such as the one= that you made, I think, on Oct. 12 in your e-mail, right?=20 MS. TEMPLE -- My understanding ----=20 MS. DEGETTE -- I mean, it's not just threatened litigation, is it? There's = other things that would trigger Arthur Andersen to recommend retention of d= ocuments.=20 MS. TEMPLE --The policy does require retention of all related material if t= here's threatened litigation.=20 MS. DEGETTE -- Or other situations, right? And one of those situations woul= d be oral indications from management or owners that the firm was somehow r= esponsible for the failure of operations or the failure to detect fraud, ri= ght? That's the third one on the list of examples of situations to be repor= ted, right?=20 MS. TEMPLE -- Right. And this list of examples is from the policy statement= No. 780, which ----=20 MS. DEGETTE -- Right.=20 MS. TEMPLE -- ---- requires notification to the legal group of those exampl= es.=20 MS. DEGETTE -- -- O.K. So now, there was a memo that was written on Aug. 15= , 2001, from Sherron Watkins, an Enron vice president, alleging improper ac= counting and all kinds of other problems. Was the legal department aware of= that?=20 MS. TEMPLE -- I don't recall if I was aware of that particular document. I = was aware of circumstances about allegations by an employee of Enron, and t= he fact that Vinson & Elkins had conducted an investigation and concluded a= nd reported positively to the board the week of Oct. 8.=20 MS. DEGETTE -- So you were aware that in August an employee had made these = allegations, and then Vinson & Elkins had done an investigation also in Aug= ust. Is that right?=20 MS. TEMPLE -- Not exactly.=20 MS. DEGETTE -- No?=20 MS. TEMPLE -- Before Oct. 12 I was aware that Vinson & Elkins had been enga= ged and completed and reported orally to the board that the results of thei= r investigation were positive.=20 And the engagement team also assured the practice directors who were being = consulted at that time and myself that they had reviewed the information ab= out the allegations, and that the allegations were, to the extent that they= had any information in them in reference to transactions, involved transac= tions that the audit team had carefully reviewed in its prior work.=20 MS. DEGETTE -- O.K. So you thought that, because Vinson & Elkins had said t= here's no problem, that that did not trigger any kind of requirement. Is th= at correct? Yes or no, please.=20 MS. TEMPLE -- No, that's not ----=20 MS. DEGETTE -- O.K, thank you.=20 MS. TEMPLE -- ---- what I was thinking at the time.=20 MS. DEGETTE -- Now, what caused you to send that memo on Oct. 12? Did you d= o that on a regular basis?=20 MS. TEMPLE -- There were several factors that caused me to send the memo on= Oct. 12.=20 MS. DEGETTE -- O.K, let me back up for a minute. How many times in your two= years, roughly, at Andersen did you send memos like this, reminding people= of the document retention and destruction policy?=20 MS. TEMPLE -- I don't recall the number of times. I have referred ----=20 MS. DEGETTE -- Had you done it before?=20 MS. TEMPLE -- I believe I had referred people to the firm's policies on doc= ument retention and destruction, as well as ----=20 MS. DEGETTE -- How many times before?=20 MS. TEMPLE -- I don't recall the number of times.=20 MS. DEGETTE -- One time? Five times? Ten times?=20 MS. TEMPLE -- To the best of my recollection, at least one other occasion, = and I ----=20 MS. DEGETTE -- And was that in relation to Enron, or was that in relation t= o another client?=20 MS. TEMPLE -- No, that was not in relation to Enron. . . .=20 MR. TAUZIN -- I just want to clarify your testimony to the gentlelady's que= stions. You indicated that Vinson & Elkins issued a positive report. I want= a quote from that report.=20 ''There is a serious risk of adverse publicity and litigation. It also appe= ars, because of the inquiries and issues raised by Ms. Watkins, Arthur Ande= rsen will want additional assurances that Enron had no agreement with LJM t= hat LJM would not lose money,'' et cetera.=20 Is that a positive report?=20 MS. TEMPLE -- As I recall, the outcome of the report, as reported to me, th= e ----=20 MR. TAUZIN -- You have a copy of this, I believe we've submitted, you have = a copy of this letter, don't you, from Vinson & Elkins? You saw it yourself= , didn't you?=20 MS. TEMPLE -- After the week of Oct. 12, I did receive a copy ----=20 MR. TAUZIN -- But here's the point, Ms. Temple. I mean, we're trying to get= the facts here. But if you will characterize a report that indicates a dec= line in the value of Enron's stock and the serious risk of adverse publicit= y and litigation as a positive report from the attorneys, we're going to ha= ve trouble with your testimony today.=20 MS. TEMPLE -- Later on, when I did receive a copy of the report and sent a = copy to outside counsel, I did note the comments that you referenced. But I= also noted that the law firm reported that there was nothing further to fo= llow up on at that point in time.=20 And the law firm was representing Enron Corporation, not Arthur Andersen. A= nd I understood and recall at the time thinking that there might be a chall= enge to the business judgment decisions of Enron to enter into certain tran= sactions.=20 MR. TAUZIN -- Did you know at the time that Vinson & Elkins had signed off = on these agreements as a counsel for the firm? There may have been a confli= ct of interest in them commenting on them now?=20 MS. TEMPLE -- I don't recall the circumstances ----=20 MR. TAUZIN -- You're not aware of that?=20 MS. TEMPLE -- I don't recall at this time.=20 MR. TAUZIN -- Thank you, gentlelady.=20 MS. DEGETTE -- Do you recall a conversation with Mr. Duncan in which he ass= ured you he was gathering the documents to preserve them? Do you recall spe= cifically having that conversation?=20 MS. TEMPLE -- I don't recall ----=20 MS. DEGETTE -- According to your notes?=20 MS. TEMPLE -- ---- his specific words, but I do recall that we had a group = conference call on Oct. 23. And I have these notes from that call.=20 MS. DEGETTE -- And the notes don't say anything about preservation, do they= ?=20 MS. TEMPLE -- The notes. . . .=20 MS. DEGETTE -- Yes or no?=20 MS. TEMPLE -- The notes do not have the word ''preservation'' in them.=20 MS. DEGETTE -- And on Oct. 12, you had just sent a memo to Mr. Duncan and h= is group, advising them of the Arthur Andersen document retention and destr= uction policy, which involved destroying of all of the notes and backup doc= uments and so on. Correct?=20 MS. TEMPLE -- No. Actually, I sent a reference to the policy to the practic= e director in Houston.=20 MS. DEGETTE -- So you never sent that to Mr. Duncan?=20 MS. TEMPLE -- I did not send it personally to Mr. Duncan.=20 MS. DEGETTE -- Mr. Odom had that, correct? Mr. Odom, did you have that?=20 MS. TEMPLE -- Yes, I sent it to the Houston practice director, based on sev= eral factors ----=20 MS. DEGETTE -- Just cutting through, in this Oct. 23 phone call, you don't = recall specifically -- and your notes do not reflect -- you telling Mr. Dun= can to retain records, do they? Yes or no.=20 MS. TEMPLE -- I don't see that in my ----=20 MS. DEGETTE -- Yes or no, ma'am?=20 MS. TEMPLE -- No, it's not. . . .=20 MS. DEGETTE -- Thank you. I yield back.=20 MR. TAUZIN -- Ms. Temple, if you received this e-mail from Mr. Duncan indic= ating he was collecting all these documents, and assumed that he was preser= ving them, why did you feel it necessary on November the 9th to leave a voi= ce mail with Mr. Duncan, directing him to preserve those documents because = of the receipt of the S.E.C. subpoena? If he was preserving them already, w= hy on earth did you feel it necessary to advise him to preserve them on Nov= . 9?=20 MS. TEMPLE -- It is our firm's practice to notify the engagement team when = the legal group receives a subpoena. I believe it had been received in the = general counsel's office, and I promptly notified the engagement partner an= d reminded about the need to, at this point in time, we'll have to collect = the documents for production.=20 MR. TAUZIN -- Well -- but you understand why common sense gets a little los= t here. If you're in a position where you know that the retention policy al= so means destruction -- you know that, didn't you?=20 MS. TEMPLE -- There are aspects of instruction guidelines ----=20 MR. TAUZIN: -- Yes.=20 MS. TEMPLE -- ---- in that policy. Yes.=20 MR. TAUZIN -- So you know that the retention policy, as long as it's operat= ing, permits Mr. Duncan and however many people he has working for him to d= estroy documents.=20 You hear, you get a memo from him saying, ''I'm gathering them all up.'' An= d you tell us today that you assumed that meant he was gathering up to pres= erve them for litigation, not to destroy them.=20 Why would you even bother to say, ''By the way,'' on Nov. 9, ''quit destroy= ing documents. We've just got an S.E.C. subpoena?'' Why would you do that?= =20 MS. TEMPLE -- The legal group notifies the engagement partner and engagemen= t team when subpoenas are served. It was received by the legal group, and I= felt it was appropriate to follow the firm protocol to notify the engageme= nt partner.=20 MR. TAUZIN -- Yes. But, you see, we also have your memo on November the 10t= h, and I'm going to read you from it. It says, ''One of the first things we= must do in preparing to respond to these subpoenas and lawsuits is to take= all necessary steps to preserve all of the documents and other materials t= hat we may have relating to claims that are being filed.''=20 Now, if that was already being done, if you had received a notice from Mr. = Duncan that he's gathering them all up to preserve them, if that was your c= onclusion, why would you say, ''the first thing we have to do now, now that= the subpoena has arrived is start preserving these things?''=20 You see, common sense, Ms. Temple, common sense tells me that destruction w= as going on up until this time when the subpoena arrived and that until you= said, ''preserve them'' they may well have been gathered up for destructio= n, and that somebody should have known that. And was that somebody you?=20 MS. TEMPLE -- I never counseled any destruction or shredding of documents. = And I only wish that someone had raised the question so that we could have = consulted and addressed the situation. Photos: JAMES C. GREENWOOD -- Republican of Pennsylvania (Stephen Crowley/T= he New York Times); NANCY TEMPLE -- Arthur Andersen (Bloomberg News)(pg. C8= ); BILLY TAUZIN -- Republican of Louisiana (Agence France-Presse)(pg. C9)= =20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Sarah Palmer Internal Communications Manager Enron Public Relations (713) 853-9843