Message-ID: <15600486.1075841151666.JavaMail.evans@thyme> Date: Mon, 4 Feb 2002 07:05:41 -0800 (PST) From: sarah.palmer@enron.com To: sarah.palmer@enron.com Subject: Enron Mentions (major papers only) -- 02/04/2002 Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: Palmer, Sarah </O=ENRON/OU=NA/CN=RECIPIENTS/CN=SPALME2> X-To: Palmer, Sarah </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Spalme2> X-cc: X-bcc: X-Folder: \ExMerge - Martin, Thomas A.\Inbox X-Origin: MARTIN-T X-FileName: tom martin 6-25-02.PST ENRON'S MANY STRANDS The Report The New York Times, 02/04/2002 ENRON'S MANY STRANDS: ANOTHER INQUIRY Company Hobbled Investigation by Its Law Firm, Report Says The New York Times, 02/04/2002 Internal Probe of Enron Finds Wide-Ranging Abuses --- Unanswered in Board R= eport Are Some Big Questions Regarding Legal Liability The Wall Street Journal, 02/04/2002 ENRON'S MANY STRANDS: NEWS ANALYSIS Talk of Crime Gets Big Push The New York Times, 02/04/2002 THE FALL OF ENRON CFO's Deals Detailed by Enron Probe: Andrew Fastow headed partnerships in w= hich the energy firm's representatives were his own subordinates, panel's r= eport shows. Los Angeles Times, 02/04/2002 How Chewco Brought Down an Empire The Washington Post, 02/04/2002 ENRON'S MANY STRANDS: THE BOOKKEEPING Too Clever by Half: Enron's Doomed 'Triumph of Accounting' The New York Times, 02/04/2002 ENRON'S MANY STRANDS: THE BOARD Shareholder Advocates Press For Actions Against Directors The New York Times, 02/04/2002 ENRON'S MANY STRANDS: LITIGATION Lawyers Say Board Report Has Limited Value for Them The New York Times, 02/04/2002 Internal Probe of Enron Finds Wide-Ranging Abuses --- Former CEO Kenneth La= y Won't Testify This Week At Hearings in Congress The Wall Street Journal, 02/04/2002 ENRON'S MANY STRANDS: THE POLITICS At 11th Hour, Lay Refuses to Testify as Congressional Criticism Grows More = Pointed The New York Times, 02/04/2002 THE FALL OF ENRON Enron's Ex-Chief Won't Testify Hearings: Kenneth L. Lay pulls out of schedu= led appearance before Senate Commerce Committee, evoking harsh reaction fro= m congressional leaders. Los Angeles Times, 02/04/2002 Ex-Chairman of Enron Cancels Hill Testimony; Lawyer Warns Of Accusatory Atm= osphere The Washington Post, 02/04/2002 Lay cancels date with Congress=20 Ex-Enron leader won't testify=20 Houston Chronicle, 02/04/2002 Text of withdrawal letter=20 Houston Chronicle, 02/04/2002 Ex-workers let down as Lay alters his plans=20 Houston Chronicle, 02/04/2002 As Enron Purged Its Ranks, Dissent Was Swept Away The New York Times, 02/04/2002 ENRON'S MANY STRANDS: THE BUZZ World Economic Forum Plays Down the Scandal The New York Times, 02/04/2002 Bentsen heads roundtable session=20 Congressman gathers hearing questions from ex-Enron employees=20 Houston Chronicle, 02/04/2002 Meltdown Is Deja Vu for Some at Enron Energy: Executives who warned about p= ractices had similar experiences at MG Corp. in the 1990s. Los Angeles Times, 02/04/2002 White House Is Expected to Recommend Only a Slight Boost in Funding for SEC The Wall Street Journal, 02/04/2002 Questioning the Books: In Spoof Video, Former CEO Steers Enron To Places No= Firm Has Gone Before The Wall Street Journal, 02/04/2002 O'Neill Wants Stiffer Penalties for CEOs --- Under Proposal, Executives Who= Mislead Holders Couldn't Use Insurance The Wall Street Journal, 02/04/2002 ENRON'S MANY STRANDS: THE AUDITORS FORMER FED CHIEF PICKED TO OVERSEE AUDITOR OF ENRON The New York Times, 02/04/2002 Questioning the Books: Andersen Retains Volcker in Effort to Boost Its Imag= e --- Former Fed Chairman Is Set To Lead Panel to Help Change Audit Practic= es The Wall Street Journal, 02/04/2002 Questioning the Books: Companies Mull Separation of Auditing, Consulting The Wall Street Journal, 02/04/2002 Derivatives Cop Wanted, but Terms Vary The Wall Street Journal, 02/04/2002 Enron's Woes Are Felt by Firms Overseas --- In U.K. and Elsewhere, Accounti= ng Rules Get Newfound Attention The Wall Street Journal, 02/04/2002 Enron's Rise and Fall Gives Some Scholars A Sense of Deja Vu --- Decades Ag= o, a Big Power Trust Likewise Pushed Its Luck -- And Earned a Place in Infa= my The Wall Street Journal, 02/04/2002 BOOM TOWN: Enron's Lessons Can Be Applied To Web Issues The Wall Street Journal, 02/04/2002 ENRON'S MANY STRANDS Hearings This Week The New York Times, 02/04/2002 As If The Enron Story, With a Plot as Thick as Pea Soup It all started with= a deal on carnivals, then snowballed into a carnival of deals. Los Angeles Times, 02/04/2002 _______________________________________________________________ National Desk; Section A ENRON'S MANY STRANDS The Report By DIANA B. HENRIQUES 02/04/2002 The New York Times Page 19, Column 1 c. 2002 New York Times Company The 217-page report of a special investigative committee of the board of th= e Enron Corporation, released late Saturday, provides the first independent= assessment of what went wrong at the company, which filed for bankruptcy i= n early December. Here are the principal findings. DIANA B. HENRIQUES=20 CONFLICTS OF INTEREST -- Senior executives who owed their primary allegianc= e to Enron and its shareholders participated in a number of private partner= ships that did business with Enron. Through the partnerships, these executi= ves, including Andrew S. Fastow, the chief financial officer, and Michael J= . Kopper, who worked with him, were enriched, in the aggregate, by tens of = millions of dollars they should never have received. INADEQUATE DISCLOSURE AND ACCOUNTING ERRORS -- Enron disclosed the existenc= e of one set of partnerships, LJM1 and LJM2, to its shareholders. However, = these disclosures were obtuse, did not communicate the essence of the trans= actions completely or clearly, and failed to convey the substance of what w= as going on between Enron and the partnerships.=20 Certain transactions allowed Enron to manipulate its publicly reported earn= ings, to offset and conceal very large losses and, from September 2000 thro= ugh September 2001, to report profits that were almost $1 billion higher th= an should have been reported.=20 The accounting treatment for some partnerships was clearly wrong, apparentl= y the result of mistakes either in structuring the transactions or in basic= accounting. In other cases, the accounting treatment was likely wrong. As = a result, business entities that should have been included in Enron's finan= cial statements were not disclosed. A set of entities called the Raptor par= tnerships were instrumental in Enron's systematic concealment of its losses= and inflation of its earnings.=20 A FAILURE AT THE TOP -- Procedures that were set up to police the potential= conflicts in the partnerships' dealings with Enron were not rigorous enoug= h and were inadequately monitored by both senior management and the board. = Individually, and collectively, Enron's management failed to carry out its = substantive responsibility for ensuring that the transactions were fair to = Enron -- which in many cases they were not.=20 The captain of the ship, Kenneth L. Lay, functioned almost entirely as a di= rector, and less as a member of management.=20 Jeffrey K. Skilling, although he certainly knew or should have known of the= risks associated with these transactions, he did not monitor them, even af= ter Enron's treasurer, Jeffrey McMahon, told him in March 2000 that he had = serious concerns about Enron's dealings with the LJM partnerships.=20 Richard Causey, Enron's chief accounting officer, presided over a series of= accounting judgments that went well beyond the aggressive and failed to pr= ovide the board with sufficient information about transactions.=20 The board failed to adequately oversee management, especially in its dealin= gs with the problematic partnerships. The board's compensation committee fa= iled to review Mr. Fastow's compensation from the partnerships. Nor did the= board react to warning signs when they occurred.=20 Enron's outside advisers also failed to protect shareholders. The accountin= g firm Arthur Andersen did not fulfill its professional responsibilities in= connection with its audits of Enron's financial statements. Besides making= errors that allowed Enron to conceal business transactions that should hav= e been disclosed, Andersen also failed to alert Enron's audit committee to = the accounting firm's own concerns about the adequacy of Enron's disclosure= of the conflicts involved in these transactions.=20 Vinson & Elkins, Enron's legal counsel, should have brought a stronger, mor= e objective and more critical voice to the disclosure process. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section A ENRON'S MANY STRANDS: ANOTHER INQUIRY Company Hobbled Investigation by Its Law Firm, Report Says By KURT EICHENWALD 02/04/2002 The New York Times Page 19, Column 3 c. 2002 New York Times Company An investigation last year by outside lawyers for Enron into accusations of= improprieties raised in an anonymous employee letter to the chairman was h= ampered by restrictions placed by executives, causing the findings to be ''= largely predetermined,'' according to a report from a committee of Enron's = board.=20 The inquiry into the accusations in the letter, later determined to have be= en written by Sherron S. Watkins, an executive who worked in the company's = finance area, failed to detect many of the problems that subsequently contr= ibuted to the company's collapse, even though the letter described them in = detail. ''Watkins was right about several of the important concerns she raised,'' t= he report stated. ''On certain points, she was right about the problem, but= had the underlying facts wrong. In other areas, particularly her views abo= ut the public perception of the transactions, her predictions were striking= ly accurate. Over all, her letter provided a road map to a number of the tr= oubling issues presented'' by certain partnerships.=20 But the investigation by Enron's lawyers at Vinson & Elkins was inadequate = largely because of restrictions placed by the company on the lawyers' effor= ts from the outset, the report says. The lawyers were told not to review th= e underlying accounting for the partnerships, the very area where Ms. Watki= ns said a problem existed and where the report found its evidence of errors= and potential malfeasance. ''The result of the V.& E. review was largely p= redetermined by the scope and nature of the investigation and the process e= mployed,'' the report says.=20 The investigators wrote that they found the most serious problems ''only af= ter a detailed examination of the relevant transactions and, most important= ly, discussions with our accounting advisers,'' both steps that Enron deter= mined would not be part of Vinson & Elkins's investigation.=20 A representative of Vinson & Elkins, speaking on the condition of anonymity= , said the accusations raised by the letter were strongly examined by the i= nvestigators.=20 ''Sherron Watkins's complaints were taken quite seriously,'' the representa= tive said. 'The exercise of ascertaining the facts was a serious one.''=20 A series of events surrounded the sending of the Watkins letter. Jeffrey K.= Skilling stepped down as chief executive on Aug. 14, after only months in = the job, and was succeeded by his predecessor, Kenneth L. Lay. A week later= , Ms. Watkins sent the anonymous letter to Mr. Lay.=20 Mr. Lay passed the letter to Enron's general counsel, James V. Derrick, who= in turn hired Vinson & Elkins to investigate, even though the law firm had= played a role in some of the transactions challenged by Ms. Watkins.=20 ''Derrick says that he and Lay both recognized that there was a downside to= retaining V.& E. because it had been involved'' in some of the transaction= s under investigation, the report says. ''But they concluded that the inves= tigation should be a preliminary one.''=20 But even in that preliminary investigation, the effort went nowhere, largel= y because the lawyers sought answers almost exclusively from the people at = Enron and its accounting firm, Arthur Andersen, who had been involved in se= tting up the partnership deals.=20 Vinson & Elkins ''spoke only with very senior people at Enron and Andersen,= '' the report says. ''Those people, with few exceptions, had substantial pr= ofessional and personal stakes in the matters under review.'' Photo: Sherron S. Watkins wrote in August to Enron's chairman and said ther= e were improprieties in the company. (James Estrin/The New York Times)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Internal Probe of Enron Finds Wide-Ranging Abuses --- Unanswered in Board R= eport Are Some Big Questions Regarding Legal Liability By Rebecca Smith and John R. Emshwiller Staff Reporters of The Wall Street Journal 02/04/2002 The Wall Street Journal A3 (Copyright (c) 2002, Dow Jones & Company, Inc.) A highly anticipated report by a special committee of Enron Corp.'s board i= nvestigating the energy trader's collapse portrayed a company riddled with = improper financial transactions and extensive self-dealing by company offic= ials. But the report left unanswered major questions whose resolution could= determine whether the company and its officials will face criminal or civi= l liability.=20 Some of those questions might begin to be addressed this week as Congress h= olds a round of hearings on Enron, once the nation's seventh-largest busine= ss, by revenue, which sought bankruptcy-law protection in early December. K= enneth Lay, Enron's chairman and chief executive for most of the past 15 ye= ars, was slated to testify this morning before the Senate Commerce Committe= e, but yesterday canceled his appearance. Mr. Lay resigned his Enron positi= ons last month. The committee's report essentially focuses on certain off-balance-sheet par= tnerships first disclosed by The Wall Street Journal beginning in October. = Controversial accounting related to the partnerships was the major factor c= ontributing to Enron's collapse. The 211-page report by the three-member sp= ecial board committee and its staff amounts to a scathing indictment of the= way the company did business in recent years. Enron "improperly" implement= ed various transactions "to conceal from the market very large losses" resu= lting from some of its business operations, the report said. Between the th= ird quarter of 2000 and the third quarter of 2001, alone, reported earnings= were "almost $1 billion higher than should have been reported," it added. = The committee said the report was prepared with limitations of time and acc= ess to certain witnesses.=20 Additionally, the report said, several Enron officers and other employees "= were enriched" by tens of millions of dollars that "they never should have = received" as the result of being investors in partnerships that did large b= usiness deals with the company. Among those employees cited by the report w= ere former chief financial officer Andrew Fastow, who allegedly made at lea= st $30 million from heading and partly owning two entities known as the LJM= partnerships; Michael Kopper, a former managing director of an Enron unit,= who supposedly made at least $10 million from the Chewco Investments partn= ership and former treasurer Ben Glisan, whom the committee quoted as acknow= ledging that he received about $1 million within two months of putting $5,8= 00 into one partnership arrangement.=20 A spokesman for Mr. Fastow declined to comment. Neither Mr. Kopper nor Mr. = Glisan could be reached for comment. In the past, both have declined to com= ment.=20 The report also takes a hard shot at Arthur Andersen LLP, noting that in ad= dition to being Enron's external auditor, the Chicago firm was paid $5.7 mi= llion in return for helping design the controversial partnerships that inve= stigators found were fraught with ethical problems from the start. In a sta= tement, the big accounting firm said the report wasn't credible because it = sought to "insulate" Enron officers and directors by "shifting the blame to= others."=20 Enron's main outside law firm, Vinson & Elkins, also comes in for criticism= . Vinson & Elkins "should have brought a stronger, more objective and more = critical voice" to the issue of what Enron needed to disclose publicly abou= t its partnership-related transactions, the report said.=20 A senior Vinson & Elkins partner declined to discuss what advice the firm g= ave to Enron executives, citing attorney-client confidentiality. The lawyer= pointed out that the report notes that Vinson & Elkins, based in Washingto= n, did push Enron to disclose more but the lawyers were overruled by Enron'= s investor-relations department.=20 Still, there's plenty the report doesn't say. It rarely ventures beyond an = examination of the LJM and Chewco partnerships, uncovered by The Wall Stree= t Journal in articles published last fall. Since then, allegations have eme= rged concerning possible fraudulent accounting schemes at several Enron uni= ts including Enron Energy Services and Enron Broadband Services. These aren= 't addressed in the report. The report also didn't answer questions concern= ing who had crucial information about the creation and financing of the Che= wco partnership in 1997. In testimony to Congress in December, Andersen Chi= ef Executive Joseph Berardino said that those 1997 Chewco-related activitie= s involved "possible illegal acts."=20 The provenance of the report also casts a shadow on its handling of issues = concerning the investigating committee itself and its advisers. The chairma= n, William Powers, is dean of the law school at University of Texas, a faci= lity that has ties to Vinson & Elkins. Another member, Herbert "Pug" Winoku= r Jr., was an outside director on Enron's board when many of the transactio= ns now under scrutiny were approved. Raymond Troubh, the final member of th= e committee, has no apparent conflict.=20 As for the advisers, William McLucas, former head enforcement officer for t= he Securities and Exchange Commission, now works for the Washington-based l= aw firm of Wilmer Cutler & Pickering, which is representing Enron in a case= against federal energy regulators that is currently before the U.S. Suprem= e Court. The accounting firm that helped advise the committee, Deloitte & T= ouche, has previously done tax work for Enron, including "certain limited t= ax-related services for Chewco Investments," according to the report.=20 Despite these potential conflicts, the report provides a wealth of detail a= bout specific transactions -- including the nearly two dozen involving the = LJM partnerships created by Mr. Fastow.=20 The theme of the report remains consistent from deal to deal: Officers who = should have been concerned with doing their fiduciary duty to shareholders = instead cooked up Rube Goldberg-like structures to circumvent already weak = accounting rules. Not only did the ventures engage in transactions that vio= lated accounting rules, the report says, but numerous transactions were don= e that "served no apparent business purpose for Enron" and appear ginned up= simply to generate fees for insiders.=20 According to the report, one of the most egregious examples of financial en= gineering concerned LJM partnership subentities known as "Raptor" that were= used to "hedge" or provide offsets to fluctuating values in other Enron in= vestments.=20 Had they been true hedges, says the report, there would have been a true tr= ansfer of risk from Enron to another party, in return for fair compensation= . But that isn't the way Enron did business. Instead, Enron engaged in appa= rently false transactions with related parties, using its own stock, in som= e cases. This provided big bursts of profits for the company while stocks w= ere rising. But it also generated big losses when prices were moving in the= opposite direction. In late 2000 and early 2001, according to the report, = two of the Raptor vehicles had insufficient credit capacity to pay Enron on= its hedges.=20 "As a result, in late March 2001, it appeared Enron would be required to ta= ke a pretax charge against earnings of more than $500 million," the report = says, "to reflect the shortfall in credit capacity" of the Raptor structure= s.=20 Rather than take the lump, Enron chose to "restructure" the Raptor vehicles= by transferring more than $800 million of contracts to the vehicles that e= ntitled the holder to receive still more Enron stock. The report says the t= ransactions don't appear to have been authorized by the board of directors.= =20 This maneuver enabled Enron to put off declaring substantial losses from th= e first quarter of 2001 until the third quarter -- by which point the compa= ny's chief executive had departed. Shortly before Mr. Skilling resigned as = president in August 2001, both he and Mr. Lay told investment analysts that= the company's financial condition had never been stronger.=20 Another troublesome series of transactions detailed in the report concerned= Chewco, a vehicle run by Mr. Kopper, a member of Enron's Global Finance te= am who reported to Mr. Fastow. The committee said it found no evidence that= any waiver from Enron's code of conduct ever was obtained from the board, = prior to Mr. Kopper's involvement.=20 Chewco was created to hold part ownership in another Enron-related investme= nt vehicle. Enron was prohibited from holding this interest directly unless= it wanted to put the related debt back on its balance sheet. But to keep t= he investment "unconsolidated," Chewco had to be separate from Enron, in te= rms of management, and it had to have outside equity equal to at least 3% o= f its total capacity.=20 It failed both tests, the investigators found. The outside equity piece was= provided by two other entities controlled by Mr. Kopper called Little Rive= r Funding LLC and Big River Funding LLC. Mr. Kopper in December 1997 transf= erred his interest in these entities to William Dodson, the report says. Th= e two men, according to the report, are "domestic partners." The nature of = their relationship at the time of the Chewco transactions isn't clear.=20 Mr. Kopper received $2 million in "management and other fees" related to Ch= ewco during a three-year period that ended in December 2000. The committee = said it couldn't identify "what, if anything, Kopper did to justify the pay= ments." All told, Mr. Kopper and Mr. Dodson received more than $12 million = from Enron and Enron-related entities in return for what is believed to hav= e been an initial investment of $125,000.=20 (See related article: "Former CEO Kenneth Lay Won't Testify This Week At He= arings in Congress" -- WSJ Feb. 4, 2002) Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section A ENRON'S MANY STRANDS: NEWS ANALYSIS Talk of Crime Gets Big Push By KURT EICHENWALD 02/04/2002 The New York Times Page 1, Column 5 c. 2002 New York Times Company The report released Saturday evening by a special committee of the Enron Co= rporation's board clearly raises the specter that at the foundation of the = company's downfall was a series of multimillion-dollar crimes, legal expert= s and former prosecutors said yesterday.=20 Until now, much of the investigation into Enron's free fall has been focuse= d on complex transactions that, while suspicious and poorly executed, appea= red to fall within the framework of workaday corporate finance. These inclu= de the now notorious off-balance sheet deals that shifted assets and debt f= rom the company's books and into a byzantine collection of partnerships, ma= ny of them controlled by Enron's former chief financial officer, Andrew S. = Fastow. But with the committee's report, if it proves accurate, investigators into = the company's collapse will seek to pinpoint whether the same kinds of frau= dulent acts that were at the foundation of the savings and loan scandals of= the late 1980's and early 1990's occurred at Enron, too. These include fal= se valuation of assets, bogus deals between related parties, and millions o= f dollars pocketed by participants along the way.=20 ''This report is a road map for the Department of Justice to bring a crimin= al indictment,'' said John J. Fahy, a certified public accountant who was o= nce a federal prosecutor in New Jersey.=20 With its detailed description of seemingly irrational transactions that ser= ved no economic purpose other than to pump up Enron's earnings, the report = has shifted the focus from the company's balance sheet, which lists assets = and liabilities, to its income statement, which describes revenues and prof= its.=20 To those uncomfortable with the internecine workings of finance, that may s= ound like a distinction without a difference.=20 But in truth, the shift allows the federal inquiries trying to unravel the = Enron collapse to move from an area weighed down by dueling professional op= inions to the familiar stomping ground of criminal prosecutions.=20 ''Moving from the balance sheet to the income statement makes the case a lo= t easier for a prosecutor to bring and a lot easier for a prosecutor to exp= lain to a grand jury,'' Mr. Fahy said.=20 To prove any case against Enron, prosecutors would have to establish that p= otential defendants intended to commit a crime. Under the law, a person can= participate in activities that result in false information being given to = investors without committing a crime, so long as he believed -- even falsel= y -- that the activities were appropriate.=20 That is what created difficulties for a criminal case based on Enron's inco= rrect accounting for the partnerships as separate entities. Executives at E= nron could point to approvals from Arthur Andersen, the company's accountin= g firm, as evidence that they intended nothing improper.=20 But with the report's conclusion that certain transactions served no purpos= e other than to manipulate the reported earnings of the company -- and with= certain executives personally receiving millions of dollars in undisclosed= profits from their partnership dealings -- the hurdle of proving intent to= commit a crime has been dramatically lowered.=20 ''It's going to take a herculean salesmanship job to persuade a jury that t= he Enron executives involved in this could not appreciate the fraudulent na= ture of these transactions,'' said Christopher J. Bebel, formerly a federal= prosecutor and a lawyer with the Securities and Exchange Commission who is= now with Shepherd, Smith & Bebel in Houston.=20 ''Their reliance on the advice of experts is starting to go out the window,= '' Mr. Bebel added, ''and the accountants could end up being key witnesses = for the government in some respects.''=20 Members of Congress, who have been investigating the Enron debacle, made it= clear yesterday that what they are seeing now appears to fall within the r= ealm of a criminal conspiracy.=20 ''We're finding what may clearly be securities fraud,'' Representative Bill= y Tauzin, Republican of Louisiana and chairman of the House Energy and Comm= erce Committee, said on NBC's ''Meet the Press.''=20 Most criminal fraud prosecutions must show that participants had some finan= cial motive to participate in an illegal scheme, and in this instance, form= er prosecutors said, there are plenty of examples of such benefits. Enron i= nsiders received millions of dollars in undisclosed compensation from their= dealings with the partnerships; Mr. Fastow alone, whose spokesman has decl= ined comment, received at least $30 million from his partnership dealings.= =20 An array of other insiders received huge sums in a deal offered to them by = Mr. Fastow and another executive, Michael J. Kopper, who declined to be int= erviewed by the committee. Two participants in the deal earned about $1 mil= lion in profits in just two months from an investment of $5,800 each, the r= eport said.=20 ''The magnitude of these returns raise serious questions as to why Fastow a= nd Kopper offered these investments to the other employees,'' the report sa= id.=20 Ultimately, if the report proves correct that profits were improperly manip= ulated, the range of charges that would be under consideration are the stan= dard mix for corporate frauds, according to former federal prosecutors. The= y include, at their base, securities fraud from the filing of false informa= tion regarding corporate profits with the Securities and Exchange Commissio= n. Those, in turn, lead to charges of mail fraud and wire fraud relating to= the transmission of that information, both to the S.E.C. and to the invest= ing public.=20 Despite the dozens of people involved in the transactions, the report descr= ibes an atmosphere of compartmentalized information, where few people under= stood the full scope of anything that was going on.=20 Employees had little understanding of their roles and responsibilities in t= he transactions; in one particularly stunning passage, the report describes= how an executive who negotiated a deal with Enron on behalf of one of the = partnerships believed that, instead, she was acting on behalf of the energy= company.=20 But, for investigators, the most damning information relates to the repeate= d instances in which the company engaged in transactions that served no pur= pose other than to inflate the earnings Enron reported to investors and the= public.=20 Indeed, the portrait painted by the report is one of a corporation where fa= cts were fungible, capable of being massaged and manipulated to create what= ever outcome most benefited the executives involved. It describes, for exam= ple, transactions with backdated documentation, done for the apparent purpo= se of taking advantage of a high price in a stock that was at foundation of= the deal. By the time the deal was actually done, the price of the stock h= ad fallen dramatically, but Enron was able to book millions more in profit = by simply pretending that the transaction had taken place weeks before it d= id.=20 Repeatedly, the report said, there were transactions in which Enron sold an= asset to a partnership near the end of an accounting period, only to buy t= hem back later after profits had been booked. The partnership involved in t= hose transactions never lost money on any deal, the report said, even when = the value of the asset being bought and sold had declined. Indeed, the repo= rt said, there are suggestions that Enron guaranteed the partnerships invol= ved against loss.=20 Ultimately, certain transactions were simply bogus, the report concluded. F= or example, the most complex series of transactions involve a group of four= partnerships known as Raptor I-IV. Purportedly, the transactions were desi= gned to allow Enron to hedge certain investments it made -- transactions in= which the risk of an investment is shared with another party for the purpo= se of minimizing potential losses. But in truth, the report said, the Rapto= r transactions were simply a complex group of partnerships controlled by En= ron, used as a secret dumpsite where troubled Enron businesses -- and the p= oor financials that accompanied them -- could be hidden.=20 Even worse, the report concluded, is the potential that, since Enron was es= sentially on both sides of each deal, the transactions were merely an illus= ion.=20 ''The fundamental flaw in these transactions is not that the price was too = low, the report said. ''Instead, as a matter of economic substance, it is n= ot clear that anything was really being bought or sold.'' Chart: ''Raising Red Flags'' Enron engaged in over 20 transactions from Sep= tember 1999 to July 2001 with LJM partnerships created and managed by Andre= w S. Fastow, Enron's chief financial officer at the time. The board's speci= al investigation committee found several reasons many of these transactions= raised red flags: Enron often sold the partnership assets at the end of ac= counting periods, only to buy them back later; LJM made a profit even when = the asset's value had declined; and true ownership of certain partnership s= takes was sometimes disguised. Chart shows companies sold or bought back by= Enron from 2000 2001. Cuiaba Brazilian power plant Enron sold its stake in= a Brazilian power plant that was under construction to LJM1 for $11.3 mill= ion, allowing it to book $65 million of income related to a gas supply cont= ract in the third and fourth quarters of 1999. Despite serious construction= problems, Enron bought back its stake for $14.4 million in August 2001. En= ron securities Collaterized loan obligations Enron wanted to sell some secu= rities with low credit ratings but was unable to find a buyer, so it sold t= hem to LJM2 and another partnership. A year and a half later, with their va= lue deteriorating, Enron bought the securities back at cost plus interest, = sparing LJM2 a loss. Nowa Sarzyna Polish power plant Enron wanted to sell i= ts interests in a Polish power plant before the end of 1999 to improve its = balance sheet. Enron sold the plant to LJM2 as a temporary solution, hoping= to find another buyer, and recorded a $16 million gain. Three months later= , after the plant malfunctioned during a test, Enron was forced to buy it b= ack under the terms of a credit agreement, giving LJM2 a 25 percent return.= MEGS Natural gas gathering After failing to find a buyer, Enron sold a 90 = percent equity interest in MEGS to LJM2 for about $26 million, giving Enron= an advantage in its year-end accounting. Less than three months later, Enr= on bought the company back, giving LJM2 a 25 percent return. Later, Enron t= ook a write-off because of diminished performance of the gas wells. Yosemit= e Trust Enron sold its share of certificates in a trust, Yosemite, to LJM2.= The date of the sale was recorded in legal documents as Dec. 29,1999, but = the actual sale appeared to occur on Feb. 28, 2000. LJM2 held the certifica= tes for one day before selling them to an affiliate of Enron. LJM2 earned $= 100,000 plus expenses on the deal. Backbone Fiber optic cable Enron Broadba= nd Services, under pressure to meet quarterly numbers, sold its unactivated= dark fiber optic cable to LJM2 on June 30, 2000, recording a $54 million g= ain. Mr. Fastow was hesitant to invest LJM2's money in the deal, so EBS had= to increase the promised return to LJM2 if it was not able to resell the f= iber within two years. The fiber was eventually sold to outside companies. = (Source: Special investigation committee of Enron's board)(pg. A19)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Financial Desk THE FALL OF ENRON CFO's Deals Detailed by Enron Probe: Andrew Fastow headed= partnerships in which the energy firm's representatives were his own subor= dinates, panel's report shows. JEFF LEEDS TIMES STAFF WRITER 02/04/2002 Los Angeles Times Home Edition A-16 Copyright 2002 / The Times Mirror Company HOUSTON -- At least 13 times in the last three years, private partnerships = headed by Enron Corp.'s chief financial officer cut deals with the energy g= iant in which the executives representing Enron were his own subordinates.= =20 These arrangements by ousted CFO Andrew S. Fastow created a jungle of confl= icts of interest in Enron's executive suites and were a key factor in the f= inancial problems leading to the company's Dec. 2 Chapter 11 bankruptcy fil= ing, according to findings of the special Enron panel that examined the par= tnerships. The report, released Saturday, provides a wide-ranging indictment of the co= mpany's management and financial practices. Much of the focus is on Fastow,= however, as it offers the most detailed account yet of the off-the-books p= artnerships he oversaw.=20 "The transactions between Enron and the [Fastow] partnerships resulted in E= nron increasing its reported financial results by more than a billion dolla= rs, and enriching Fastow and his co-investors by tens of millions of dollar= s at Enron's expense," said the report, released this weekend.=20 Enron's internal investigation alleges that Fastow, a former banking execut= ive who became Enron's CFO four years ago at age 36, raided the energy gian= t from the inside, exposing his employer to deepening risk while orchestrat= ing side deals that paid him at least $30 million.=20 "Fastow, as CFO, knew what assets Enron's business units wanted to sell, ho= w badly and how soon they wanted to sell them and whether they had alternat= e buyers," the report said. "He was in a position to exert great pressure a= nd influence, directly or indirectly, on Enron personnel who were negotiati= ng" with the entities in which he had a personal financial stake.=20 Gordon Andrew, a spokesman for Fastow, declined to comment.=20 The 203-page report was written by a three-member panel led by William Powe= rs, the University of Texas Law School dean appointed to the Enron board sp= ecifically to conduct the inquiry.=20 Enron had turned to Fastow in the late 1990s to devise a strategy that woul= d allow the energy giant to keep investing in new businesses while keeping = the company's credit ratings strong.=20 Fastow responded by increasing Enron's use of so-called special-purpose veh= icles--corporate entities that can be used to absorb gains and losses as lo= ng as they are controlled and partially owned by outside investors.=20 Enron had used such financing at least once before, cutting a joint-venture= deal with the California Public Employees' Retirement System. But Fastow a= dded a twist--he proposed that Enron engage in deals with an ostensibly ind= ependent entity run by one of Enron's own executives.=20 The technique worked for a time. By moving assets and liabilities off its b= ooks, Enron was able to inflate its profit and credit rating--fueling its s= wift ascent on Wall Street and pumping up the value of its executives' stoc= k options.=20 But amid increased scrutiny last year, Enron decided that many of the outsi= de entities weren't truly independent. On Oct. 16, it was forced to disclos= e a $1.2-billion drop in shareholder equity, and the resulting decline in i= ts credit ratings led the company to file for bankruptcy protection.=20 Much of the problem arose from three partnerships engineered or partially o= wned by Fastow.=20 Chewco Investments=20 Fastow's first such off-the-books design for Enron was Chewco Investments--= named for the Chewbacca character in the "Star Wars" films. He planned to u= se Chewco, financed with bank loans, to buy out the California pension syst= em's share of a joint venture that Enron wanted to keep off its books.=20 But the venture was hardly independent, the report found: The bank loans us= ed to fund it were guaranteed by Enron, and initially, Fastow planned to ma= nage it himself while continuing as Enron's CFO.=20 Fastow told employees that Enron's then-president and his mentor, Jeffrey K= . Skilling, had approved of his participation in Chewco as long as it didn'= t have to be disclosed in Enron's regulatory filings, the internal probe fo= und.=20 When Enron's in-house lawyers told him his involvement would have to be dis= closed, Fastow substituted one of his lieutenants, Michael Kopper, to run t= he partnership.=20 Although Chewco "apparently required little management" aside from preparin= g unaudited financial statements for internal use, Kopper received about $2= million in fees, the report said. During certain periods of Chewco's exist= ence, these management tasks "appear to have been performed by Fastow's wif= e," the report said.=20 LJM Cayman=20 Chewco was just the start of Fastow's deal making. In June 1999, he formed = a partnership called LJM, with the letters representing the first initials = of the names of his wife and two children.=20 Fastow formed LJM Cayman to shield Enron from possible losses from its $10-= million investment in a start-up Internet service provider called Rhythm Ne= tConnections Inc.=20 As part of the plan, Fastow told Enron's board that he would serve as the g= eneral partner of LJM Cayman and would invest $1 million of his own money. = In return, he would be paid fees including 100% of the proceeds of the sale= of any assets until he had reached a rate of return of 25%. But he said he= would not receive any gains from increases in the price of Enron stock pai= d to LJM Cayman.=20 The board approved the arrangement, waiving Fastow's potential conflict of = interest.=20 In a complex swap, Enron moved the risk from the Internet company to LJM Ca= yman in exchange for more than $170 million in paper increases on Enron sto= ck locked up in a contract with an outside investment bank.=20 Enron in early 2000 decided to sell the Rhythm shares and had to unwind the= deal with LJM. Fastow negotiated the deal with Enron's chief accounting of= ficer, Richard Causey--another potential conflict.=20 An executive who has been interviewed by congressional investigators said C= ausey "was intimidated by Andy and didn't think it was his role" to haggle = with him.=20 Causey could not be reached for comment.=20 According to the calculations of the board investigators, the final deal re= sulted in Enron giving up options and cash worth $70 million more than the = restricted shares it received.=20 The transaction also exposed another potential conflict. In March 2000, Fas= tow had allowed a handful of Enron executives to participate in LJM Cayman.= These executives--who included Fastow and Kopper--signed an agreement to f= orm an entity called Southampton Place, which acquired a stake in LJM Cayma= n.=20 The deal enabled a Fastow family foundation to receive $4.5 million about t= wo months after Fastow made an initial investment of $25,000. Two other emp= loyees who each invested about $5,800 received about $1 million each in the= same period.=20 The special committee found that Fastow's financial stake was inconsistent = with his representation to Enron's board that he wouldn't receive any value= from Enron stock involved in the LJM Cayman transaction.=20 The panel also found that at least two of the executives who received windf= alls from LJM Cayman were representing Enron at the time in transactions wi= th another Fastow-created entity.=20 LJM2 Co-Investment=20 In October 1999, Fastow engineered the creation of another, far larger enti= ty called LJM2 Co-Investment. Again, he would serve as the entity's general= partner while maintaining his post as Enron's chief financial officer. The= plan was to raise money from outside investors and purchase assets from En= ron and enable the energy giant to remove debt from its books.=20 To raise funds, LJM2 sent an offering memorandum to potential investors. In= an usual move, the document emphasized Fastow's position as Enron CFO, not= ing that LJM2 would have access to "investment opportunities that would not= be available otherwise to outside investors." Critics say it is improper f= or Fastow to dangle the possibility of using inside information for investo= rs' benefit.=20 The report said the deals often took place under terms that were "remarkabl= y favorable" to LJM2 while serving no apparent business purpose for Enron. = For example, in one of the deals, Enron agreed that an LJM2 affiliate would= n't have to start absorbing Enron losses until the Fastow-controlled LJM2 r= eceived an initial return of $41 million, or 30%, on its initial $30-millio= n investment.=20 The report concluded that the troubles created by Fastow's partnerships wou= ld have come to light far sooner if the board itself had exercised closer o= versight. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 A Section How Chewco Brought Down an Empire Peter Behr Washington Post Staff Writer 02/04/2002 The Washington Post FINAL A01 Copyright 2002, The Washington Post Co. All Rights Reserved With its "Star Wars" name, its elusive origin and its central role in the i= mplosion of Enron Corp., the investment partnership named Chewco has been o= ne of the mysteries of the unfolding scandal.=20 Now it stands exposed in 27 detailed pages of a special investigative repor= t. In the Chewco story are examples of huge profits improperly claimed by Enro= n and individual enrichment by Enron insiders. In three years, a $125,000 i= nvestment by a second-level financial executive and his domestic partner ba= llooned into a $10.5 million payoff, plus other lucrative fees.=20 On paper Chewco appeared independent; control was shared by Enron and outsi= de investors in an arrangement that would permit Enron to keep some of its = energy projects and debts off its books. Enron executives created Chewco in= 1997 as part of a complex investment in another Enron partnership that own= ed stakes in natural gas projects.=20 But personal motives dominated Chewco's history, according to the report by= a special investigating committee of Enron's board of directors.=20 First, then-chief financial officer Andrew S. Fastow proposed that he be al= lowed to manage Chewco, the report said. Jeffrey Skilling, then Enron's pre= sident, told the committee that Fastow also wanted to have members of his w= ife's family as Chewco's investors, but Skilling said he told Fastow no.=20 Because of his senior executive position, Fastow could not run Chewco witho= ut publicly disclosing his role, which Skilling did not want, the investiga= tors said. So Fastow turned Chewco over to a friend, Michael J. Kopper, the= n-managing director of Enron Global Finance, whom Fastow supervised. Kopper= 's role did not have to be disclosed because of his lower rank.=20 To remove any public appearance that Kopper might be seen as controlling Ch= ewco, several more pieces were tacked on. An entity, Big River Funding, bec= ame Chewco's limited partner. Little River Funding was set up as the owner = of Big River.=20 In December 1997, as Chewco was being created, Kopper transferred his owner= ship in both Big River and Little River to his domestic partner, William D.= Dodson, an employee of an airline. That left Kopper with no formal ownersh= ip interest in Chewco.=20 Kopper invested $115,000, and Dodson invested $10,000. Before Enron bought = out their interests in March 2001, Fastow stepped in and pressured Enron to= pay more. Kopper and Dodson ultimately shared a $10.5 million windfall fro= m their $125,000 investment, according to the committee and former Enron em= ployees.=20 Kopper, in addition to collecting his regular Enron salary, was paid about = $2 million in questionable management fees relating to Chewco from 1997 to = 2000, the report said. According to the committee, Chewco required little m= anagement -- mainly clerical work involving transferring funds. Much of tha= t was done by another Enron employee on company time and occasionally by Fa= stow's wife, although the report said it wasn't known if she was paid.=20 Kopper and Dodson have an unlisted phone number and could not be reached ye= sterday.=20 The outlines of Chewco's role in Enron's collapse emerged recently in newsp= aper reports and in investigations by lawyers representing shareholders. En= ron, the report said, violated accounting standards when it created Chewco,= enabling the company to claim $405 million of profits from 1997 through 20= 00 that it was not entitled to have, while also concealing more than $600 m= illion in debt. Enron executives broke the rules a second time, the report = said, using Chewco to report a profit on the increased value of Enron commo= n stock held by a related partnership, Jedi.=20 When Enron owned up to its accounting violations concerning Chewco and yet = another partnership, LJM, last November, the disclosures stunned investors = and pushed Enron toward a death spiral that ended with its Dec. 2 bankruptc= y court filing.=20 Chewco was an early example of the Byzantine investment structures that wer= e Fastow's specialty. Its roots go back to 1993, when Enron formed the Jedi= partnership with the giant California Public Employees' Retirement System = (Calpers) to invest in natural gas projects. By 1997, company executives we= re eager to expand Jedi, but Calpers was reluctant.=20 So Fastow and Kopper decided to buy out Calpers's share, which was then wor= th $383 million, and replaced it with their new creation, Chewco Investment= s LP.=20 Jedi was operating off Enron's books. To keep it there, Chewco, as Jedi's n= ew half-owner, would have to meet certain accounting standards. It would ha= ve to be independent of Enron's control, and its owners had to put in a sma= ll but specific amount of real money.=20 That investment requirement came to 3 percent of Chewco's capital, or about= $11 million. Kopper was a successful executive, former associates say, but= he didn't have $11 million. The solution was to borrow most of the money f= rom a willing lender -- in this case, Barclays Bank PLC.=20 The remaining 97 percent included a loan from Jedi and another from Barclay= s. In another questionable part of the transaction, Enron guaranteed the Ba= rclays' loans.=20 But the creation of Chewco was hurriedly done, and there was a fateful slip= .=20 At the last minute, key details of the transaction changed, primarily becau= se Barclays wanted more collateral for its loans. Accordingly, the size of = Barclays' loan to Kopper and Dodson was trimmed by $6.6 million, making the= ir investment less than 3 percent. If Fastow or Kopper had found another in= vestor to make up the difference, Chewco would have met the standard. That = was not done.=20 From its beginning then, Chewco -- and thus Jedi -- didn't meet accounting = requirements, so Enron should not have kept Jedi's debt off its books or ha= ve segregated Jedi's profits and losses from Enron's results, the committee= said. Belatedly, the company corrected the error last November, with the d= evastating revision of its revenue and profits.=20 "We do not know whether this mistake resulted from bad judgment or careless= ness" by Enron employees or their auditor, Arthur Andersen, "or whether it = was caused by Kopper or other Enron employees putting their own interests a= head of their obligations to Enron," the committee said. It noted: "the con= sequences were enormous." http://www.washingtonpost.com=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section A ENRON'S MANY STRANDS: THE BOOKKEEPING Too Clever by Half: Enron's Doomed 'Triumph of Accounting' By FLOYD NORRIS 02/04/2002 The New York Times Page 18, Column 1 c. 2002 New York Times Company The original raptors were fierce creatures that hunted in packs and managed= to bring down larger dinosaurs, which they then devoured.=20 Now the special report of the Enron board committee has clarified just how = four entities known as Raptors played an essential role in destroying Enron= . It is a tale of how accounting rules can be abused and insiders enriched. The report traces the delicate machinery that was used by Enron's accountan= ts. There appears to have been, at least for a time, a tortured interpretat= ion of accounting rules that could be used to justify the hiding of $1 bill= ion in losses.=20 But that smokescreen would have been completely unsuccessful had auditors f= rom Arthur Andersen forced the company to disclose what was happening, as t= hey should have done. Those disclosures would have made it clear that there= was no economic rationale for the transactions, and thus no reason to thin= k that Enron had earned nearly as much money as it said it did.=20 Over 15 months, from the beginning of the third quarter of 2000 through the= third quarter of 2001, Enron reported pretax profits of $1.5 billion. Had = Enron not used the Raptor artifices, the figure would have been 72 percent = lower: $429 million.=20 The accounting rationale was that the risks of some truly bad investments h= ad been transferred from Enron to the Raptors, which were created in conjun= ction with partnerships run by Andrew S. Fastow, then Enron's chief financi= al officer.=20 In fact, as the report makes clear, there was no real transfer of risk, and= Enron eventually had to shoulder the losses. But there was a large transfe= r of wealth to the Fastow partnerships, which were guaranteed huge profits = while taking no risks. Those transactions helped provide $30 million for Mr= . Fastow and millions for other Enron insiders.=20 When it became clear that the Raptor enterprises were failing, Enron desper= ately restructured them, first at the end of 2000 and again three months la= ter. Those reorganizations, which the committee denounces in the strongest = terms, allowed the truth about Enron to stay largely hidden for many months= -- a period when top Enron officials sold large quantities of stock.=20 ''The creation, and especially the subsequent restructuring, of the Raptors= was perceived by many within Enron as a triumph of accounting ingenuity by= a group of innovative accountants,'' the committee report stated. ''We bel= ieve that perception was mistaken. Especially after the restructuring, the = Raptors were little more than a highly complex accounting construct that wa= s destined to collapse.''=20 When it did collapse last fall, Enron was forced to take a large loss, whic= h it painted as extraordinary. It was also forced to take a $1.2 billion re= duction in shareholder equity -- the amount a company's balance sheet shows= the company is worth. As questions about that intensified, Enron's collaps= e began. The Raptors lived up to their name, bringing down a giant.=20 As with any disaster, there seem to be differing recollections. Jeffrey K. = Skilling, Enron's president and chief executive during the March 2001 scram= ble to avoid having to report a half-billion dollars in losses, told the co= mmittee that he had known little of what happened.=20 Other Enron employees, not named by the committee, recalled that Mr. Skilli= ng had taken an intense interest, saying that fixing the Raptors was of the= highest priority and then calling an accountant to congratulate him after = the problem was finessed.=20 There also seems to have been a bit of historical revisionism at Arthur And= ersen, the auditing firm that repeatedly signed off on accounting that the = committee characterized as dubious or clearly incorrect.=20 In a Dec. 28, 2000, memorandum, Andersen partners in Houston reported that = they had consulted with officials at the accounting firm's Chicago headquar= ters before approving a temporary Raptor restructuring that kept Enron from= having to report a loss that year.=20 But on Oct. 12, 2001, days before Enron reported the big loss related to Ra= ptor -- the loss that led to the company's collapse -- an amended version o= f the December memorandum was put in the files. In that version, the Chicag= o partners advised that Enron's accounting in December had been wrong.=20 What happened? Patrick Dorton, an Andersen spokesman, explained that there = had been no need for the original memorandum to mention that the Chicago ex= perts thought the accounting was wrong. That was because the Houston partne= rs believed that the issue in question was not critical to the accounting.= =20 The accounting fiction of the Raptor enterprises stemmed from having the pa= rtnerships agree to assume the losses if some Enron investments lost value,= as they did. The Raptors could stand the losses only because they had prof= its on investments in Enron stock, which was transferred by the company to = them at a discount.=20 It was an accounting hall of mirrors, and those involved knew it. Enron's c= orporate secretary, taking notes at a board committee meeting where a Rapto= r transaction was explained, wrote, ''Does not transfer economic risk, but = transfers P&L volatility,'' referring to the profit and loss statement. In = other words, there was no purpose for the deals save to hide the losses. If= any directors were bothered by this sleight of hand, they do not appear to= have spoken up.=20 If the Raptor accounting was correct, the committee concluded, then ''a com= pany with access to its outstanding stock could place itself on an ascendin= g spiral: an increasing stock price would enable it to keep losses on its i= nvestments from public view; which, in turn, would spur further increases i= n its stock price; which, in turn, would increase its capacity to keep loss= es from its investments from public view.''=20 Arthur Andersen says its auditors acted properly, and it says the board rep= ort ''overlooks the fundamental problem: that poor business decisions on th= e part of Enron executives and its board ultimately brought the company dow= n.''=20 In fact, the board committee's report makes clear that bad investments play= ed an important role in Enron's demise. But it also provides evidence that = if Andersen had done its job well, investors would have known the reality o= f those bad investments long before they did. Chart: ''Raptors, a Step-by-Step Guide'' Through complex derivatives tranac= tions, enterprises called Raptors were used by Enron to hedge the risk that= stock investments it held might decline. Here are how the Raptors worked, = according to a recent report by an investigative committee of Enron's board= . RAPTOR LJM2 1 Creating a Raptor Partnership Each Raptor needed capital to= operate. Enron provided its stock to the Raptor in exchange for a promisso= ry note. LJM2, a partnership run by senior Enron executives and financed by= outside investors, invested $30 million in the Raptor. In return, LJM2 was= promised at least a 30 percent return. 2 Recouping LJM2's Investment The R= aptor could not operate until LJM2 had recouped its investment and made a p= rofit. Enron paid the Raptor $41 milion for a contract that allowed Enron t= o sell the Raptor a certain amount of its stock at a fixed price sometime i= n the future. The Raptor gave the $41 million to LJM2, thereby repaying LJM= 2's investment and giving it a profit of $11 million -- enough to satisfy i= ts investors. 3 Putting the Raptor to Work With LJM2 paid off, Enron made a= contract with the Raptor in which the Raptor agreed to cover any losses fr= om certain Enron investments if those investments declined in value. In ret= urn, the Raptor was promised any gains if the investments appreciated in va= lue. The Problem -- The agreement between Enron and the Raptor protected En= ron from a decline in the value of its investments only if the Raptor was a= ble to cover those losses. That was possible only if the Raptor's principal= asset -- Enron's stock -- rose in value. If the stock fell, it would be un= able to meet its obligations and Enron would be stuck with the losses.=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section A ENRON'S MANY STRANDS: THE BOARD Shareholder Advocates Press For Actions Against Directors By REED ABELSON 02/04/2002 The New York Times Page 20, Column 1 c. 2002 New York Times Company Shareholder activists said yesterday that they would use the sharply critic= al report by a special committee of Enron's board to take a much closer loo= k at the board's own responsibility for the company's collapse.=20 ''Nothing could be more conclusive on the substantial unfitness of the Enro= n board,'' said William Patterson, the director of the office of investment= for the A.F.L.-C.I.O. His federation plans to ask the Securities and Excha= nge Commission today to start an investigation into whether the Enron direc= tors should be barred from serving on boards of other public companies. The= federation is urging companies to remove any Enron director from their own= boards. The directors have maintained, through one of their lawyers, that they were= misled by some Enron executives and were never told about critical transac= tions. They also say they relied on the guidance of outside accountants and= lawyers.=20 The report portrays a board, despite the prominence and financial sophistic= ation of some members, as all too willing to go along with the numerous man= euvers that kept investors in the dark about Enron's true financial health.= Instead of asking pointed questions, the report indicated, the directors a= ppeared to rely too heavily on assurances from Enron executives and outside= advisers. The report found that the board never probed deeply enough to un= derstand what was going on and stop the financial abuses and self-dealing t= hat the report said took place.=20 The board, the report said, ''failed, in our judgment, in its oversight dut= ies.'' If the board had ''been more aggressive and vigilant,'' it continued= , the abuses that allowed Enron to inflate profits by at least $1 billion m= ight never have happened.=20 The report, however, does not distinguish among members of the board or hol= d individual directors accountable for specific actions, Mr. Patterson said= . It offers little insight into why the board was not more skeptical and do= es not examine some of the potential threats to their independence that mig= ht have contributed to their laxity, he said.=20 The directors have been sharply criticized by advocates for shareholders an= d by others for their lack of independence and their coziness with manageme= nt. One director, Lord Wakeham, a former British cabinet member, for exampl= e, was also paid by Enron as a consultant, while another, Herbert S. Winoku= r Jr., an investment manager, was involved with a company that did business= with Enron. Others, including Wendy L. Gramm, a former federal regulator a= nd wife of Senator Phil Gramm, Republican of Texas, work for organizations = that received charitable contributions from Enron.=20 The committee that prepared the report was made up of three directors: Mr. = Winokur, William C. Powers Jr. and Raymond S. Troubh. Mr. Powers, who leads= the committee, and Mr. Troubh joined Enron after the company's collapse an= d were responsible for evaluating the board's own behavior.=20 Whatever the reasons for the directors' behavior, they are sharply criticiz= ed by Mr. Powers and Mr. Troubh for their lack of oversight even when there= were clear indications of significant potential problems at Enron.=20 In particular, the report said, the board was aware of the potential confli= cts involving the creation of partnerships with Enron's chief financial off= icer, Andrew S. Fastow. But the directors apparently never bothered to find= out how much Mr. Fastow might have personally benefited, and they made onl= y a cursory review of transactions between the partnerships and the company= . Even when they should have known some of the transactions were devised pr= imarily to improve Enron's financial results, the report said, they did not= probe deeply enough to find the basic problems with the deals.=20 ''You can't accept stuff like that at face value when it deviates so much f= rom business norms,'' said Robert E. Mittelstaedt Jr., a business professor= at the Wharton School of the University of Pennsylvania. Enron's audit com= mittee ''has a responsibility for risk management in the broadest sense,'' = he said.=20 In particular, Mr. Mittelstaedt faults the board for choosing to suspend En= ron's own code of ethics to create the partnerships.=20 Because the board commissioned the report, it has already been criticized b= y some, including Arthur Andersen, Enron's former accounting firm, as being= self-serving.=20 The report specifically says there is no evidence to suggest that the direc= tors, unlike some Enron executives, had a financial interest in any of part= nerships.=20 But the report does not address other concerns involving the board, like th= e significant sales of stock by some directors, including Norman P. Blake J= r., chief executive of Comdisco.=20 To Enron's critics, the board's real offense may have been its willingness = to listen to the company management when there were indications that they s= hould have taken a closer look. Many of the directors, including Robert K. = Jaedicke, who headed the audit committee, and Mr. Winokur, who headed the f= inance committee, had served on the Enron board since the company was creat= ed in 1985 through a merger.=20 ''The board was asleep,'' said one person close to the board. ''It was mesm= erized by the price of the stock and the apparent success of the company.'' Photo: Some Enron directors have been criticized as lacking in independence= . Lord Wakeham, a director, was also paid as a consultant. (Reuters)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section A ENRON'S MANY STRANDS: LITIGATION Lawyers Say Board Report Has Limited Value for Them By BARNABY J. FEDER 02/04/2002 The New York Times Page 19, Column 5 c. 2002 New York Times Company The Enron-sponsored report detailing the company's manipulation of numerous= investment partnerships will provide only limited support to lawsuits by E= nron investors and former employees, lawyers who filed the suits say.=20 ''It confirms many of the allegations in our complaints,'' said Steve W. Be= rman, a Seattle lawyer whose firm has filed four lawsuits seeking compensat= ion for Enron employees who lost pensions, jobs or both when the company co= llapsed last fall. But plaintiffs and their lawyers say any benefit from the report will be mo= dest because the investigators, who were chosen by Enron's board, did not c= over a range of Enron activities that will figure in many lawsuits. In the = report, released Saturday, investigators ignored foreign operations, accusa= tions of insider trading, Enron's role in the California energy crisis last= year and possible mishandling of employee pensions.=20 Nor did the investigators have access to several crucial Enron managers and= members of the Enron audit team at the accounting firm Arthur Andersen, or= enough time to delve deeply into the investment partnerships that were the= focus of the inquiry. Some lawyers were also disappointed to see no mentio= n of investment bankers and consultants that they suspect played a role in = constructing what turned out to be a financial house of cards.=20 ''It only scratches the surface,'' said Trey Davis, a spokesman for the Uni= versity of California Board of Regents, which is a plaintiff in a lawsuit. = The university has estimated that it lost $145 million on its Enron investm= ents, second only to the State of Florida among public investors.=20 Lawyers not involved in any lawsuits said the report appeared to support an= argument that Enron's directors did not recklessly or willfully participat= e in fraud. That is the conclusion the board, which appointed the investiga= tors, might want a bankruptcy court to reach in deciding whether to leave t= he company under its control instead of naming a special trustee, said Seth= T. Taube, head of the securities and business crimes practice at the law f= irm of McCarter & English in Newark.=20 ''You always want a report that says your people were negligent, not venal,= '' Mr. Taube said.=20 Despite the report's limited scope, plaintiffs and their lawyers said that = the publicity it generated could encourage witnesses to come forward. The r= eport also provided some new information about the roles of various parties= in Enron's collapse, including some that have not yet been named in lawsui= ts. Many hoped that the report would encourage judges overseeing the suits = to throw out motions to quash them. That, in turn, could allow the plaintif= fs to move ahead sooner with the pretrial gathering of evidence, a process = known as discovery.=20 ''A report like this is amazingly helpful in laying out who was involved an= d what went on,'' said James M. Finberg, a lawyer at Lieff Cabraser Heimann= & Bernstein in San Francisco, which has filed a suit for investors against= Enron directors, many of its executives and Arthur Andersen. The suit seek= s class-action status. (Suits against Enron have been put on hold by the co= mpany's bankruptcy court filing.)=20 Mr. Berman said that the report had made it more likely that his firm would= add Enron's outside law firm, Vinson & Elkins, to the list of defendants i= n two of the four suits it has filed. One suit is based on federal antirack= eteering statutes. The other, filed in a Texas state court, seeks damages f= or former employees who chose stock rather than cash as part of their compe= nsation on the basis of Enron's statements about its financial condition.= =20 The report singled out Vinson & Elkins for playing a significant role in de= veloping Enron's annual proxy statements to shareholders, which the investi= gators described as ''fundamentally inadequate.'' It also criticized the la= w firm for its role in an investigation last year of complaints about Enron= 's accounting.=20 Evidence of active misconduct by parties like Vinson & Elkins and Arthur An= dersen would be crucial to the lawsuits. In 1994, the Supreme Court ruled t= hat a business could not be sued under federal law for providing advice or = services that a client uses illegally in selling or buying stocks or other = securities.=20 Higher barriers went up in 1995 when Congress barred courts from allowing p= retrial discovery in securities suits until all motions to dismiss the liti= gation had been dealt with. That has discouraged lawyers from dragging law = firms, bankers and accountants into lawsuits before they have strong eviden= ce against them.=20 The same law also said defendants were liable for damages only in proportio= n to their role in securities violations. That further reduced the incentiv= e for plaintiffs to sue a defendant's outside advisers.=20 Most of the Enron lawsuits have been assigned to Federal District Court Jud= ge Melinda Harmon in Houston. Three groups of lawyers are vying to be chose= n by Judge Harmon as the lead representatives of investors. That decision i= s expected within two weeks. Lawyers representing employees, meanwhile, hav= e been negotiating among themselves to form a committee to carry the cases = forward. Judge Harmon has set a hearing for Feb. 25 to review where the law= suits are headed. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Internal Probe of Enron Finds Wide-Ranging Abuses --- Former CEO Kenneth La= y Won't Testify This Week At Hearings in Congress By Greg Hitt and Kathryn Kranhold Staff Reporters of The Wall Street Journal 02/04/2002 The Wall Street Journal A3 (Copyright (c) 2002, Dow Jones & Company, Inc.) WASHINGTON -- Kenneth Lay, the embattled former chairman of Enron Corp., an= d two other former top company executives told lawmakers they won't testify= this week as Congress begins much-anticipated hearings probing the company= 's collapse.=20 In a letter sent late yesterday to the Senate Commerce Committee, where Mr.= Lay was scheduled to appear today, his attorney, Earl Silbert, said the at= mosphere surrounding the hearing had become "prosecutorial." Following rece= ipt of the letter, the committee's chairman, Sen. Ernest Hollings (D., S.C.= ) canceled the hearing, saying that the panel won't proceed without Mr. Lay= . The letter followed an appearance by Sen. Byron Dorgan, a senior member of = the Commerce Committee, on NBC's "Meet the Press," in which the North Dakot= a Democrat voiced sharp concerns about the company. "Once you start peeling= away the layers of this onion, it gets pretty ugly," Mr. Dorgan said. On t= he same NBC news show, Rep. W.J. "Billy" Tauzin (R., La.) said investigator= s for the House Commerce Committee had found what may "end up being securit= ies fraud."=20 Mr. Silbert said Mr. Lay had intended to testify until it became clear from= the Sunday news shows that "judgments have been reached and the tenor of t= he hearing will be prosecutorial."=20 Mr. Lay had stayed out of the public eye since the company's spectacular co= llapse, and Mr. Silbert wrote that his client's silence amid public allegat= ions of misconduct has been "construed as acquiescence" by some. "They are = wrong," Mr. Silbert wrote. "Mr. Lay firmly rejects any allegations that he = engaged in wrongful or criminal conduct."=20 Mr. Silbert also wrote Ohio Rep. Michael Oxley, chairman of the House Finan= cial Services Committee, canceling Mr. Lay's scheduled appearance before th= at committee Tuesday.=20 Even before the Sunday shows, it was clear Mr. Lay would face stiff questio= ning from lawmakers on issues ranging from the controversial web of partner= ships that let Enron hide debt to his handling of "whistle-blowers" who rai= sed concerns inside the company.=20 Robert Bennett, Enron's outside counsel, said the company is cooperating wi= th Congress, but he "understands" the concerns raised by Mr. Silbert. "It w= as unfortunate," Mr. Bennett said. "Mr. Lay was going to testify."=20 Mr. Lay's expected testimony had been the centerpiece of several congressio= nal hearings planned on Capitol Hill this week probing Enron's collapse. Be= fore Mr. Lay backed out of his appearance, the company's former chief finan= cial officer, who organized many of the questionable off-balance sheet deal= s that led to the company's collapse, had indicated he wouldn't cooperate w= ith the congressional probe.=20 Former Enron CFO Andrew Fastow and an aide, Michael Kopper, plan to invoke = their Fifth Amendment rights against self-incrimination when called to appe= ar before the House Energy and Commerce Committee Thursday, the committee's= chairman said.=20 A spokesman for Mr. Fastow declined comment on whether he will appear this = week, and an attorney for Mr. Kopper didn't return calls. However, a spokes= person for Jeffrey Skilling, Enron's former chief executive, said he intend= s to appear before Congress and will testify freely.=20 With his deep personal and political ties to the White House, Mr. Lay's rol= e in Enron's collapse underscores how the matter has become a political lia= bility for President Bush. On Friday, the Justice Department asked the Whit= e House to preserve any Enron-related documents, drawing the administration= directly into the probe.=20 Despite heavy financial support by Enron to Bush campaigns, however, the Ju= stice Department's demand doesn't suggest that it is focusing on possible i= nfluence-peddling. Instead, the letter to White House Counsel Alberto Gonza= les hints that the focus may be on whether company executives took actions = or made private statements about Enron's condition that were at odds with t= heir public statements -- a signal the criminal investigation may be focusi= ng on building a case alleging securities fraud. The Commerce, Energy and T= reasury departments were also ordered to retain documents.=20 The department's demand also could raise pressure on the White House to rel= ent in a showdown with Congress over access to White House records. Lawmake= rs are seeking notes of meetings between Vice President Dick Cheney and Enr= on executives and other energy industry officials as a new national energy = policy was being drafted.=20 Several congressional hearings this week will air various aspects of Enron'= s failure, providing what lawmakers hope will be a detailed accounting of e= vents that led to the firm's decline into bankruptcy. Several current and f= ormer Enron executives have been called to appear Thursday before the Energ= y and Commerce Committee, of which Mr. Tauzin is chairman.=20 The House Financial Services Committee and the Energy and Commerce Committe= e this week also will hear from William Powers Jr., the University of Texas= law school dean and an Enron director. Mr. Powers leads a special, board-a= ppointed team investigating possible malfeasance at the company. A report o= n his findings, released over the weekend, raises serious questions about t= he ethics and judgment of executives who created the maze of partnerships t= hat allowed Enron to report strong profits while sweeping debt off its bala= nce sheet.=20 ---=20 John R. Wilke and Michael Schroeder contributed to this article.=20 ---=20 Journal Link: Listen in as former Enron Chairman Kenneth Lay goes before a = Senate panel probing the company's fall, in the Online Journal at WSJ.com/J= ournalLinks, by arrangement with Hearings.com.=20 (See related article: "Unanswered in Board Report Are Some Big Questions Re= garding Legal Liability" -- WSJ Feb. 4, 2002) Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section A ENRON'S MANY STRANDS: THE POLITICS At 11th Hour, Lay Refuses to Testify as Congressional Criticism Grows More = Pointed By STEPHEN LABATON and RICHARD A. OPPEL Jr. 02/04/2002 The New York Times Page 20, Column 1 c. 2002 New York Times Company WASHINGTON, Feb. 3 -- After a weekend of sharp criticism for his stewardshi= p of Enron, Kenneth L. Lay, the company's former chief executive, abruptly = reversed course this evening and told Congress he would refuse to testify b= efore two committees preparing to hear his testimony, starting on Monday.= =20 Earl J. Silbert, the lawyer for Mr. Lay, said he had decided to withdraw be= cause ''judgments have been reached and the tenor of the hearings will be p= rosecutorial.'' But Congressional aides said that they had never expected t= hat Mr. Lay would appear and that he was looking for a convenient excuse to= miss the hearings. His appearance on Monday morning before a Senate committee and the next day= before a House committee had been eagerly awaited. He had repeatedly decli= ned to comment publicly. On Saturday evening, however, a special committee = of Enron's board provided new details of the self-dealing and financial sle= ight-of-hand that had substantially overstated earnings.=20 The report characterized Mr. Lay as responsible in an overall sense for Enr= on's problems because he was the ''captain of the ship'' who ''had the ulti= mate responsibility for taking reasonable steps to ensure that the officers= reporting to him performed their oversight duties properly.'' But he is al= so described as largely oblivious to a wide range of inside-dealing and cor= porate malfeasance.=20 Some lawmakers raised questions about that characterization, and, in appear= ances on talk programs today, suggested, without directly pointing to Mr. L= ay, that crimes might have been committed at Enron.=20 ''It is hard to imagine how the C.E.O. of a company of this size that was e= ngaged in moving hundreds and hundreds of millions of dollars of obligation= off its books, enriching members of its hierarchy to the tunes of tens of = millions of dollars, could be so oblivious,'' Representative James C. Green= wood, Republican of Pennsylvania, said on ''Late Edition'' on CNN.=20 Mr. Lay has refused to respond to questions about the collapse. His wife, L= inda, and their children, however, appeared on television last week, mainta= ining that he was largely ignorant of the events that led to Enron's collap= se and that the family was struggling to avoid bankruptcy.=20 For days, Mr. Lay's lawyers had promised Congressional investigators that h= e would testify, despite the suggestions by many defense lawyers in Washing= ton that it would be unwise for him to testify under oath while he was a su= bject of a sprawling criminal inquiry into securities fraud and illegal ins= ider trading.=20 Today, Mr. Silbert said that Mr. Lay had been preparing as late as this mor= ning to testify but reversed course after lawmakers on the morning talk pro= grams suggested that Enron had been rife with fraud. In letters to the two = committee chairmen this evening, Mr. Silbert recounted some of the criticis= m, including a reference to an article in The New York Times today that sai= d ''Mr. Lay will face a panel eager to pulverize him.''=20 ''I have instructed Mr. Lay to withdraw from his prior acceptance of your i= nvitation,'' Mr. Silbert added. ''He cannot be expected to participate in a= proceeding in which conclusions have been reached.''=20 ''Many allegations have been publicized in the news media accusing Mr. Lay = and others of wrongful, even criminal conduct,'' Mr. Silbert wrote in his l= etters to Senator Ernest F. Hollings, Democrat of South Carolina, and Repre= sentative Michael G. Oxley, Republican of Ohio, whose committees were to he= ar testimony from him. ''Some have construed his silence as acquiescence. T= hey are wrong. Mr. Lay firmly rejects any allegations that he engaged in wr= ongful or criminal conduct.''=20 But Congressional aides said Mr. Lay had been looking for an excuse to avoi= d testifying.=20 ''In all honesty, we never expected him to appear,'' said Ken Johnson, an a= ide to Representative Billy Tauzin, the Louisiana Republican who leads the = House Energy and Commerce Committee. Mr. Tauzin said earlier in the day tha= t he expected, based on what had been uncovered so far, that ''maybe somebo= dy ought to go to the pokey for this.''=20 Mr. Johnson said: ''I can only tell you that if Mr. Lay spurns our committe= e, Mr. Lay will be subpoenaed. And if he ignores the subpoena, we'll pursue= all our options, including the possibility of a contempt of Congress'' cit= ation.=20 Senator Byron L. Dorgan, Democrat of North Dakota and head of one of the su= bcommittees investigating Enron, said that he had been informed on Friday a= nd Saturday that Mr. Lay would testify. He said he believed that the report= was a ''pretty tough indictment of what was happening at that corporation'= ' and had probably persuaded Mr. Lay to change his mind.=20 Democratic and Republican lawmakers praised the company's internal report t= oday, although Congressional investigators cautioned that it failed to reso= lve crucial issues about the roles senior executives played in establishing= the questionable partnerships at the heart of the scandal.=20 The members of Congress said that while the report presented strong evidenc= e of corporate crimes, most notably securities fraud, it did not reduce the= need for a significant overhaul of the accounting and corporate governance= rules.=20 ''The report presents a pretty straightforward case of fraud,'' said Senato= r Jon S. Corzine, Democrat of New Jersey, and a former senior executive on = Wall Street at Goldman, Sachs. ''If the facts of it are accurate, it's quit= e despicable and damning.''=20 ''There is still no less of a need for reform of 401(k) rules and corporate= governance rules,'' he added.=20 Mr. Tauzin said the report closely tracked what was being uncovered by Cong= ressional investigators.=20 ''I think we're finding what may clearly end up being securities fraud,'' M= r. Tauzin said on the NBC News program ''Meet the Press.'' Mr. Tauzin said = he had been told that Andrew S. Fastow, Enron's former chief financial offi= cer and the engineer of many of the partnerships, would refuse to testify l= ater this week and invoke his Fifth Amendment right against self-incriminat= ion. He added that he had also been told that Jeffrey K. Skilling, the form= er chief executive, would testify later this week and that he had refused t= o sign the approval sheets for some of the partnerships after being warned = they were questionable.=20 ''What does that say about his knowledge about whether these deals were hon= est or corrupt?'' Mr. Tauzin said.=20 Bruce Hiler, a lawyer for Mr. Skilling, said his client would testify befor= e Congress on Thursday and not exercise his Fifth Amendment right. Mr. Hile= r declined to comment on Mr. Tauzin's remarks. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Financial Desk THE FALL OF ENRON Enron's Ex-Chief Won't Testify Hearings: Kenneth L. Lay p= ulls out of scheduled appearance before Senate Commerce Committee, evoking = harsh reaction from congressional leaders. RICHARD SIMON; ELIZABETH SHOGREN TIMES STAFF WRITERS 02/04/2002 Los Angeles Times Home Edition A-1 Copyright 2002 / The Times Mirror Company WASHINGTON -- Former Enron Chairman Kenneth L. Lay on Sunday abruptly cance= led his much-anticipated appearance before Congress, contending he would no= t receive a fair hearing.=20 Lay changed his mind about testifying before the Senate Commerce Committee = today, after comments by congressional leaders on Sunday television news sh= ows suggested that "judgments have been reached and the tenor of the hearin= g will be prosecutorial," said his attorney, Earl J. Silbert. Lay had agreed to appear voluntarily at the hearing, though other committee= s have issued subpoenas in the Enron investigation. Committee sources said = no decision had been reached as of Sunday night on whether the members will= subpoena Lay to appear in the future.=20 His client "cannot be expected to participate in a proceeding in which conc= lusions have been reached before Mr. Lay has been given an opportunity to b= e heard," Silbert said in a letter to Sen. Ernest F. Hollings (D-S.C.), the= committee chairman, and Rep. Michael G. Oxley (R-Ohio).=20 Until Jan. 23, Lay was chairman and chief executive of Enron Corp., once th= e country's seventh-largest corporation. The energy company filed for Chapt= er 11 bankruptcy protection Dec. 2 after questions about its financial heal= th and questionable accounting practices sent its stock plummeting.=20 The Senate Commerce Committee hearing--at which Lay was to be the only witn= ess--was canceled. The House Financial Services subcommittee on capital mar= kets will hear this afternoon from Securities and Exchange Commission Chair= man Harvey L. Pitt and from William Powers, the University of Texas law pro= fessor who led an internal inquiry into the company's collapse. The report = of that inquiry--a scathing rebuke to the company, its directors and its ac= counting firm, Andersen--was released late Saturday.=20 Lay also had been scheduled to appear Tuesday before the House Financial Se= rvices subcommittee, along with Andersen Chairman and CEO Joseph F. Berardi= no, but will not attend that hearing either.=20 Meanwhile on Sunday, Berardino, whose firm also faces several federal and c= ongressional probes, said Andersen hired former Federal Reserve Chairman Pa= ul A. Volcker to head a panel to help overhaul the way the firm operates. "= It's obvious the public has been let down more than once," Berardino said. = "We will be very tough on ourselves."=20 Lay's decision evoked a harsh reaction from congressional leaders.=20 "I am disappointed," said Sen. Byron Dorgan (D-N.D.), chairman of the Senat= e Commerce subcommittee on consumer affairs, the panel before which Lay was= scheduled to testify. "I believe the American people, the Congress and his= own employees have a right to hear a public explanation of what happened a= t the Enron Corp."=20 "I doubt they ever thought appearing before a congressional committee would= be a walk in the park," Dorgan added, "because there are tough and difficu= lt questions that need answers. . . . Eventually, Mr. Lay and others will h= ave to provide those answers, and sooner rather than later."=20 Lay, who reportedly accepted the committee's invitation to appear against h= is attorney's advice and without any offer of immunity, was in Washington o= n Sunday preparing for his appearance. But while listening to lawmakers on = the talk shows, he heard "inflammatory statements" suggesting that "judgmen= ts have been reached and the tenor of the hearing will be prosecutorial," S= ilbert said.=20 The lawyer cited a comment by Rep. W.J. "Billy" Tauzin (R-La.), chairman of= the House Energy and Commerce Committee, predicting that some senior compa= ny executives will end up "in the pokey."=20 Silbert also cited a remark by Dorgan on NBC's "Meet the Press" that the la= rgest bankruptcy filing in corporate history put some people in "real jeopa= rdy."=20 Rep. Henry A. Waxman (D-Los Angeles), a senior Democrat on the House Energy= and Commerce Committee--one of a dozen congressional committees investigat= ing the Enron collapse--said, "It's a real setback for those of us who want= some accountability from this man."=20 Waxman said Congress should subpoena Lay because he will not testify volunt= arily.=20 "It looks like statements that he made that he was willing to be cooperativ= e were not sincere," Waxman added.=20 Sen. Peter Fitzgerald (R-Ill.), top Republican on the Senate Commerce subco= mmittee on consumer affairs, said: "In my judgment, Mr. Lay is again taking= a dive."=20 "It's that lack of accountability and responsibility that led to the Enron = debacle in the first place. He will eventually have to answer questions--pe= rhaps not before the Commerce Committee but possibly in a forum where his t= estimony can be compelled."=20 Lay's appearance was to kick off a week of hearings on Capitol Hill probing= Enron's collapse and featuring a notable list of witnesses. Andrew S. Fast= ow, the company's former chief financial officer, is scheduled to appear be= fore the House Energy and Commerce subcommittee Thursday but is expected to= invoke the 5th Amendment.=20 Former Enron CEO Jeffrey K. Skilling, who left the company in August, also = is scheduled to appear before the panel.=20 Fitzgerald noted that the Powers report was critical of many parties, inclu= ding Lay.=20 Congress will use the information it unearths to determine what laws may ha= ve been broken and whether any laws or regulations should be changed to pre= vent such corporate misdeeds. The information also may be used by the Justi= ce Department as it investigates possible criminal wrongdoing by the compan= y, whose downfall left more than 6,000 people without jobs and shattered th= e savings of thousands of employees and investors.=20 Enron attorney Robert S. Bennett said Sunday: "The company is fully coopera= ting with Congress, and we are encouraging people who are requested to test= ify to testify. But I have read Mr. Silbert's, letter and I understand his = concerns and the sound basis for them."=20 Earlier Sunday, Waxman said in an interview that Lay should reveal the iden= tities of investors in more than 3,000 controversial off-the-books partners= hips that led to the company's collapse. The names were left out of the Pow= ers report.=20 "These entities became the basis for looting the corporation," Waxman said.= "If we want to know where the money went, we need to know who these partne= rs were."=20 PHOTO: House Energy and Commerce Committee Chairman Rep. W.J. "Billy" Tauzi= n talks about Enron probe on "Meet the Press."; ; PHOTOGRAPHER: "Meet the P= ress"; PHOTO: Sen. Byron Dorgan heads the Senate subcommittee on consumer a= ffairs, which was set for Kenneth L. Lay's testimony.; ; PHOTOGRAPHER: "Mee= t the Press"=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 A Section Ex-Chairman of Enron Cancels Hill Testimony; Lawyer Warns Of Accusatory Atm= osphere Susan Schmidt Washington Post Staff Writer 02/04/2002 The Washington Post FINAL A01 Copyright 2002, The Washington Post Co. All Rights Reserved Former Enron chairman Kenneth L. Lay last night abruptly canceled a much-an= ticipated appearance today before a Senate panel in the wake of a scathing = report on the management failures and self-dealing that led to his company'= s spectacular collapse.=20 Key members of Congress, reacting to the report released this weekend, said= yesterday that top officials of the bankrupt energy trader may have engage= d in securities fraud in booking $1 billion in non-existent profits over th= e past 15 months. "Clearly some things have happened that are going to put some people into r= eal jeopardy and trouble," said Sen. Byron L. Dorgan (D-N.D.), a member of = the Senate panel that was to question Lay, in comments on NBC's "Meet the P= ress." "This is almost a culture of corporate corruption."=20 House Energy and Commerce Chairman W.J. "Billy" Tauzin (R-La.), appearing o= n the same program, agreed, saying "maybe somebody ought to go to the pokey= for this."=20 Lay's lawyer, Earl Silbert, seized on the comments, telling Congress in a l= etter yesterday evening that he advised Lay not to testify. Silbert said La= y was prepared to answer critics about his stewardship of Enron, but, he sa= id, "these inflammatory statements show that judgments have been reached an= d the tenor of the hearing will be prosecutorial."=20 But Dorgan said in an interview last night he believes the report itself "t= ipped the balance" and led Lay and his legal team to conclude that Lay coul= d place himself in greater legal jeopardy by testifying. "I can't believe h= e ever thought it would be a walk in the park to testify before Congress," = Dorgan said.=20 The Justice Department is conducting an investigation into Enron's collapse= . Witnesses called before Congress amid a criminal investigation are often = advised by lawyers not to testify because they may open themselves to charg= es of perjury or false statements.=20 Experts in securities law said the findings in the 218-page report suggest = that former Enron chief financial officer Andrew Fastow, who received $30 m= illion from partnerships he organized, is most vulnerable to possible crimi= nal charges. But they said the legal consequences of Enron's financial mach= inations are not as clear-cut for Lay, former chief executive Jeffrey Skill= ing and Enron's board of directors.=20 Lawyers for Fastow have told House investigators he would appear voluntaril= y before the House Energy and Commerce Committee Thursday, but investigator= s are not certain that he will testify. Michael J. Kopper, a former Enron m= anaging partner who worked for Fastow, was subpoenaed by the committee, but= he has told investigators that he would decline to testify citing his Fift= h Amendment right against self-incrimination.=20 Skilling, one of the architects of the company's off-the-books partnerships= that concealed massive debts from investors, sold $100 million in Enron st= ock since 1998. His profit from the sales is not known. He is scheduled to = testify Thursday, and his lawyers have told the House panel that he intends= to appear. Lay's family and his lawyers have said he was eager to answer q= uestions, though he has so far declined to personally respond to the allega= tions swirling about Enron's mismanagement. Lay continues to believe "the a= ppropriate place to explore these allegations and related policy issues was= before the Congress," Silbert wrote.=20 "Some have construed his silence as acquiescence. They are wrong," he said.= "Mr. Lay firmly rejects any allegations that he engaged in wrongful or cri= minal conduct."=20 Lay associates said in interviews last week that he was being advised by la= wyers to keep silent. "He wants to talk so bad," said his daughter, Elizabe= th Lay, 31, a lawyer who has been advising her father. She and other source= s said that Lay was anxiously awaiting the report from the special investig= ating committee before testifying.=20 Lay was to testify voluntarily, but now that he has refused, lawmakers may = subpoena him. He could then invoke his Fifth Amendment right to keep silent= . Another family member said that "his lawyers are telling him to shut up. = They were very angry Linda was talking," referring to Lay's wife, who defen= ded her husband in two televised interviews last week. This source said las= t week that Lay would take the risk of testifying before Congress if "he is= convinced he has a preponderance of the facts" surrounding the demise of h= is company. "But the basic strategy always is, if there's a possibility of = criminal charges [in the case], you shut up," the family member said. "It's= a no-win situation for him."=20 The assessments of Lay's leadership and the Enron corporate culture were wi= thering yesterday, one day after the release of a report for the Enron boar= d of directors prepared under the direction of William Powers Jr., dean of = the University of Texas School of Law. Powers joined the Enron board on Oct= . 31, after the company reported its third-quarter loss and appointed a spe= cial investigating committee.=20 The committee investigated only a handful of the more than 1,000 partnershi= ps Enron established and found that Enron executives manipulated the compan= y's financial condition in several transactions with these partnerships. Th= e committee said some partnerships hid losses from troubled Enron deals, in= cluding investments at power plants in Brazil and Poland, and in companies = such as Internet service provider Rhythms NetConnections Inc. and networkin= g equipment maker Avici Systems. Deals were done to make the company appear= profitable when it was actually losing money and heavily in debt. At the s= ame time, insiders made hundreds of millions of dollars in the sale of Enro= n stock, at the expense of employees and shareholders.=20 Lay was portrayed in the report as a lax manager who "bears significant res= ponsibility for those flawed decisions" to create off-the-books partnership= s and let others run them. He would have faced a firestorm of questions tod= ay, members predicted.=20 "They were doing almost no business, but they manufacture income from a ban= k loan," Dorgan said. "That's the kind of thing that went on over and over = and over again. We want to know what Ken Lay knew."=20 Sen. Peter Fitzgerald (R-Ill.), in a broadcast interview on NBC's "Today," = said: "Ken Lay obviously had to know this was a giant pyramid scheme, a gia= nt shell game."=20 Under criticism for its role in the Enron collapse, accounting firm Arthur = Andersen announced yesterday that it would conduct a sweeping review of its= business practices under the direction of former Federal Reserve Board cha= irman Paul A. Volcker. Andersen was paid $5.7 million to scrutinize the par= tnerships, in addition to its fees for auditing Enron's books.=20 "Not only were there corrupt practices, not only was there a hiding of the = fact that debt was being put off the balance sheets and profits were report= ed that didn't exist, but we found more than that," Tauzin said. "I think w= e're finding what may clearly be securities fraud, attempts -- not to hedge= or put debt out of the company, which many companies do -- but literally f= raudulent, phony attempts to do so."=20 Tauzin noted yesterday that the report found that Skilling held back from s= igning his name on approval forms for several off-the-books partnership dea= ls. "What does that say about his knowledge of whether these deals were hon= est or corrupt?" he said.=20 Lawyers for Skilling and Fastow were unavailable for comment yesterday.=20 Nowhere in the report is there any mention of former Enron vice chairman J.= Clifford Baxter, who committed suicide Jan. 25, anguished, associates said= , over the Enron scandal. Baxter made millions from the sale of Enron stock= but left the company last spring after complaining about the propriety of = the partnerships to colleagues. Authorities have not disclosed the contents= of his suicide note.=20 Among the questions the report was not able to answer are the identities of= the outside investors in more than 1,000 partnerships and related investme= nt groups linked to Enron. Major Wall Street firms sold partnership interes= ts to outside investors. Dorgan said Congress wants to know who was invited= into the partnerships.=20 A few Enron employees tried to bring the self-dealing and dangerous financi= al machinations to the attention of Lay and other top managers, the report = also found. Lawyer Jordan Mintz, who worked for Fastow, sought advice from = Washington law firm Fried Frank Harris Shriver & Jacobson as to what needed= to be disclosed about the partnerships, including whether Fastow's $30 mil= lion compensation for managing the partnerships had to be revealed.=20 Fried Frank suggested more disclosure of some partnership information, the = report said. Mintz is scheduled to testify this week about the disclosure i= ssues. Columbia University law professor John C. Coffee said the report lay= s the groundwork for "an old-fashioned, plain-vanilla fraud case against Ko= pper and Fastow."=20 "I think this is going to significantly enhance the prospect of criminal in= dictments in their cases," Coffee said. If the facts stated in the report a= re true, "this is into the zone of active fraud," he said.=20 Donald Langevoort, a securities law professor at Georgetown, said of the re= port: "It certainly adds to the evidence we've already seen that there were= deliberate falsifications that led to fraudulent accounting. The question = becomes not so much were the financial reports accurate, but were they doct= ored -- and if so, by whom."=20 But Langevoort noted that the "language of the report is very measured with= respect to its senior executives, in questioning what Lay and Skilling kne= w or should have known. There is a mile of difference between 'known' and '= should have known' that amounts to whether you can stick someone with secur= ities fraud."=20 "The report talks about a failure of management; it says Lay acted more lik= e a director than a senior executive. That is not terribly unusual in a lar= ge corporation and certainly not the basis for liability," Langevoort said.= =20 The report was prepared for the board of directors, and while it criticizes= the board, those criticisms are mainly directed at its failure to live up = to its responsibility to monitor management decisions and internal controls= . The board could face negligence lawsuits, lawyers said, but on the basis = of the report's findings, members would not likely be vulnerable to civil o= r criminal fraud charges.=20 The report found that the board should have sought more information about t= he partnerships and should not have allowed Fastow to run them while he was= simultaneously Enron's chief financial officer because it created a confli= ct of interest. The board's attorney, Neil Eggleston, focused on the report= 's assessment that some information was withheld from directors.=20 "The board and its committees were repeatedly assured that the controls the= board had ordered were adequate and being implemented, but the board was m= isled," he said.=20 Staff writers David S. Hilzenrath, Lois Romano and Jackie Spinner contribut= ed to this report. http://www.washingtonpost.com=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Lay cancels date with Congress=20 Ex-Enron leader won't testify=20 By JOHN C. HENRY=20 Copyright 2002 Houston Chronicle Washington Bureau=20 Feb. 4, 2002, 6:13AM WASHINGTON -- Questioning whether he could get a fair hearing before Congre= ss, former Enron Corp. Chairman Ken Lay notified lawmakers Sunday that he w= ould not appear this week before committees examining the company's collaps= e.=20 Lay's decision, outlined in letters delivered to Capitol Hill by his lawyer= , came hours after House and Senate members heading the inquiries suggested= that some top Enron executives engaged in illegal activity and "ought to g= o to the pokey."=20 Attorney Earl J. Silbert wrote that Lay "cannot be expected to participate = in a proceeding in which conclusions have been reached before (he) has been= given an opportunity to be heard."=20 Citing remarks by three lawmakers Sunday on television news programs, Silbe= rt wrote: "These inflammatory statements show that judgments have been reac= hed and the tenor of the hearing will be prosecutorial."=20 Silbert's letter said Lay rejects "any allegations that he engaged in wrong= ful or criminal conduct."=20 Lay was to have led off the first of seven congressional hearings this week= into the Houston-based company and its bankruptcy, the largest in U.S. his= tory. In addition to at least 10 congressional inquiries, Enron and its exe= cutives face federal criminal investigations and several civil class-action= lawsuits filed by employees and stockholders.=20 Lay, who in December accepted an invitation to testify today before the Sen= ate Commerce Committee, also was to have appeared Tuesday at a House Financ= ial Services Committee hearing. The committee plans to proceed without the = former Enron chairman.=20 "To back out at this stage of the game is a breach of trust," said Rep. Ken= Bentsen, a Houston Democrat who sits on the House panel. "This has all the= appearances that he was stringing us along and in the 11th hour has pulled= the plug. I'm profoundly disappointed."=20 There was no indication late Sunday whether either the Senate Commerce Comm= ittee or the House Financial Services Committee would try to compel Lay to = appear later. The Senate hearing -- which was to have been chaired by Sen. = Byron Dorgan, D-N.D., and broadcast live on seven television networks -- wa= s canceled.=20 "We're going to meet with the committee members and have a discussion about= what we do next," Dorgan said, dismissing Silbert's assertion that the hea= ring would have had a "prosecutorial" tone.=20 Meanwhile, a spokesman for the House Energy and Commerce Committee -- which= is holding three hearings into Enron this week but was not scheduled to he= ar from Lay -- said a subpoena would be issued if he turns down an invitati= on to appear.=20 "If he thumbs his nose at us like he did the Senate Commerce Committee, we'= ll subpoena him," said Ken Johnson, whose boss, Rep. Billy Tauzin, D-La., c= hairs the House Energy and Commerce Committee. "Mr. Lay has some tough ques= tions to answer, and sooner or later he's going to have to answer them."=20 Enron's former chief financial officer Andrew Fastow, who has been subpoena= ed to appear before Tauzin's panel later this week, has notified congressio= nal investigators that he will not testify unless he is granted immunity fr= om prosecution.=20 "We're not granting immunity to anybody," Johnson said. "We're not in a dea= ling mood. Too many people have lost their jobs and lost their pensions."= =20 Lay's decision not to appear came the day after a special committee of Enro= n's board of directors released a 218-page report that criticizes Enron's e= xecutives, auditors, lawyers and board members for allowing improperly crea= ted partnerships to inflate the company's earnings, hide its debt and wrong= fully enrich a handful of insiders.=20 The report spent more time criticizing Fastow and accounting firm Arthur An= dersen than it did Lay. At the same time, the report by University of Texas= law school Dean William Powers cited Lay as ultimately responsible for mak= ing sure his officers performed their oversight duties properly.=20 "For much of the period in question, Lay was the Chief Executive Officer of= Enron and, in effect, the captain of the ship," the report said. "He does = not appear to have directed their attention, or his own, to the oversight o= f the LJM partnerships. Ultimately, a large measure of the responsibility r= ests with the CEO."=20 Also singled out for criticism in the report were former Chief Executive Of= ficer Jeff Skilling, Chief Accounting Officer Rick Causey and Chief Risk Of= ficer Richard Buy. The report says former employee Michael Kopper violated = Enron's code of ethics for having managed one of the partnerships without t= he board of directors' approval.=20 Skilling is scheduled to appear later this week before the House Energy and= Commerce Committee and, Tauzin says, has agreed to testify. Kopper, who al= so has been subpoenaed, has notified the committee's investigators that he = will decline to testify and cite his Fifth Amendment right to avoid self-in= crimination.=20 Robert Bennett, a Washington attorney representing the Enron board, said th= e company had hoped Lay would testify but cannot blame him for backing down= after seeing the Sunday morning television performances by Tauzin and othe= r lawmakers.=20 "I understand his (Lay's) position and the sound basis for it," Bennett sai= d. "The remarks on television today were very troubling."=20 Appearing early Sunday on NBC's Meet the Press, Tauzin referred to the Powe= rs report and weeks of investigation by Energy Committee staff members when= he said: "We're finding what may clearly end up being securities fraud" by= Enron executives.=20 Tauzin said his panel -- which began investigating Enron's collapse in Dece= mber -- wants to find whether "there really (was) wrongdoing and maybe some= body ought to go to the pokey for this? And I think we're going to find out= `yes' to that question."=20 On the same program, Dorgan said: "Some things have happened here that are = going to put some people in real jeopardy, in trouble."=20 On NBC's Today, Sen. Peter Fitzgerald, R-Ill., said: "Ken Lay obviously had= to know that this was a giant pyramid scheme -- a giant shell game."=20 Chronicle reporter Tom Fowler contributed to this story.=20 Text of withdrawal letter=20 Feb. 3, 2002, 9:43PM Houston Chronicle WASHINGTON -- Text of letters sent Sunday by a lawyer for Ken Lay to the ch= airmen of the House Financial Services Committee and the Senate Committee o= n Commerce, Science and Transportation.=20 The letters from Earl J. Silbert were identical except the one to the Senat= e chairman referred to Lay having accepted an invitation to appear before t= he full committee and a subcommittee, while the letter to the House chairma= n referred only to a hearing scheduled by the full committee.=20 Dear Mr. Chairman:=20 About one month ago, Kenneth Lay accepted your invitation to appear before = this committee (and subcommittee) to testify about the collapse of Enron. H= e was looking forward to a meaningful, reasoned question and answer session= to provide his understanding of the events and to discuss with you a numbe= r of related policy, legal, and regulatory issues. This tragedy for the com= pany, its current and prior employees, retirees, and shareholders has been = devastating and heartbreaking to him.=20 Many allegations have been publicized in the news media accusing Mr. Lay an= d others of wrongful, even criminal conduct. He has not personally responde= d to them. Some have construed his silence as acquiescence. They are wrong.= Mr. Lay firmly rejects any allegations that he engaged in wrongful or crim= inal conduct. He did and still does believe that the most appropriate place= to explore these allegations and related policy issues was before the Cong= ress.=20 Mr. Lay, with counsel, has been spending extensive time preparing both for = written and oral testimony. As of this morning, Mr. Lay intended to testify= tomorrow. In the midst of our preparation, particularly disturbing stateme= nts have been made by members of Congress, even today, on the eve of Mr. La= y's scheduled appearance. These inflammatory statements show that judgments= have been reached and the tenor of the hearing will be prosecutorial.=20 For example, on NBC's Today Show and MSNBC, Senator Peter Fitzgerald charge= d:=20 "Ken Lay obviously had to know that this was a giant pyramid scheme -- a gi= ant shell game. ... They grafted a pyramid onto an old-fashioned utility. .= .. There was blatant fraudulent activity going on for years, and in my opin= ion he had to have known. ... "=20 On Meet the Press today, Senator Byron Dorgan concluded:=20 "(T)his is almost a culture of corporate corruption. ... "=20 "Clearly some things have happened here that are going to put some real peo= ple in real jeopardy and trouble."=20 On the same TV program, Congressman Billy Tauzin, the chair of one of the c= ommittees conducting one of the principal investigations of the Enron colla= pse, claimed:=20 "Secondly: were they really wrongdoing, and maybe somebody ought to go to t= he pokey for this? I think we are going to find out yes to that question."= =20 Congressman Tauzin also charged:=20 "(N)ot only were there corrupt practices, not only was there a hiding of th= e fact that debt was being put off the balance sheets and profits were repo= rted that didn't exist, but we've found more than that. I think we're findi= ng what may clearly end up being securities fraud, attempts not to hedge or= put debt out of the company, which many companies do, but literally fraudu= lent, phony attempts to do so. ... "=20 These are a few examples, from among many others. Indeed, as The New York T= imes reported today, in appearing before the subcommittee, "Mr. Lay will fa= ce a panel eager to pulverize him." As a consequence, I have instructed Mr.= Lay to withdraw his prior acceptance of your invitation. He does so, but o= nly with the greatest reluctance and regret. He also wishes to express, as = do I, our sincerest apologies for any inconvenience caused by this decision= , but he cannot be expected to participate in a proceeding in which conclus= ions have been reached before Mr. Lay has been given an opportunity to be h= eard.=20 Sincerely,=20 Earl J. Silbert=20 Ex-workers let down as Lay alters his plans=20 By STEVE BREWER=20 Copyright 2002 Houston Chronicle=20 Feb. 3, 2002, 9:49PM For former Enron employees in Houston, Ken Lay's televised testimony before= Congress was going to be the equivalent of Sunday's Super Bowl. They had m= ade plans to gather in bars, restaurants and homes today to hear what their= ex-boss had to say.=20 But when the former Enron CEO backed out of testifying on Sunday, they were= left with more questions, anger and a lot of disappointment. They said the= y felt robbed.=20 "We kind of thought at least he will take the Fifth Amendment and ask for i= mmunity. At least then, we would have had a good laugh," said Anthony Huang= , a former Enron contractor who is part of Enronx.org. "But he didn't even = let us do that."=20 Enronx.org, an Internet-based resource for former employees of the fallen c= orporate giant, was expecting more than 60 ex-Enron workers to show up and = watch Lay's testimony in a local restaurant. Television networks had arrang= ed for the testimony to be fed straight into the restaurant, and the group = had even sent an invitation to Lay's family.=20 By 8 p.m. Sunday night, the gathering had been called off.=20 "We're disappointed and slightly upset," Huang said. "A lot of people were = anticipating hearing from him, so he could at least defend himself, and to = see if he knew about certain transactions occurring."=20 Charles Weiss, a former manager for Enron's long-haul network, said he had = planned on watching the testimony at home, like he was doing with the Super= Bowl on Sunday.=20 News of Lay's cancellation made him mad.=20 "How can he continue to dodge the inevitable?" Weiss asked. "Does he plan j= ust to say anything and plead total ignorance? ... It's insane that he's be= ing allowed to not own up and answer all the questions on the table."=20 Weiss also said he thought it was odd that Lay's decision not to testify ca= me the day after a review of the company's activities by University of Texa= s School of Law Dean William Powers concluded that the company's management= concealed financial information.=20 Gloria Alvarez worked as an administrative coordinator for Enron for 13 yea= rs. She said she had planned to go to a friend's house to watch the testimo= ny and that groups of her former co-workers had planned gatherings througho= ut town to do the same thing.=20 Many of those groups were going to be joined by national news outlets, hopi= ng to get their on-the-spot reaction to Lay's words.=20 Late Sunday, she got the call informing her that the meeting had been cance= led.=20 "I just don't understand," she said. "I suppose this is something his lawye= r told him to do."=20 For people like Jackie Jackson, who worked for Enron four years as a contra= ct administrator, Lay's decision not to testify only makes them more bitter= about the company executives they once worked for.=20 "It's unfortunate that we were working for a bunch of cowards that we all l= ooked up to," Jackson said. "And now, it turns out those people we held as = superior are looking very inferior to us now."=20 Former Enron workers also weren't too impressed with the reason Lay's lawye= r gave for his deciding not to appear -- that judgments had been reached pr= ior to the hearing that remarks by various members of Congress on Sunday mo= rning news talk shows showed that the hearing would be "prosecutorial" in t= enor.=20 Business/Financial Desk; Section C As Enron Purged Its Ranks, Dissent Was Swept Away By JOHN SCHWARTZ 02/04/2002 The New York Times Page 1, Column 2 c. 2002 New York Times Company HOUSTON, Feb. 3 -- Linda Richardson was in her office at Enron one day in F= ebruary 1999 when her secretary, Marie Thibaut, came in with an open intero= ffice envelope and a look of concern on her face. ''Linda, are you quitting= ?'' she asked.=20 The envelope contained a severance agreement. As Ms. Richardson, a vice pre= sident for information technology, looked at the papers, the realization da= wned. ''Marie, they're firing me!'' she exclaimed. By that point, Enron, which had once prided itself on its intense team spir= it, had become the kind of place where someone could be dismissed in such a= n impersonal way -- a company so bent on success that it did not always obs= erve the basic human niceties. Many former employees and executives say the= atmosphere became so intensely competitive that people often did not feel = secure enough in their jobs to question irregularities, if they were aware = of them at all.=20 In recent years, a steady stream of Enron employees made their way to the e= xits, whether by choice or by force. Some, including J. Clifford Baxter, wh= o was a vice chairman, left after it became known within the company that t= hey were troubled by the network of partnerships that concealed a flood of = red ink on Enron's balance sheet. Others, like Rebecca Mark-Jusbasche, a pr= ominent executive who signed deals to build and buy power plants around the= world, lost internal corporate battles and moved on. Indeed, of the 34 sen= ior executives listed in the company's 1999 annual report, only 11 remain.= =20 But departures occurred on all rungs of Enron's ladder. Many of those who l= eft -- whether voluntarily or not -- say part of the reason was that Enron = had metastasized into a more ruthless, less humane place.=20 Many who left say that much of the change in Enron's culture coincided with= the rise of Jeffrey K. Skilling, whom many called a brilliant visionary; h= e was promoted to president and chief operating officer in 1996. It was Mr.= Skilling -- the company's chief executive when he resigned last summer -- = who was largely responsible for Enron's transformation. He helped turn Enro= n from a large but unglamorous natural gas company in the mid-1980's into a= kind of hedge fund that created and ran markets in energy and a dizzying a= rray of commodities, including high-speed Internet access and even weather = risk. Ultimately, the company gambled away its own future.=20 Mr. Skilling was singled out for criticism in the internal investigation th= at was released by Enron on Saturday. The report said of the partnerships t= hat he ''certainly knew or should have known of the magnitude and the risks= associated with these transactions.'' It concluded that Mr. Skilling ''bea= rs substantial responsibility for the failure of the system of internal con= trols'' to reduce the risks in the partnerships. Through a spokeswoman, Mr.= Skilling declined requests for an interview.=20 Whatever Mr. Skilling's eventual failings as a chief executive, a zealous a= pproach to business was there from the start.=20 Professors at Harvard Business School recalled that even in that rich pool = of future business titans, Mr. Skilling stood out as a student at the schoo= l in the late 1970's. Jeffrey A. Sonnenfeld, an expert in corporate leaders= hip, recalled an argument he had with Mr. Skilling one day at the Galley, a= student grill in the school's Gallatin Hall.=20 ''I had the foolish temerity to argue with him about energy deregulation,''= the hot business topic of the day, Mr. Sonnenfeld recalled, and he was soo= n overwhelmed by the student's passionate and relentless arguments on behal= f of free markets.=20 Mr. Sonnenfeld recently asked his Harvard Business School colleagues about = Mr. Skilling and found that ''everybody remembered him, and I don't think a= nybody remembered an unpleasant thing about him.''=20 Once out of business school, Mr. Skilling rose quickly in the energy world = and made his way to the consulting firm McKinsey & Company, where he ultima= tely became head of its energy and chemical practices. In 1982, he began ad= vising Enron; seven years later, he helped the company devise a complex tra= nsaction that offered the customer the equivalent of a safe, fixed-price co= ntract in a deregulated natural gas market, where prices fluctuated.=20 It was a defining moment for Mr. Skilling and for Enron. At the time, the o= ld-line gas companies were being hammered by deregulation. The deal proved = that Enron could surf the waves of change instead of drowning in them. In 1= 990 Mr. Skilling joined Enron as head of trading.=20 The Enron that Mr. Skilling joined was very different from the one that he = would eventually run. Under the chairmanship of Kenneth L. Lay, the company= 's divisions had enjoyed so much autonomy that they were referred to as sta= nd-alone silos. Each had its own system for determining salaries and bonuse= s and its own culture. But despite their differences, all the units were bi= g on risk and reward. And they were arrogant, thinking themselves invincibl= e.=20 ''There were no grown-ups at Enron,'' a former executive said.=20 At Enron International, which built power plants around the world, the cult= ure was especially freewheeling. Ms. Mark-Jusbasche and Joseph W. Sutton, a= nother top executive at the unit, once made a grand entrance on roaring Har= ley-Davidson motorcycles at a meeting for the group's thousands of employee= s. One presentation included a live elephant.=20 ''It was a hoot,'' said Connie Castillo, a former legal assistant with the = group. But it was fun with a purpose, Ms. Castillo recalled. ''It made ever= ybody a part of something.''=20 Mr. Skilling's trading operation, however, had a more cutthroat reputation,= and it was suffused with Mr. Skilling's particular buzzwords -- like ''loo= se-tight,'' which he used to describe his management style.=20 The tight side was managing risk in every transaction. The company was loos= e when it came to managing creativity, Mr. Skilling told researchers from t= he Darden Graduate School of Business Administration at the University of V= irginia. ''You wanted to have an environment that weird people liked operat= ing in,'' he said, adding, ''It's the weird ideas that create new businesse= s.''=20 More and more, Mr. Lay and Mr. Skilling saw the company's future in the luc= rative world of trading -- not in hard assets like power plants and pipelin= es. By the time Mr. Skilling became president and chief operating officer o= f the entire company in early 1996, his traders were the in-crowd.=20 He quickly started shaking things up. In an videotaped interview with the V= irginia researchers, Mr. Skilling's eyes danced as he recalled a confrontat= ion with the managers of the office tower that is Enron's headquarters. The= managers bore detailed manuals describing the number of square feet allott= ed to a senior vice president, a vice president and so on, Mr. Skilling sai= d.=20 ''I want to get rid of all the walls,'' he recalled telling a person he ref= erred to as the ''building Gestapo.'' He wanted a big open room where ''peo= ple will talk and throw things at each other and get all excited and creati= ve.'' The ''building Gestapo,'' he said, ''didn't get it.''=20 After a big struggle, Mr. Skilling said, he simply ''hired contractors and = had them start ripping the walls out.'' Under Mr. Skilling, the old rules n= o longer applied. Literally and figuratively, the walls were coming down.= =20 A former Enron lobbyist said employees could could see the differences betw= een Mr. Lay and Mr. Skilling in how the men walked through the company's cr= owded lobby. Mr. Lay worked the room, shaking hands, patting backs and pull= ing out photographs of his grandchildren to share with secretaries.=20 Mr. Skilling, by contrast, exuded an intensity, marching through with his e= yes straight ahead, his body language radiating importance and urgency and = making clear that few should dare to take a moment of his time.=20 As Mr. Skilling brought the silos under a more unified management, function= s like accounting and compensation were made more consistent. But the most = troubling part of Mr. Skilling's rise for many at Enron could be expressed = in a buzz phrase: ''rank and yank.'' That was the informal name for a perfo= rmance review process in which employees were evaluated at regular interval= s by management groups and the lowest-ranked were purged.=20 ''If you were ranked high and well thought of, you made a beaucoup amount o= f money,'' recalled Ms. Richardson, the ousted technology executive. ''If y= ou disagreed with anything, if you spoke what you thought was the truth, yo= u didn't fare too well.''=20 Ms. Richardson said she had been fired because she had spoken out against a= decision to invest tens of millions of dollars in new software and had rid= iculed the cost-benefit analysis. ''If this is the kind of process that we = use to justify projects, then we're in trouble,'' she recalled saying. She = now works as an independent software consultant.=20 Rank-and-yank cast a pall over the company, said Ms. Castillo, the legal as= sistant, who said she had gone from the top of the scale to the bottom afte= r she filed a harassment complaint, accusing another woman on the staff of = hostile actions. She was fired in mid-2001.=20 Prof. Robert F. Bruner, a co-author of the University of Virginia study of = Enron, said that while that kind of performance review could help build a c= ompany, ''if it's just a front for cronyism, rank-and-yank can be extremely= destructive.''=20 Over time, the culture that Mr. Skilling cultivated ''just swamped the othe= r parts of the business,'' said a former executive from the international s= ide, who added, ''We became an open target.'' Many began to see rank-and-ya= nk as a tactic in Mr. Skilling's fight for supremacy.=20 Members of the international team, while acknowledging a number of very exp= ensive mistakes, argue that most of the financial drag on the company from = projects like the $3 billion Dabhol power plant in India could be corrected= with further investment. But they say the Skilling team wanted to get out = of capital-intensive assets as quickly as possible.=20 Prof. Samuel E. Bodily, the other author of the Virginia study, said that a= lthough the environment at Enron had been genteel, compared with that at a = New York investment bank, the review process had accelerated a trend toward= shortsightedness. Employees gravitated toward projects that could show res= ults within the six-month review cycle, an attitude that he described as ''= if it's not going to happen by then, don't talk to me about it.''=20 Or, as Michael J. Miller, a manager in the company's ill-starred venture to= provide high-speed Internet services, put it: ''Get it done. Get it done n= ow. Reap the rewards.'' Whether the deal made money, or even made sense, wa= s somebody else's problem, he said.=20 A clear plastic block from 1998 -- one of a seemingly endless series of com= memorative objects that the legal department handed out -- testified to the= company's hang-10, toes-over-the-edge attitude. It gave the department's m= ission statement this way: ''To provide prompt and first-rate legal service= to Enron on a proactive and cost-effective basis.''=20 Underneath was a tongue-in-cheek addendum. ''Translation: We do big, comple= x and risky deals without blowing up Enron.''=20 And then, in 2001, it all did blow up. Mr. Skilling resigned in August, and= before long the series of devastating financial restatements and revelatio= ns about Enron's hidden debt crushed the once highflying company.=20 The Virginia professors warn against looking for simplistic reasons for the= collapse. They quote a passage from the novelist Victor Hugo, translating = it as, ''Great blunders, like large ropes, have many fibers.''=20 The question has often been asked lately: Why didn't more people speak up a= bout the problems they saw at Enron? Some say that they heard rumors of irr= egularities but that the company was so vast that they had no firsthand evi= dence. Some said they feared that spreading rumors might cause the damage t= hey would have hoped to avert by blowing the whistle.=20 It was clear, too, that Enron had become a company where dissent was tolera= ted less and less over the years.=20 When people came to Mr. Sutton to complain about unfairness they perceived = in the company's compensation system, they would be rebuffed, according to = a former employee who was present for one such dressing- down. ''He'd scowl= and say, 'Are you making more money than you ever expected to make in your= whole entire life?' '' the former employee said. '' 'If you keep whining a= bout everything else and everybody else in this company,' he would warn, 'Y= ou're never going to succeed.' ''=20 Most important, said another departed senior executive, employees tended to= trust Mr. Lay. If they heard of a problem that seemed to flunk the ''smell= test,'' the former executive said, ''I think they questioned their own nos= trils more than they questioned the company.''=20 Now many former employees feel betrayed. ''The core values of the company w= ere 'Respect. Integrity. Communication. Excellence,' '' said Sue Vasan, rec= iting the much repeated list from memory. She worked in the company's corpo= rate risk assessment department but was laid off in December, the day after= Enron filed for bankruptcy. ''The people preaching those values were the o= nes most violating them,'' she said. ''I think it's appalling.'' Photos: Many executives who left in recent years, like Linda Richardson, ab= ove with her daughter Lucy, say Enron's culture became less welcoming with = the rise of Jeffrey K. Skilling, right. He became president and chief opera= ting officer in 1996. (Paul Hosefros/The New York Times); (James Estrin/The= New York Times) Chart: ''Exiting Early'' Enron's 1999 annual report listed= 34 senior executives. Many are identified informally; for example, Lawrenc= e G. Whalley is listed as Greg Whalley. Most departed last year as the comp= any began to collapse. When the executives left 2000 Harrison Hirko Huneke = Mark-Jusbasche Sutton 2001 Izzo Bhatnagar Christodoulou White Bannantine Ba= xter Haug Pai Skilling Rice Hannon McDonald Fastow Sherriff Enron files for= bankruptcy McConnell Kean Frevert 2002 Whalley Lay* *Still a director (Sou= rce: Enron)(pg. C2)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section A ENRON'S MANY STRANDS: THE BUZZ World Economic Forum Plays Down the Scandal By LOUIS UCHITELLE 02/04/2002 The New York Times Page 20, Column 5 c. 2002 New York Times Company More than a thousand corporate chief executives are gathered in New York fo= r the World Economic Forum, their voices ringing out in almost all the pane= l discussions.=20 But in four days of nonstop talking, the Enron scandal has hardly been ment= ioned; when it has been, the emphasis has been on lax business practices an= d how every recession brings down some big company, rather than on the appa= rent fraud at the heart of Enron's collapse. Only one hastily organized panel specifically dealt with the scandal, and i= ts principal speaker, Richard H. Murray, director of legal and regulatory a= ffairs at Deloitte & Touche, quickly set the tone. Enron, he told a less-th= an-packed audience in one of the smallest conference rooms, should not be v= iewed as a morality play -- there are too many nuanced issues and no clear = answers.=20 Gail D. Fosler, chief economist at the Conference Board, argued that ''Enro= n happened as part of the change in corporate value systems between 1989 an= d today.''=20 Ms. Fosler, appearing with Mr. Murray, said she had not been recruited unti= l Wednesday for the Saturday panel, long after most planning for the confer= ence was done.=20 No one gives more support to the World Economic Forum than those leading Am= erican corporations that each pay $26,000 a year in dues and fees to cover = much of the cost of the elaborate annual gathering held, until this year, i= n Davos, the Swiss ski resort. Enron was a prominent supporter, and when th= e first list of probable participants for this gathering went out in late S= eptember, Kenneth L. Lay, Enron's chairman, was still on it, although his c= ompany had begun to unravel in public.=20 ''I don't think we have ever had a more sudden demise,'' Charles McLean, th= e forum's chief spokesman, said. Or seen a company more quickly dismissed. = ''Enron is not important to us,'' Mr. McLean said. ''They are bankrupt.''= =20 But if the forum's participants -- not only chief executives, but entertain= ers, heads of state, writers, religious leaders and union officials -- winc= ed at dealing with Enron head on, there were references to it in the panel = discussions and the hallways.=20 Many cited Enron as a symptom of the times, a point of view offered by Stan= ley Fischer, the former second in command at the International Monetary Fun= d who is now a vice chairman at Citigroup. ''Enron is something that happen= s at the end of a boom,'' he said in a panel on the economic outlook, ''so = I think we are in for a period of slow growth.''=20 But mostly there was minimizing. Joseph F. Berardino, chief executive of Ar= thur Andersen, also under fire as Enron's auditor, canceled a scheduled app= earance. And in interviews, half a dozen chief executives, made less rather= than more of the scandal.=20 ''It will raise the diligence of boards,'' said Michael D. Capellas, chairm= an of Compaq Computer. ''I don't think there is a C.E.O. out there who is n= ot paying attention. But I don't think they are drawing the conclusion that= because Enron failed, the system is flawed.''=20 The resistance to linking Enron to corporate fraud and political connection= s came out at a session on a supposedly loftier matter attended by John J. = Sweeney, president of the A.F.L.-C.I.O. ''Someone raised the issue of corpo= rate corruption,'' Mr. Sweeney said, ''and the consensus on the panel was t= hat this was not an issue of globalization.'' Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Bentsen heads roundtable session=20 Congressman gathers hearing questions from ex-Enron employees=20 By LORI RODRIGUEZ=20 Copyright 2002 Houston Chronicle Minority Affairs Writer=20 Feb. 4, 2002, 12:05AM On the eve of a congressional hearing today that was to feature former Enro= n Chairman Ken Lay, Houston Congressman Ken Bentsen met with former company= employees Sunday to hammer out questions for the ex-CEO about the collapse= of the company and the subsequent plight of its workforce.=20 In an abrupt move a few hours later, however, Lay announced he would not ap= pear at the hearing as requested.=20 "What we are trying to find out is one, what happened, what went wrong, wer= e there things that were done incorrectly, were there bad business decision= s, was there mismanagement or were there things that were even worse, perha= ps bordering on fraud," said Bentsen Sunday.=20 "Were there problems in existing law that need to be affected and were ther= e things done by senior management that resulted in the decisions by employ= ees to hold the stock that they might not have otherwise done."=20 Following the private discussion with former Enron employees, Bentsen, a ca= ndidate for the seat being vacating by retiring U.S. Sen. Phil Gramm, said = he had introduced two bills aimed at helping workers who lost their jobs an= d life savings when the company failed.=20 One bill would prohibit employers from preventing their workers from sellin= g company stock contained in a 401(k) or retirement savings account. Anothe= r would give employees a seat at the bankruptcy court table, requiring that= they be granted the same rights to compensation as fully secured investors= in the company.=20 Lay was scheduled to appear before the Senate Commerce, Science and Transpo= rtation Committee beginning at 8:30 a.m. today. The hearing was to be viewe= d in Houston on all the major networks. Bentsen is a senior member of the H= ouse Financial Services Committee, which will conduct another hearing at 1 = p.m. probing the company's fall.=20 When he arrived in Washington late Sunday, Bentsen was told of Lay's decisi= on to pull out of the hearings. "I'm profoundly disappointed, and I know th= e former employees of Enron I met with are not too pleased," the congressma= n said.=20 Primed with questions of his own and several from the former Enron workers,= Bentsen said Lay was "making a terrible mistake" by not testifying. "We wi= ll get the answers at some point," Bentsen said.=20 Earlier Sunday at Bentsen's Houston office, Enron ex-employees said they ha= rbor no malice toward Lay personally. But they told harrowing tales of what= they called "Black Monday", Dec. 3, the day they got their marching orders= .=20 "We had 30 minutes to get out of the building and that was not fair," said = Louis Allen, who served as supervisor of parking and transportation for nin= e years. "We were treated like criminals."=20 Although Allen lost $50,000 in savings made during his nine years with the = company, he and the other employees had kind words for their former top bos= s.=20 "Mr. Lay is a very generous man, and I think he needs to come forth," said = Allen. But Allen noted the former chairman would not have left the company = and returned "if he wasn't concerned."=20 "He didn't want any of this to happen. If he could have done anything, I be= lieve that he would have tried to save the company. He was a people's perso= n.=20 "I'm not angry. I just want relief."=20 Debbie Perrotta, a former senior executive assistant for five years who los= t $40,000 in savings, similarly said she held no anger toward Lay.=20 "I just want the truth to come out," said Perrota, when asked what question= s she wants Lay and other executives to answer.=20 If employees had been forewarned of the looming trouble, said Perrota, inst= ead of being constantly reassured of the company's solvency, they might hav= e pulled back from further savings and investments.=20 "Nobody knew. It was a complete surprise. It was a shock."=20 Allen said he is convinced top Enron officials knew well before the company= 's public failure that it teetered on bankruptcy. As the person in charge o= f executive parking, Allen said he watched numerous officials turn in their= garage keys and bail out months before the collapse.=20 Allen called a scathing report by a three-member team from Enron's board of= directors released Saturday "internal damage control." The report conclude= d the company overstated profits by $1 billion in the last two years while = some executives pocketed more than $50 million from poorly monitored partne= rships.=20 Business; Business Desk Meltdown Is Deja Vu for Some at Enron Energy: Executives who warned about p= ractices had similar experiences at MG Corp. in the 1990s. LEE ROMNEY and WALTER HAMILTON TIMES STAFF WRITERS 02/04/2002 Los Angeles Times Home Edition C-1 Copyright 2002 / The Times Mirror Company There were massive financial losses and ousted executives. Finger-pointing = at the company's auditor, Andersen, for not ringing alarm bells. An executi= ve who warned of what could lie ahead but was unheeded.=20 And ultimately, a corporate collapse. The story is Enron Corp.'s. But it is also that of MG Corp., a German congl= omerate's U.S. subsidiary that suffered its own high-profile meltdown in th= e early 1990s.=20 And in a tale of intertwining fates, Enron executives who warned about Enro= n's practices last year had worked at MG and seen it all before.=20 Jeffrey McMahon, promoted last week to Enron president and chief operating = officer, was MG's internal auditor. In 1993, he warned his bosses of poor i= nternal controls in the months before MG began to fall, copies of the audit= s obtained by The Times show.=20 Sherron S. Watkins, the Enron vice president whose memo to former Enron Cha= irman and Chief Executive Kenneth L. Lay last summer predicted the company = would "implode in a wave of accounting scandals"--and pointed to McMahon as= equally concerned--also had worked at MG.=20 That experience, according to one friend and former colleague of Watkins, h= elped her foresee how fast and hard Enron could fall.=20 The crises that battered both companies are far from identical. MG--which i= s still alive, but no longer owns any operating businesses--was done in by = an ill-fated bet on oil futures. Enron's slide was triggered in part when l= osses hidden in off-balance-sheet partnerships suddenly were disclosed.=20 *=20 Both Turned to Derivatives=20 But among the striking similarities is that both companies took risky foray= s into so-called derivatives that pushed the envelope of conventional finan= ce, economists familiar with the companies said.=20 Derivatives are financial contracts whose value is derived from the price o= f an underlying stock, commodity or index. They can be used to make high-oc= tane market bets or to hedge against market moves.=20 Both firms also used aggressive "mark-to-market" accounting. The goal of ma= rk-to-market accounting is for companies to list the true value of their as= sets at prevailing market prices. But experts say the technique can be abus= ed in thinly traded markets where companies can arbitrarily assign high val= ues to their assets.=20 In addition, both companies displayed a hubris during their peak years that= stood out against their humbling descents, one source said.=20 For those who were in both workplaces, the parallels are all too strong.=20 "I can see anyone who had been at MG saying, 'Hey, I've been here before,'"= said Philip K. Verleger Jr., an energy economist who served as an expert w= itness for MG's parent company in the subsequent litigation. "It must have = become increasingly uncomfortable."=20 MG unraveled in late 1993, when a sudden plunge in world oil prices left it= with gaping losses in energy derivatives.=20 Until that time, MG had been aggressively signing long-term contracts with = energy distributors and marketers to supply them with gasoline and other oi= l products. Because it promised deliveries at fixed prices, MG sought to gu= ard against a sudden rise in oil prices.=20 To do that, MG invested in oil futures contracts and other derivatives that= would increase in value if oil prices rose. Theoretically, the gains in de= rivatives would offset any losses on the energy contracts. But rather than = rising, oil prices sank abruptly. MG incurred steep losses on its large der= ivatives holdings.=20 *=20 Hypothetical Profit on Books=20 Meanwhile, the cash flow from the long-term contracts MG signed to supply g= asoline to energy firms was dwarfed by the short-term losses on the derivat= ives. And in some cases, MG had structured the contracts so customers didn'= t have to take any supply, or make any payments, for a decade. Yet MG alrea= dy had recorded expected long-term profit from the energy-supply contracts = on its books.=20 MG's losses eventually reached $2.7billion. The bankruptcy of its parent, M= etallgesellschaft, once Germany's 14th-largest company, was averted only by= a bailout by German banks.=20 The parent company underwent an aggressive restructuring and eventually liq= uidated its U.S. oil trading unit.=20 Neither Watkins nor her attorney returned calls for comment on her three-ye= ar stint at New York-based MG Corp.'s financing arm--MG Trade Finance Group= --which she left in 1993 to join Enron.=20 Watkins was not at the center of the MG storm, which involved MG Refining &= Marketing Inc. But one friend said she had mentioned her experience with t= hat company's debacle when sounding alarms at Enron.=20 McMahon was closer to the crisis. As internal auditor of MG, he issued seve= ral internal audits that raised concerns about the oil trading unit.=20 An August 1993 report concluded that the unit's risk-management procedure "= requires improvement" and that the overall risk-management system was "some= what informal."=20 *=20 Warning Ignored by Executives=20 Apparently referring to the increasingly large and risky derivatives positi= ons that the unit was taking on, McMahon wrote that the exposure to losses = was "much larger than anticipated in the original business plan."=20 McMahon said through Enron spokesman Mark Palmer that he had attempted to a= lert his superiors to potential problems at the trading unit.=20 McMahon "found a lot of problems," Palmer said. "They just didn't have the = governance structure to manage the trading positions."=20 The audits "fell on deaf ears" until the losses mounted in late 1993, said = New York attorney Bob Bernstein, who represents Metallgesellschaft, now kno= wn as MG Technologies.=20 "Jeff's reports ... were quite prescient," Bernstein said. "Was he the most= important person? No. Was Jeff McMahon an important person? Yes.... He's a= person of honor and integrity who saw things that were wrong and alerted p= eople to that."=20 At Enron, McMahon has emerged as one of a handful of executives who alleged= ly was concerned by off-balance-sheet partnerships headed by former Chief F= inancial Officer Andrew S. Fastow.=20 According to Watkins' memo, McMahon was "highly vexed over the inherent con= flicts of [the partnerships]. He complained mightily to Jeff Skilling."=20 Days later, Watkins wrote, Skilling offered McMahon a different job heading= another Enron unit. With Skilling and Fastow both gone by fall, McMahon be= came CFO.=20 *=20 Finger-Pointing Followed Collapse=20 As with Enron, MG's collapse was held forth as having broad implications fo= r corporate governance, financial controls and derivatives trading.=20 There were allegations that German board members--who claimed they were kep= t in the dark about the U.S. trading unit's problems--were too close to the= company. Similar concerns swirl around Enron's board.=20 There also were questions about accounting firm Andersen. According to publ= ished reports, the German parent pointed a finger at the firm for supportin= g MG's interpretation of its numbers and replaced Andersen by 1994.=20 Patrick Dorton, an Andersen spokesman, said MG's problems were due to the b= ig swing in oil prices.=20 "This is simply the case of a company caught on the wrong side of a dramati= c slide in oil prices, like many other companies were at that time," Dorton= said, refusing to comment further.=20 In Enron's case, Andersen is under investigation for shredding Enron-relate= d documents after the Securities and Exchange Commission had launched an in= vestigation of the energy trader. The firm has denied that it authorized sh= redding.=20 The companies' financial practices also bear similarities. MG has been desc= ribed in academic papers as a derivatives "horror story." Now, there are si= gns that in Enron's hands derivatives evolved into tools of fiscal concealm= ent and manipulation, some experts say, allowing Enron to inflate the value= of assets while understating the risks involved.=20 Palmer rejected the notion that the company's problems are tied in any way = to derivatives. Enron's trading operation suffered when the company's credi= t rating was cut, not by the trading itself, which he said was profitable.= =20 Nonetheless, both MG and Enron entered long-term contracts whose ultimate v= alues were difficult to predict and booked the hypothetical long-term profi= t from those contracts in the present. That mark-to-market accounting has e= merged as a trouble spot in both cases, said John Parsons, a financial econ= omist at Charles River Associates in Boston.=20 "People are marking to what their own opinion is of the value," Parsons sai= d. If those opinions are wrong, the financial consequences can be severe.= =20 As it turned out, Enron and MG became directly linked: Eighteen months ago,= Enron bought the company's London-based metals trading operation, and the = Enron and MG logos are side by side in Madison Avenue office space.=20 That relationship is now ending. Sempra Energy last week announced its purc= hase of the metals business.=20 The similar fates of MG and Enron strike some observers as eerie.=20 "It's almost identical," economist Verleger said. "I think that Enron inadv= ertently blundered into the same corporate model that caused the collapse o= f MG." Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 White House Is Expected to Recommend Only a Slight Boost in Funding for SEC By Greg Ip Staff Reporter of The Wall Street Journal 02/04/2002 The Wall Street Journal A5 (Copyright (c) 2002, Dow Jones & Company, Inc.) WASHINGTON -- Despite widespread demands for increased scrutiny of corporat= e accounting following Enron Corp.'s collapse, the White House is expected = to recommend only a slight increase in funding for the lead regulator on su= ch matters when its budget is unveiled today.=20 What's more, the Securities and Exchange Commission's operating budget woul= dn't include money to back up a recent commitment from both Congress and th= e Bush administration to raise SEC salaries to stem an exodus of experience= d staff, people familiar with the matter said. Just three weeks ago, the agency appeared to score an important victory whe= n President Bush signed legislation that would raise SEC staff pay to the l= evels of their counterparts at federal banking-regulation agencies, who ear= n an estimated 24% to 39% more. Funding the increase was to be handled late= r.=20 But just a week after the bill was signed, Chairman Harvey Pitt told staff = in an e-mail, "Unfortunately, the Office of Management and Budget has advis= ed us that funding for pay parity will not be included in the president's p= roposed budget for fiscal year 2003, which starts in October. While I am en= ormously disappointed by this, we are part of one government, and must abid= e by government-wide budget decisions."=20 The SEC originally requested more than $500 million for 2003, including $76= million to implement pay parity for its lawyers and investigators, accordi= ng to people familiar with the request. As it is, the White House is expect= ed to recommend a rise of about 4% from the agency's overall budget of $438= million this year, with the increase allotted mostly to additional technol= ogy rather than beefed-up salaries, these people said. In his e-mail, Mr. P= itt said the administration has agreed to let the SEC use some of this year= 's budget to partially implement pay parity in the current year.=20 The SEC experienced a major exodus of experienced staff in recent years, as= the bull market drove up the salaries they could earn in the private secto= r. During one two-year period in the late 1990s, the SEC's New York regiona= l office lost more than half of its 137-member enforcement staff. Critics s= ay that hampered both the level of scrutiny the agency could bring to the m= arkets and its ability to pursue cases.=20 For example, the SEC tries to review annual reports from large companies at= least once every three years, but in the late 1990s its staff was so inund= ated with reviewing initial public offerings they were unable to scrutinize= the usual number of annual reports. Last month, The Wall Street Journal re= ported that Enron Corp.'s 2000 annual report was scheduled for SEC review, = but staffers delayed the process for another year, not only to await newly = required derivatives disclosures but also, a person with knowledge of the p= rocess said, because they didn't want to take the time to wrestle with Enro= n's complicated filings.=20 The SEC could face fresh demands on its resources, as better policing of co= rporate reports and accountants is sought in the aftermath of Enron's colla= pse. SEC spokeswoman Christi Harlan said Mr. Pitt "has said that we have th= e staff and the resources to do the job we need to investigate Enron. What = we will be interested in seeing is what additional duties Congress might as= k the SEC to take on."=20 White House budget director Mitchell Daniels Jr. said in an interview Frida= y that the administration doesn't consider the SEC's request for pay parity= "justified." He added, "I think the SEC is amply provided for. . . . If th= ey need more money, it might be for more investigations, as opposed to doin= g the same investigations and pay everybody more." Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Questioning the Books: In Spoof Video, Former CEO Steers Enron To Places No= Firm Has Gone Before By Jonathan Friedland Staff Reporter of The Wall Street Journal 02/04/2002 The Wall Street Journal A8 (Copyright (c) 2002, Dow Jones & Company, Inc.) If former Enron Corp. Chairman Kenneth Lay testifies before Congress this w= eek, he won't be showing up dressed as Captain Kirk.=20 But in an in-house spoof video made four years ago for a sales event of Enr= on's retail energy-services unit, Mr. Lay was shown piloting the Starship E= nterprise as part of Enron's quest to expand its influence to every corner = of the universe. The 10-minute tape -- made at a time when Enron's stock price was soaring a= nd the company was lauded by many as the nation's most innovative firm -- t= akes the form of a mock segment from ABC's "20/20" newsmagazine. In it, voi= ces impersonating Barbara Walters and Hugh Downs, dubbed over their images,= recount how in the year 2020 Enron was elected "the world's first global g= overning body." A voice impersonating ABC correspondent Sam Donaldson says,= there "isn't a person who is alive today who doesn't know and revere Enron= ."=20 Featuring cameos by former Enron President Jeffrey Skilling and the former = Vice Chairman of Enron Energy Services and now Secretary of the Army Thomas= White, the tape tells the story of how Enron righted many of the world's w= rongs, essentially by being smarter than anyone else.=20 Enron officials figure out ways to vanquish earthquakes in Japan, tidal wav= es in Asia and drought in India. Mr. White averts nuclear war with Russia. = He is depicted at one point suggesting to Russia's president that the best = way to prevent tensions from rising anew is for Moscow to outsource managem= ent of its nuclear arsenal to Enron. The next segment shows Red Square full= of Enron logos.=20 The tape, which mixes in footage from such movies as "Naked Gun" and "Deep = Impact," also recounts how Mr. Lay received the Nobel Prize for economics f= or theories that forestall a stock market crash in 1999.=20 Mr. Lay had been scheduled to testify before Congress today, but his lawyer= s said he wouldn't because the hearings have become "prosecutorial."=20 For his part, Mr. Skilling, who is expected to testify this week, is shown = in the video talking about how he is retiring to a remote island near islan= ds owned by Bill Gates and Warren Buffett because he has done everything he= set out to do at Enron. "It's time for me to go fishing with Warren and Bi= ll," he tells the interviewer. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Economy O'Neill Wants Stiffer Penalties for CEOs --- Under Proposal, Executives Who= Mislead Holders Couldn't Use Insurance By Bob Davis Staff Reporter of The Wall Street Journal 02/04/2002 The Wall Street Journal A2 (Copyright (c) 2002, Dow Jones & Company, Inc.) NEW YORK -- Treasury Secretary Paul O'Neill said he favors strengthening pe= nalties for chief executives who release misleading financial statements, i= ncluding barring them from using insurance to cover the costs of some share= holder lawsuits.=20 Responding to the gale of criticism over the collapse of Enron Corp., whose= disclosure statements were seen as inadequate or misleading, Mr. O'Neill s= aid rules governing corporations should be changed to make clearer the resp= onsibility of corporate executives. "It would be helpful to strengthen the certification [of financial results]= that a chief executive officer makes on behalf of the company," he said du= ring an interview at the World Economic Forum meeting in New York. One way = to accomplish that, he said, would be to bar the CEO, other senior executiv= es and directors from having insurance that pays for legal costs and judgme= nts arising from situations where a firm doesn't release adequate financial= information.=20 Mr. O'Neill said such an insurance ban would apply "to all cases, whether t= here is wrongdoing or whether there is a wrongful statement." A total ban i= s important "so there is no ambiguity about the responsibility of executive= officers -- that they have the responsibility to know and a responsibility= to share" information.=20 Insurance policies covering directors and officers liability typically stat= e that deliberate misrepresentations or violations of securities laws are g= rounds for denying a claim.=20 Other types of policies often are less clear in spelling out when an insure= r must pay. In the Enron situation, insurers who wrote surety bonds are dis= puting some claims because the insurers say Enron misled them about how the= bonds were to be used. Surety bonds are issued by insurers to companies th= at want to guarantee performance or payment in a business transaction.=20 In the wake of the Enron collapse, President Bush named Mr. O'Neill to head= a panel to look at changes in rules governing corporate behavior, which is= expected to make recommendations by mid-February. He said it was "worth lo= oking into" the insurance proposal, but the plan wasn't final. Mr. O'Neill = also heads a separate panel to look at changes in pension laws, such as rec= ommending that workers have more flexibility to diversify retirement accoun= ts, and that senior executives be held to the same blackout periods on stoc= k sales as rank-and-file employees.=20 By focusing on the actions of CEOs, Mr. O'Neill said it should be possible = to avoid wholesale changes in rules governing corporate disclosure. "It's n= ot possible to devise a detailed regulatory scheme that anticipates everyth= ing that one ought to know," he argued. "Therefore, it's probably going to = be more beneficial to put the duty on the executives because they should kn= ow everything that's necessary to know and they should provide everything t= hat's necessary to know."=20 Stephen Kaufman, chairman and CEO of Arrow Electronics, a Melville, N.Y., s= emiconductor supplier, who was also attending the WEF meeting, said he was = concerned that a broad denial of insurance would make it hard to fill top c= orporate jobs and directorships. "As a CEO of a large company, it's impossi= ble to know everything going on," he said. "Am I supposed to be sued becaus= e someone did something wrong? I'd have to think twice about taking the job= if that were the situation."=20 So long as an officer or director exercised "reasonable" care in producing = financial reports, Mr. Kaufman said, he thought they ought to be able to qu= alify for insurance.=20 Mr. O'Neill said he also would review the recommendations of a task force h= eaded by former Federal Reserve Chairman Paul Volcker, who is examining int= ernational accounting standards. More and more of the world is one from a f= inancial standpoint, Mr. O'Neill said, "I think there's no reason to have m= ultiple standards."=20 Separately, Mr. O'Neill said he expected pace of U.S. economic growth to pi= ck up during the year, and forecast fourth-quarter growth at an annual rate= of 3% to 3.5%. He anticipated that the government would run a surplus, inc= luding revenue from Social Security taxes, again in "a couple of years." He= dismissed criticism that the government should measure its surplus or defi= cit, without including Social Security taxes.=20 "Tell me why I should do that?" he said. "What does that have to do with an= ything."=20 When the government runs a surplus, each dollar is used to retire debt, whe= ther or not that revenue comes from Social Security taxes. That improves th= e fiscal condition of the government and makes it easier for it to borrow a= gain in the future to pay for retirement of baby boomers. The proper level = of government surplus is a subject for debate, Mr. O'Neill said, but the le= vel shouldn't be determined by the amount of Social Security taxes coming i= nto the Treasury now.=20 "It's not a relevant thing," he said. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section A ENRON'S MANY STRANDS: THE AUDITORS FORMER FED CHIEF PICKED TO OVERSEE AUDITOR OF ENRON By JONATHAN D. GLATER 02/04/2002 The New York Times Page 1, Column 6 c. 2002 New York Times Company A day after a committee of the Enron board issued a damning report on the c= ompany's collapse, Arthur Andersen, the accounting firm that certified Enro= n's financial statements, gave extraordinary authority to a new oversight p= anel to be led by Paul A. Volcker, the former Federal Reserve Board chairma= n.=20 But Enron's former chief executive, Kenneth L. Lay, abruptly pulled out of = two promised appearances before Congress beginning today, saying that lawma= kers had already decided on his guilt. Mr. Lay's lawyer, Earl J. Silbert, said, ''Judgments have been reached and = the tenor of the hearings will be prosecutorial.''=20 Lawmakers generally praised the Enron report yesterday, saying, without poi= nting directly to Mr. Lay, that it contained strong evidence of corporate c= rimes.=20 ''The report presents a pretty straightforward case of fraud,'' said Senato= r Jon S. Corzine, Democrat of New Jersey and a former executive at the inve= stment firm Goldman, Sachs. ''If the facts of it are accurate, it's quite d= espicable and damning.''=20 The report, issued Saturday, concluded that Enron executives intentionally = manipulated profits, inflating them by almost $1 billion in the year before= the company's collapse through byzantine dealings with a group of partners= hips. It described across-the-board failures of controls at almost every le= vel, as a culture of self-enrichment at the expense of shareholders emerged= .=20 The report said that Arthur Andersen signed off on flawed and improper deci= sions every step of the way and deserved much of the blame for Enron's coll= apse. Andersen responded on Saturday by attacking the report as an effort t= o shift blame to others.=20 Yesterday, Andersen executives said that their reforms were already planned= and in no way a reaction to the report. While this is not the first time t= hat an accounting firm has created an oversight body, the amount of power t= hat Mr. Volcker's committee will have is remarkable, said Arthur W. Bowman,= editor of Bowman's Accounting Report.=20 ''What they've done now is almost hard to believe,'' Mr. Bowman said. ''The= y're going to give this committee carte blanche to make recommendations, an= d they'll follow them without question.''=20 Mr. Volcker will lead a committee of at least three people with the power t= o change Andersen's policies and fire or reassign personnel, the firm annou= nced. The new board is one of several steps Andersen will take to restore i= ts credibility, the firm's chief executive, Joseph F. Berardino, said.=20 In its efforts to reassure clients and investors, Andersen has already said= that it will stop serving as both internal accountants and external audito= rs for the same company. It will no longer sell certain technology consulti= ng services to clients whom it audits, a dual role that critics say creates= conflicts of interest. Enron paid Andersen about $27 million for consultin= g and $25 million for auditing in 2000.=20 Mr. Berardino, who sought out Mr. Volcker, said other changes are in the wo= rks. ''We're taking a first step forward, and I emphasize it's a first step= ,'' Mr. Berardino said. ''We are serious about being the strongest firm in = quality, as soon as possible.''=20 The oversight board, whose other members have yet to be named, will have at= least one paid full-time staff member. Mr. Volcker will not be paid for hi= s services.=20 While it is unclear just how far the power of the committee will extend, Mr= . Volcker said that he expected to be able to effect ''substantial'' change= s. Otherwise, he said, ''I could not possibly invite other people to join t= his board.''=20 As the leader of efforts to persuade Swiss banks to return deposits to fami= lies of Holocaust victims, Mr. Volcker has already established himself as a= powerful moral voice.=20 Andersen's announcement comes as accounting firms that audit the nation's l= argest companies find themselves under intense pressure to change practices= that have undermined the credibility of the financial statements they appr= ove. Last week, four of the Big Five accounting firms, including Arthur And= ersen, announced support for new restrictions on the services they could se= ll to companies they audit.=20 Andersen's role in Enron's fall, coming after previous scandals over financ= ial statements it approved at the Sunbeam Corporation and Waste Management,= has made it the focus of industry critics. Beyond missing Enron's accounti= ng errors and omissions, the Enron report said, the firm also ''participate= d in the structuring and accounting treatment'' of some of Enron's transact= ions with partnerships, run by Enron executives, that hid company debt.=20 At the news conference yesterday, Mr. Berardino and Mr. Volcker would not a= nswer questions about the Enron report -- though Mr. Berardino is likely to= face such questions when he testifies before Congress tomorrow. They tried= instead to focus on broader accounting issues.=20 ''Accounting and auditing in this country is in a state of crisis,'' Mr. Vo= lcker said at yesterday's news conference, at the offices of Andersen's New= York law firm, Davis Polk & Wardwell.=20 ''Auditing is crucial to protection of the investor'' and to the functionin= g of efficient markets, Mr. Volcker said. ''If you can't trust the numbers,= how can you allocate capital correctly?''=20 Accounting firms, hoping to head off tougher regulation or legislation, are= rushing to make themselves more open and accountable. PricewaterhouseCoope= rs last week announced steps similar to Andersen's, including the addition = of 3 outside directors to its 18-member board. In the future, the firm will= put out an annual report detailing its revenues, compensation policies and= other practices to ensure the quality of audits, its chief executive, Samu= el A. DiPiazza Jr., said at the time.=20 ''There needs to be a proactive response by the profession to the Enron sit= uation,'' Mr. DiPiazza said. ''It is important for us, as we take steps, th= at we emphasize that we don't think our system is broken. We think our qual= ity is very high; we think our focus is on the interests of the public and = public investors. But there's a perception issue.''=20 Ernst & Young, another Big Five firm, is expected to announce its own propo= sals for changing the profession early this week. According to an executive= close to the matter, the heads of all five firms met more than a week ago = and at that time Mr. Berardino informed them of Andersen's plans.=20 The adoption of an independent board is a measure that experts in corporate= governance and former regulators have long called for as a way to make up = for the lack of oversight given the private partnership structure of accoun= ting firms.=20 Such oversight might have led Andersen to drop Enron as a client, said Rich= ard C. Breeden, a former chairman of the S.E.C. ''If Andersen's quandary ov= er whether to resign had been brought to a board, what would have happened?= '' he said. ''When conscience questions come up, you need to have a board w= ith public representatives dealing with them.''=20 Andersen's measures probably will not head off regulatory or legislative ac= tion, Mr. Bowman said, but may help preserve what is left of the firm's rep= utation and keep some clients from leaving. ''It takes a step in restoring = confidence in the firm's ability to do the best work with the best people,'= ' he said. ''But this does not do a thing for what's happened to them to th= is point.''=20 Accounting experts and some former regulators said the reforms that the fir= ms now support would not necessarily have prevented the kind of accounting = that concealed Enron's true condition.=20 But for accounting firms to take the steps they are proposing is radical fo= r an industry that seldom receives, or wants, much outside attention. The a= ctions indicate the sense of crisis that accountants acknowledge they now f= eel.=20 No previous accounting scandals have led the firms to propose such reforms.= Last summer, Andersen paid $7 million to settle a lawsuit brought by the S= .E.C. after it had certified statements that vastly overstated earnings at = Waste Management. In 1998, Waste Management adjusted its previous earnings = downward by $1.43 billion.=20 But Andersen did not discipline three partners who were involved in the aud= it, who paid fines of $30,000 to $50,000 each and were temporarily barred f= rom auditing public companies.=20 Asked whether in light of Andersen's role in Enron, Andersen should have re= sponded differently to the S.E.C.'s Waste Management charges, Mr. Berardino= offered an answer he may have to use repeatedly in the future: ''In hindsi= ght, I guess we all might do things differently.'' Photos: Joseph F. Berardino of Arthur Andersen, right, with Paul A. Volcker= , who will lead a review of the firm. (James Estrin/The New York Times)(pg.= A1); Joseph F. Berardino, chief executive of Arthur Andersen, left, said y= esterday that forming an oversight committee led by Paul A. Volcker, right,= was one step the firm was taking to try to restore its credibility. (James= Estrin/The New York Times)(pg. A18)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Questioning the Books: Andersen Retains Volcker in Effort to Boost Its Imag= e --- Former Fed Chairman Is Set To Lead Panel to Help Change Audit Practic= es By Jonathan Weil Staff Reporter of The Wall Street Journal 02/04/2002 The Wall Street Journal A8 (Copyright (c) 2002, Dow Jones & Company, Inc.) NEW YORK -- Looking to bolster its damaged image, Arthur Andersen LLP said = it has retained former Federal Reserve Board Chairman Paul Volcker to lead = an outside panel that will guide Andersen in making "fundamental change" in= the accounting firm's audit practice.=20 Andersen also announced it will stop accepting assignments for information-= technology consulting work or internal-audit work from U.S.-based publicly = traded clients for which Andersen also acts as independent auditor. Critics= have accused the accounting firm of conflicts of interest because it was E= nron Corp.'s internal and external auditor and did extensive consulting wor= k for the energy-trading company before it filed for bankruptcy-court prote= ction late last year. The announcement that Andersen would limit the scope of services it provide= s to domestic audit clients is in line with similar announcements made in t= he past week by other Big Five accounting firms. Joseph Berardino, Andersen= 's chief executive, called the initiatives an important "first step" toward= regaining the public's confidence in the Chicago firm's audits.=20 On Saturday, a special committee of Enron's board issued a blistering repor= t that, among other things, accused Andersen of failing to perform its prof= essional duties as the auditor. Andersen promptly issued a statement blamin= g the Houston company's collapse on poor business decisions.=20 But at a news conference here yesterday, Mr. Berardino ducked reporters' qu= estions about the special committee's report. "We've had a major letdown in= our whole process," Mr. Berardino said. "It's obvious the public has been = let down, and the question is what should their expectations be." Explainin= g why he wouldn't comment on the Enron board's findings, Mr. Berardino said= , "Today's conversation is about going forward."=20 In its report released Saturday, a special committee appointed by Enron's b= oard pinned much of the responsibility for Enron's misleading financial rep= orts and eventual collapse on former Enron executives -- and on the company= 's board for failing to exercise adequate oversight. However, the report al= so laid blame on Andersen.=20 "The evidence available to us suggests that Andersen did not fulfill its pr= ofessional responsibilities in connection with its audits of Enron's financ= ial statements, or its obligation to bring to the attention of Enron's boar= d . . . concerns about Enron's internal controls," the special committee's = report states. The report also says Andersen at times declined to cooperate= with Enron's internal review, a contention Andersen denies. Mr. Berardino = referred questions about the report to the statement released Saturday by a= nother Andersen executive, global managing partner C.E. Andrews.=20 "Nothing more than a self-review, [the Enron board's report] does not refle= ct an independent credible assessment of the situation, but instead represe= nts an attempt to insulate the company's leadership and the board of direct= ors from criticism by shifting blame to others," Mr. Andrews said. "More im= portantly, the report overlooks the fundamental problem -- the fact that po= or business decisions on the part of Enron executives and its board ultimat= ely brought the company down."=20 By appointing Mr. Volcker to Andersen's outside panel, Mr. Berardino said h= e wants to signal that Andersen is serious about improving its audit polici= es and procedures. "We want to improve our standing in the public's mind, a= nd we want to improve the quality of our auditing," he said. "Today is a ne= w day."=20 It remains to be seen what changes Mr. Volcker might recommend. Mr. Volcker= , who is providing his services free of charge, said the new oversight pane= l will assemble its own staff and will be funded by Andersen. At the news c= onference, Mr. Berardino said Andersen would abide by any recommendations m= ade by the panel. Under the contract between Andersen and Mr. Volcker, an e= xcerpt of which was released by the firm, the panel would have authority to= mandate policy and personnel changes at the firm, which Mr. Berardino desc= ribed as an unprecedented concession for a large accounting firm.=20 Andersen also has retained former U.S. Sen. John Danforth, a Missouri Repub= lican, to conduct a review of the firm's records-management policy and reco= mmend improvements in light of Andersen's disclosure of widespread document= destruction at the firm's Houston office. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Questioning the Books: Companies Mull Separation of Auditing, Consulting A Wall Street Journal News Roundup 02/04/2002 The Wall Street Journal A6 (Copyright (c) 2002, Dow Jones & Company, Inc.) The accounting scandal at Enron Corp. has prompted other companies to consi= der following a move by Walt Disney Co. to cease using their external audit= ors to do consulting work.=20 While many companies say they see no need to separate the functions, Cornin= g Inc., Mirant Corp. and New York Times Co. are among those saying they mig= ht consider the step. The collapse of Houston energy trader Enron Corp. brought new scrutiny to t= he common practice of companies using one accounting firm both to audit the= books and to provide lucrative consulting services -- with companies somet= imes paying much more for the nonaudit services.=20 Some audit firms, facing strong criticism of the practice, aren't waiting f= or clients to act. Yesterday Arthur Andersen LLP, which audited and did con= sulting work for Enron, became the latest to react. Andersen said it will n= o longer accept internal-audit and financial information-systems work from = publicly traded clients to which it provides external audit services.=20 Disney last week became the first major company to announce it would separa= te auditing from consulting, saying that though there were no problems with= outside auditor PricewaterhouseCoopers LLP, it wanted to be free from conc= erns about auditor independence. Disney's move rendered moot a shareholder = initiative, scheduled for the annual meeting later this month, that questio= ned the company's use of its auditor for consulting services.=20 Many companies try to ensure audit independence through rules that require = board members to approve the use of outside accountants for other services.= Others place limits on the fees paid to accountants. At the same time, que= stions about the practice are prompting executives to re-examine their poli= cies, to make sure safeguards are sufficient to prevent conflicts of intere= st.=20 This week, Corning's board-level audit committee will consider adding restr= ictions to its auditing and consulting-fee policies, said Paul Rogoski, a c= ompany spokesman. In light of the Enron situation, "we're going to look at = what our current process is and see if it needs to be updated," Mr. Rogoski= said. For 2000, the most recent figures available, Corning, a Corning, N.Y= ., optical-fiber maker, paid $2.5 million in auditing fees to Pricewaterhou= se and $13.3 million to the firm in consulting fees.=20 Mirant, an Atlanta energy firm, says it probably will study the Disney move= as part of a "constant review" of its audit policy, though it typically tr= ies to separate audit work from consulting jobs. "We're making every effort= we can to be non-Enron-like," a company spokesman said. In 2000, the compa= ny paid Arthur Andersen LLP $2.2 million for auditing services, another $1.= 2 million for financial information-systems services, and $10.1 million for= other services, including help with its initial public offering and tax co= nsulting.=20 JDS Uniphase Corp. a maker of fiber-optic components for telecommunications= networks, said that last year, under pressure from regulators, it began to= reduce the nonaudit services that it purchases from auditors Ernst & Young= LLP. For the fiscal year ended June 30, JDS, which maintains dual headquar= ters in Ottawa and San Jose, Calif., paid Ernst & Young $1.4 million for it= s audit; $2 million for other audit-related services, including review of J= DS's SEC filings; and $3.6 million for other services, including tax consul= ting and its internal audit.=20 Chief Financial Officer Anthony Muller said JDS stopped using Ernst & Young= for real-estate consulting and internal auditing because of "loud messages= from the SEC" about auditor independence. He said the company continues to= use Ernst & Young for tax-related issues because JDS believes there is "co= nsiderable value" in having the auditor work on both accounting and tax iss= ues.=20 At New York Times Co., Enron-related accounting concerns are prompting the = company's audit committee to review whether it will use auditors Deloitte &= Touche for consulting work in 2002, spokeswoman Catherine Mathis said. In = 2000, the company paid Deloitte $1.3 million for reviewing its financial st= atements and $3.1 million for other services, principally tax consulting an= d work revolving around a since-withdrawn plan to create a tracking stock f= or its New York Times Digital unit.=20 Some companies say there is nothing wrong with using auditors for other ser= vices if there are safeguards in place.=20 Dow Jones & Co., publisher of The Wall Street Journal, paid Pricewaterhouse= Coopers $1.2 million in audit fees for the year ended Dec. 31, 2000, and an= other $11 million primarily for tax, technology and management-consulting s= ervices. Richard Zannino, Dow Jones's chief financial officer, said a large= chunk of the nonaudit expenses were related to computer systems bought thr= ough the audit firm. He said Dow Jones isn't considering altering its polic= y in light of Enron, because the company already has "very conservative pra= ctices" in place.=20 Even before the Enron debacle, there was pressure on professional-services = firms to stop hawking audit and consulting services to the same client. Som= e firms have taken their consulting units public or gone public themselves = in recent years. Ernst & Young sold its consulting business two years ago, = while KPMG LLP spun off KPMG Consulting Inc. in an initial public offering = one year ago this month.=20 Last week, Pricewaterhouse said it will file plans this spring to spin off = its management-consulting unit, PwC Consulting, in an IPO. The firm says th= e timing is due in part to what it sees as a crisis of confidence in the in= dustry.=20 Arthur Andersen itself, in 2000, separated from its management-consulting b= usiness, now called Accenture, in an acrimonious split. However, Andersen's= role as auditor and consultant to Enron is prompting intense scrutiny. Enr= on paid Andersen $25 million for audit services and $27 million for nonaudi= ting work, including tax consulting, in 2000, the most recent period for wh= ich figures are available. After Enron revealed in November that it had ove= rstated its earnings for four years, Andersen officials testified before Co= ngress that the nonauditing fees didn't compromise their independence as au= ditors.=20 Yesterday, Joseph F. Berardino, the firm's managing partner and chief execu= tive, signaled that Andersen wouldn't accept internal-audit and computer-sy= stems work from audit clients as a way "to assure confidence in the quality= of our audits in all jurisdictions." Andersen also said it had hired forme= r Federal Reserve chairman Paul Volcker as chairman of an oversight board t= o help recommend other changes.=20 Some accounting firms, however, warn against quick judgments. Deloitte & To= uche, in a statement last week, acknowledged that "a perception problem nee= ds to be solved" in the industry. But the firm said "it is premature to acc= ept or reject any single proposal." A spokeswoman for Deloitte had no addit= ional comment. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Derivatives Cop Wanted, but Terms Vary By Michael Schroeder and Jathon Sapsford Staff Reporters of The Wall Street Journal 02/04/2002 The Wall Street Journal C1 (Copyright (c) 2002, Dow Jones & Company, Inc.) In the wake of Enron's colossal fall, the Bush administration and a biparti= san group of lawmakers want to shine a light on derivatives-trading practic= es. Pressure is building for new regulatory action.=20 But the question is: Which regulatory cop will get the derivatives beat? President Bush, in his State of the Union address, singled out the need for= "stricter accounting standards and tougher disclosure requirements." Thoug= h Mr. Bush didn't mention Enron Corp. by name or identify derivatives tradi= ng specifically, Treasury Secretary Paul O'Neill recently spoke for the adm= inistration in calling for modernization of derivatives regulation.=20 Lawmakers have their own proposals. Some Democrats are using Enron to reviv= e a debate about whether derivatives should be regulated by a merged Securi= ties and Exchange Commission and Commodity Futures Trading Commission. Some= derivatives -- investment contracts whose value is derived from underlying= assets such as commodities or currencies -- aren't traded on exchanges and= fall through the regulatory cracks.=20 Rep. Peter DeFazio, a Democrat from Oregon, is drafting legislation that wo= uld create a merged superregulator to address "gaping holes in the federal = oversight of financial markets," specifically with regard to over-the-count= er derivatives. Sen. Jon Corzine (D., N.J.), former co-chairman of Goldman = Sachs Group Inc., says he believes both agencies should share increased ove= rsight of these risky transactions.=20 Everyone agrees that it is a huge market. The nominal value of derivatives = on the books of commercial banks soared to $51.3 trillion at the end of Sep= tember from $6.8 trillion in 1990, with nearly $20 trillion of that growth = coming since 1998, according to the Office of the Comptroller of the Curren= cy. Of course, these numbers considerably overstate the actual money at ris= k because the aggregate dollars are based on the theoretical value on which= each transaction is based. For example, it is highly unlikely that the val= ue of most derivative contracts would ever go to zero.=20 Financial regulators hew to decades-old divisions of authority. They have c= ontinued to keep a close watch on banks, brokerage firms and conventional e= xchanges, while leaving new entrants such as Enron to police themselves. Th= e CFTC regulates futures contracts and, along with the SEC, options traded = on exchanges, but not derivatives traded off-exchange, or "over the counter= ." These over-the-counter trades are negotiated privately between large fin= ancial institutions or corporations.=20 The way such derivatives are regulated depends on what kind of firm sells t= hem. For example, bank regulators such as the Federal Reserve can scrutiniz= e commercial banks' activity, while the SEC can examine brokers who conduct= business in the U.S.=20 Enron -- which started by trading natural gas, then expanded to electricity= , metals and more exotic derivatives -- fell through the gaps of this regul= atory framework. During 2000 alone, Enron's derivatives-related assets incr= eased to $12 billion from $2.2 billion, with most of the growth coming from= increased trading through its EnronOnline unit, according to Enron's finan= cial reports. To ensure that Enron met Wall Street quarterly earnings estim= ates, it used derivatives and off-balance-sheet partnerships, known as spec= ial-purpose vehicles, to hide losses on technology stocks and debts incurre= d in financing unprofitable businesses, some specialists say. In addition, = some traders apparently hid losses and understated profits, which had the e= ffect of making derivatives trading appear less volatile than it was.=20 Throughout the 1990s, there have been calls for expanded regulation and mor= e disclosure after a number of high-profile financial disasters involving d= erivatives, including investigations of Bankers Trust New York Corp., Orang= e County, Calif., and Long-Term Capital Management, the investment fund who= se fall in 1998 threatened the entire financial system.=20 In the past, however, proposals to merge the SEC and CFTC have run into a b= uzzsaw from lawmakers unwilling to give up jurisdiction over the agencies. = The agriculture committees fought to preserve oversight of the CFTC, while = the banking and financial-services committees wouldn't consider relinquishi= ng their SEC authority.=20 Giving financial institutions the option of selecting a derivatives regulat= or from among the SEC, CFTC or banking regulators, including the Federal Re= serve Board, is one approach being considered. That arrangement would give = regulators confidential access to books and records, which wouldn't be made= public. Lawmakers also are discussing giving a designated regulator the au= thority to do a yearly, unscheduled audit of each derivatives dealer -- an = approach used in Japan.=20 To address problems posed by companies such as Enron, some specialists have= said nonfinancial public companies should be required to split derivatives= -trading operations into separate affiliates subject to strict capital requ= irements, much as banks as well as brokerages do.=20 Derivatives have been around since the ancient Greeks hedged the price of t= heir crops. But early in the 1980s, U.S. corporations such as International= Business Machines Corp. or institutions such as the World Bank began using= derivatives to hedge against the volatility of currency or interest rates.= By 1990, use of derivatives by U.S. corporations had become the rule rathe= r than the exception.=20 Any effort to increase wholesale regulation of derivatives dealers will mee= t fierce opposition from powerful banks and Wall Street firms, which succes= sfully have championed the near-complete absence of oversight of over-the-c= ounter derivatives.=20 For their part, bankers say financial institutions are subjected to much mo= re scrutiny than other public companies. Not only do banks have regulators = like the Federal Reserve monitoring the way they carry the risk of derivati= ves, but banks also must pass muster with entire industry of analysts, cred= it-rating agencies and competitors who constantly measure their risk as cou= nterparties. Some bankers concede their own disclosure provides investors a= nd counterparties little insight into the full scope of the risks involved.= =20 In late 2000, Congress exempted over-the-counter derivatives from nearly an= y regulation. Enron led the massive lobbying effort on Capitol Hill and, wi= th the exemption, escaped federal oversight of its trading activities. Sen.= Diane Feinstein (D., Calif.) plans legislation to repeal the part of the 2= 000 Commodity Futures Modernization Act that exempts energy trading from re= gulation.=20 As a publicly traded company, Enron and other big energy-derivatives trader= s routinely provide the SEC with general information about finances. They a= ren't obliged to divulge detailed information to any agency about over-the-= counter trading activities.=20 The Financial Accounting Standards Board has required since last year that = companies report broad aggregate derivatives numbers to the SEC each quarte= r, but regulators concede that companies can do last-minute transactions to= dress up portfolios. In December, FASB issued extensive guidance on deriva= tives reporting, which is covered in more than 800 pages. Specialists say t= he sheer complexity of the rule could muddy the waters.=20 The investing community -- and Congress -- probably will compel companies t= o disclose information about corporate use of derivatives. "If companies ar= e going to indicate to investors that they are managing risk with derivativ= es, investors are going to want more information about how they are doing t= hat so they can reach their own judgment about how well its being managed,"= says Nik Khakee, director of derivatives ratings at credit-rating agency S= tandard & Poor's. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 International Enron's Woes Are Felt by Firms Overseas --- In U.K. and Elsewhere, Accounti= ng Rules Get Newfound Attention By Steve Liesman and Marc Champion Staff Reporters of The Wall Street Journal 02/04/2002 The Wall Street Journal A12 (Copyright (c) 2002, Dow Jones & Company, Inc.) Two weeks ago, Mohamed Alabbar, the chairman of a public company in the Uni= ted Arab Emirates, received a hurried visit from his auditors at Ernst & Yo= ung.=20 The team asked him to declare that his company, Emaar Properties PJSC, had = no off-the-books partnerships or off-balance-sheet debts. While Mr. Alabbar= was ready to sign a document pledging that was the case right away, the au= ditors told him to take the document home for a couple of days and think ab= out it first. "All these auditors are sharpening their pencils," says Mr. A= labbar, who has even had his travel expenses questioned recently. "It's lik= e they are coming and sitting with you almost every day." The collapse of Enron Corp. has led global markets to retrench in fear of w= idespread accounting irregularities, forced at least one foreign official t= o resign, and focused attention on local accounting scandals. It also has p= rompted a rethink of accounting practices from Britain to the UAE to South = Africa. In many ways, the Houston company's bankruptcy is being treated lik= e a fault has been found in a critical airplane system, prompting a scrambl= e to effect global repairs.=20 In Britain, ripples from the Enron affair claimed a first casualty Friday, = when Lord John Wakeham, a former U.K. energy minister and accountant who se= rved on Enron's audit committee, stepped down temporarily from his job as h= ead of Britain's press complaints commission. Lord Wakeham has said he will= remain on leave until he has cleared his name in the U.S. investigation in= to Enron.=20 As in the U.S., the question of political donations from Enron has been rai= sed in the U.K., with the opposition Conservative Party charging that GBP 3= 8,000 ($61,000) in Enron donations to the ruling Labour Party in 1997 to 20= 00 may have influenced the government to end a moratorium on the constructi= on of gas-fired power stations. So far, the Tories have come up with no evi= dence to support their claim of impropriety and have had to admit that they= accepted GBP 25,000 in Enron donations as well.=20 While the current political squall over Enron in the U.K. may blow over, th= ere are likely to be lasting effects on British accounting regulations. How= ard Davies, the head of Britain's newly consolidated Financial Services Aut= hority, says he has set up an internal inquiry to look into lessons that th= e U.K. could learn from the collapse of Enron. Interviewed at the World Eco= nomic Forum in New York, Mr. Davies said plans for a review of Britain's ac= counting rules were already in place as a result of an earlier, domestic ac= countancy scandal. But, he said, "Enron has given that process a big kick."= =20 While Mr. Davies believes an Enron-style scandal is less likely in the U.K.= because of differences in accounting practices, he says it is possible. Re= forms in the pipeline would aim primarily to strengthen auditor independenc= e. The FSA will, for example, look into drafting new rules that would requi= re companies to rotate their auditing firms, or at least re-tender the cont= racts, perhaps every five years. There may also be more formal restrictions= on firms providing nonauditing services -- such as consulting -- to client= s. Mr. Davies said the Enron scandal likely has given him greater political= clout to push through change, using either his own authority or through pa= rliament.=20 Worried about the implications of the Enron affair, the U.K.-based global f= oods and household goods company, Unilever PLC, has already said that it wi= ll ban its auditors from consulting contracts with the company.=20 Similarly, in South Africa, an earlier accounting scandal has suddenly beco= me a more significant public issue. The collapse of the biggest health-club= chain in the country is receiving intense scrutiny because its accounting = irregularities mirrored Enron's. The company, Leisurenet, booked upfront me= mbership revenues to be debited monthly from credit cards rather than as th= ey were paid, echoing charges that Enron aggressively booked future profits= from derivatives contracts.=20 South African Finance Minister Trevor Manuel said the country is examining = its accounting legislation, including its accounting oversight board. "This= was in process before, but now I think we have to take a very hard look at= it." Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Enron's Rise and Fall Gives Some Scholars A Sense of Deja Vu --- Decades Ag= o, a Big Power Trust Likewise Pushed Its Luck -- And Earned a Place in Infa= my By Rebecca Smith Staff Reporter of The Wall Street Journal 02/04/2002 The Wall Street Journal A1 (Copyright (c) 2002, Dow Jones & Company, Inc.) As Congress investigated the collapse of a high-profile energy company, it = faced a daunting challenge.=20 One senator said that to understand the huge company's shocking failure, la= wmakers must consider the regulatory and legal missteps that led to its dow= nfall. How, he wondered, could Congress restore investors' confidence in th= e financial system? By repealing old laws? Enacting new ones? One of his colleagues answered by recounting an old joke: A man gets a mess= age that his mother-in-law has died. "Shall we embalm, cremate or bury?" it= asks. Replies the man, "Embalm, cremate and bury. Take no chances."=20 Was this a moment of levity during last week's hearings into the Enron Corp= . debacle?=20 Actually, it was a scene that played out nearly seven decades ago between F= red Herbert Brown, a New Hampshire Democrat and George Norris, a Nebraska R= epublican, as they took to the Senate floor to discuss the demise of Middle= West Utilities Co. The holding company -- the hub of a vast empire built b= y energy magnate Samuel L. Insull -- had sunk abruptly into bankruptcy amid= allegations of stock fraud and crooked accounting, wiping out thousands of= investors.=20 Today, many students of corporate history get a sense of deja vu as they wa= tch the Enron saga unfold. "In the 1930s, investors lost confidence in the = basic institutions of capitalism -- banks, corporations and accountants," s= ays Richard Hirsh, professor of economics at Virginia Polytechnic Institute= and State University in Blacksburg, Va. "To see this happening again with = Enron certainly gives one pause."=20 Middle West was made up of a host of interconnected companies with interloc= king boards -- an arrangement mirrored, in some ways, by the web of off-bal= ance-sheet partnerships that concealed Enron's heavy debt burden. So compli= cated was Middle West's structure that it took seven years for a team from = the newly formed Federal Trade Commission to fully unravel its financial st= ructure.=20 Other similarities between Middle West and Enron go straight to the top. Li= ke Kenneth Lay, who resigned last month as Enron's chairman and chief execu= tive, Middle West's Mr. Insull was a big campaign contributor, with powerfu= l friends in Washington. Both men were successful in keeping the government= out of their business dealings. Mr. Insull, for one, "was careful to regul= ate the regulator," Sen. Norris declared in June 1934.=20 In its era, Middle West's operations were every bit as groundbreaking as En= ron's would be with EnronOnline, its Internet-based energy-trading system. = Mr. Insull, for example, pioneered the idea that central power plants shoul= d operate 24 hours a day to help defray their high fixed costs.=20 To generate enough demand to fulfill this vision, Mr. Insull, who sported a= broom mustache, wooed electric streetcar companies, promoted electric elev= ators and touted the labor-saving advantages of the "all-electric home." He= even coined the term "massing production," later shortened by his publicis= ts to "mass production," to describe the benefits of huge power plants supp= lying electricity to large regions of the country. Some economists credit M= r. Insull with single-handedly driving down power costs, helping American f= actories to flourish.=20 But, also like Enron, Middle West pushed its financial engineering too far.= By the early 1930s, it was emblematic of the octopus-like "power trusts" t= hat were suspected of manipulating the nation's energy markets in unseen wa= ys.=20 Middle West was born in Chicago in 1912, about 31 years after the London-bo= rn Mr. Insull immigrated to the U.S., where he became private secretary to = Thomas Alva Edison. While Mr. Edison invented the technology that harnessed= electricity, Mr. Insull invented the business model that turned it into a = money maker. He rose to manage Mr. Edison's Schenectady, N.Y., operations, = later to become General Electric Co. Then, he moved on to Chicago, where he= broke free of Mr. Edison in 1892 and formed Commonwealth Edison Co. by mer= ging smaller companies.=20 Middle West was the first and most prominent of Mr. Insull's half-dozen or = so holding companies. Its myriad affiliates, which included utilities, cons= truction outfits and electrical-equipment makers, hawked stocks tied to oth= er Insull enterprises. "There was tremendous pyramiding and preferential tr= eatment of affiliated companies," says Alfred Kahn, an economics professor = at Cornell University in Ithaca, N.Y.=20 Middle West withstood the stock-market crash of 1929, and it looked at firs= t like Mr. Insull might emerge relatively unscathed. At one point, he even = extended $50 million in credit to the city of Chicago to pay its schoolteac= hers and police.=20 But Middle West had an Achilles' heel. Its companies had taken on an enormo= us amount of debt during the go-go years of the 1920s, and the company acce= lerated its borrowings after the crash. By the middle of 1931, creditors an= d rivals, including financier J.P. Morgan, were circling. In 1932, with pre= sidential hopeful Franklin Roosevelt blasting the "Insull monstrosity" for = allegedly inflating the value of its holdings and selling worthless bonds, = Middle West and many of its 284 affiliates were placed in receivership.=20 Washington quickly got into the act. In rapid order in 1934 and 1935, Congr= ess passed the Securities and Exchange Act, the Public Utility Holding Comp= any Act and the Federal Power Act. Those laws sought to break up the power = trusts and guarantee investors the information they needed to make informed= decisions. More than a half century later, Enron would figure out ways aro= und parts of those same laws.=20 After Middle West went bust, an exhausted Mr. Insull left the country, land= ing in Greece. Later, at the behest of the U.S., Turkish authorities arrest= ed him on his yacht and shipped him home to stand trial for fraud and embez= zlement.=20 In a packed Chicago courtroom, the 75-year-old Mr. Insull took the stand, m= esmerizing jurors with his Horatio Alger-like tale of how an English dairym= an's son rose to become secretary to the Wizard of Menlo Park, as Mr. Ediso= n was known, and head of a vast conglomerate. In all, he stood trial three = times; all three trials ended in his acquittal.=20 Still, he was far from home free. The politicians whom he had liberally sup= ported now took pains to distance themselves from him. He also lost his per= sonal fortune, estimated in 1930 at $150 million, remained significantly ti= ed up with Middle West -- a notable difference, it seems, from Mr. Lay and = other Enron executives who cashed out hundreds of millions of dollars in st= ock before the company went under.=20 "It looks to me like Enron management made beaucoup boatloads of money and = jumped ship," says University of Alabama historian Forrest McDonald, an Ins= ull biographer who sees his subject as a tragic figure whose contributions = have been largely overlooked. By contrast, Mr. McDonald says, Mr. Insull "w= ent down with the ship. "=20 In 1936, Mr. Insull left the U.S. to live in France, trusting his son to de= fend his interests in lingering lawsuits. Two years later, at age 78, he su= ffered a massive heart attack while waiting for a Paris subway train. When = police arrived, his wallet was missing. The next day, newspapers gloated ov= er his rags-to-riches-to-rags saga, noting that the onetime millionaire had= died alone, and with a mere 85 cents in his pocket. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 BOOM TOWN: Enron's Lessons Can Be Applied To Web Issues By Kara Swisher 02/04/2002 The Wall Street Journal B1 (Copyright (c) 2002, Dow Jones & Company, Inc.) Is the Enron crisis taking Silicon Valley off the hook? Lately, it's been s= tealing all the tsk-tsk headlines and the blame for Wall Street woes as the= prime example of hype and greed.=20 "I think people are tending to look back on this era now as a comedy and no= t a tragedy," says John Cassidy, author of the aptly named new book, "Dot.c= on: The Greatest Story Ever Sold. "Capitalism has great recuperative powers= and there is now a feeling that we let bygones be bygones." Not so fast. It's critical that we keep a spotlight on the issues that have= surfaced since the Internet and tech sector began imploding, especially if= the industry is to move forward on stable footing. Here are some continuin= g concerns:=20 Fueled by sky-high stock valuations, bickering managers, indiscriminate dea= l-making and a spate of service complaints, the bankruptcy of Excite@Home l= ast year was a shocking example of Web-mania run amok. The cable service's = users and minority shareholders bore the brunt of the pain. Most of the com= pany's assets have been sold and the rest will be shuttered down. "Basicall= y, after Feb. 28, we will cease to exist," Excite@Home spokeswoman Julie Da= vidson says.=20 So, shareholder lawsuits will be moot and investors will be out of luck, ev= en as many top executives and venture investors sold out big chunks of thei= r shares while urging others to invest. It had a distinct Enronish feel, li= ke many dot-coms, with insiders benefiting over outsiders, even though the = share-selling was perfectly legal.=20 More, not less, oversight by the media and Wall Street analysts was needed = in this case. As most of the company's customers are forced to move onto al= ternatives, state and federal regulators need to keep an eye on the rollout= of broadband access. This is especially important as tech leaders pressure= the Bush administration to make high-speed Internet access a priority by o= ffering tax breaks and removing regulation.=20 It's a good thing Enron is keeping accounting issues at the forefront of pu= blic attention. Dubious, though usually legal, methods of accounting for re= venue and income were common in the dot-com sector in its early years. Reve= nue-enhancing methods, such as mixing barter, investment and other one-time= revenues into the mix of ordinary sales performance -- while stripping out= costs -- painted a skewed picture of many companies' prospects.=20 The travails of Homestore.com, the Westlake Village, Calif., online real-es= tate company, is a good measuring stick for how well Web firms clean up the= ir balance sheets. Once one of the few survivors with a multibillion dollar= market valuation, the company warned of trouble in the form of a huge quar= terly loss in November. At that time, executives blamed the ad downturn for= their plight against the backdrop of Sept. 11.=20 In fact, after new executives took over and an internal audit inquiry was o= rdered, Homestore.com conceded it had overstated revenue by as much as $95 = million for the first three quarters of 2001 by counting a large chunk of q= uestionable barter transactions as ad sales. The company also has ferreted = out those responsible and taken disciplinary actions.=20 "Clearly, the future of the company relies on its ability to restore confid= ence with partners, employees and customers," says Homestore.com spokesman = Gary Gerdemann. "We definitely have some bridges to mend."=20 Companies need such frankness. And investors need to demand increased trans= parency in a company's financial health. While it isn't clear that Homestor= e.com will survive, a mea culpa like Mr. Gerdemann's is refreshing to hear,= given how little public responsibility many dot-com players have taken. Th= ey should take more.=20 The recent lawsuit lobbed by AOL Time Warner against Microsoft over the sor= ry state of AOL's Netscape subsidiary brought a collective yawn from Silico= n Valley. It deserved more attention. It's critical this plodding legal dra= ma be played out to the very end for the good of the industry.=20 In a nutshell, AOL claims its once-dominant Navigator browser was unable to= withstand Microsoft's withering monopolistic assault. Microsoft claims Net= scape's products just plain stunk.=20 "This is a logical extension of the findings of two federal courts that Mic= rosoft thwarted competition and violated the antitrust laws," says AOL spok= eswoman Kathy McKiernan. Microsoft's spokesman Vivek Varma counters that AO= L is just using the courts to make business gains it can't achieve via comp= etition. "The last thing our industry and consumers want and need is for tw= o of America's biggest companies suing each other in court," he says.=20 Actually, it may be just the thing we need. Even if such battles may seem t= o drain energy from all-important innovation -- and Microsoft is correct th= at it often does -- the future development of the industry may depend on th= em.=20 ---=20 What are the most troublesome issues of the dot-com heyday that serve as le= ssons for the future? Write me at kara.swisher@wsj .com and see the debate = Friday at WSJ .com/BoomTown. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 National Desk; Section A ENRON'S MANY STRANDS Hearings This Week 02/04/2002 The New York Times Page 20, Column 1 c. 2002 New York Times Company Committee: House Committee on Financial Services: Subcommittee on Capital M= arkets, Insurance, and Government-Sponsored Enterprises=20 Chairman: Richard H. Baker=20 Republican, Louisiana=20 Date: Monday, 2 p.m. Tuesday, 10 a.m.=20 Focus: Regulation of accounting industry, impact on commodity markets, reas= ons for Enron's overstated earnings, possible 401(k) mishandling and potent= ial securities fraud.=20 Expected witnesses:=20 Monday=20 Harvey L. Pitt=20 Chairman, Securities and Exchange Commission=20 William C. Powers Jr.=20 Enron special investigative committee; Enron board; dean, University of Tex= as School of Law=20 Tuesday=20 Joseph F. Berardino=20 Managing partner and chief executive, Andersen Committee: Senate Committee on Governmental Affairs=20 Chairman: Joseph I. Lieberman=20 Democrat, Connecticut=20 Date: Tuesday, 9:30 a.m.=20 Focus: Impact of Enron's collapse on investors in the 401(k) plan.=20 Expected witnesses: Witnesses will include Enron employees, 401(k) plan adm= inistrators and public policy experts.=20 Committee: House Committee on Energy and Commerce: Subcommittee on Oversigh= t and Investigations=20 Chairman: James C. Greenwood=20 Republican, Pennsylvania=20 Date: Tuesday, 10 a.m.=20 Thursday, 9:30 a.m.=20 Focus: Findings of Enron's special investigative committee concerning trans= actions between Enron and several=20 of its current and former employees.=20 Expected witnesses:=20 Tuesday=20 William C. Powers Jr.=20 Thursday=20 Jeffrey K. Skilling=20 Former chief executive, Enron=20 Andrew S. Fastow=20 Former senior vice president. and chief financial officer, Enron=20 Michael Kopper=20 Former officer, Enron=20 Robert K. Jaedicke=20 Enron audit committee; Enron board; former dean, Graduate School of Busines= s, Stanford University=20 Richard A. Causey=20 Executive vice president and=20 chief accounting and information officer, Enron=20 Richard B. Buy=20 Senior vice president and chief risk officer, Enron=20 Committee: Senate Committee on the Judiciary=20 Chairman: Patrick J. Leahy=20 Democrat, Vermont=20 Date: Wednesday, 10 a.m.=20 Focus: Ways to protect investors and lessons learned.=20 Expected witnesses: Christine Gregoire=20 Attorney general, Washington State (Washington has filed a class-action sui= t against Enron)=20 Committee: House Committee on Education and the Work Force=20 Chairman: John A. Boehner=20 Republican, Ohio=20 Date: Wednesday, 10 a.m.=20 Thursday, 10 a.m.=20 Focus: Enron's benefits plan and its compliance with laws on employer-spons= ored pension plans. Enron's employee stock-selling rules.=20 Expected witnesses:=20 Wednesday=20 Elaine L. Chao=20 U.S. secretary of labor=20 Thursday=20 Cindy Olson=20 Executive vice president for human resources, community relations and build= ing services, Enron=20 Chris Rahaim=20 Director of benefits, Enron=20 Thomas Padgett=20 Former Enron employee=20 Scott Peterson=20 Hewitt Associates (firm hired by Enron for record- keeping for the 401(k) p= lan)=20 Committee: House Committee on Energy and Commerce=20 Chairman: Billy Tauzin=20 Republican, Louisiana=20 Date: Wednesday, 12:30 p.m.=20 Focus: Review of S.E.C. oversight and the accounting questions involving Ar= thur Andersen.=20 Expected witnesses:=20 James S. Chanos=20 President and founder, Kynikos Associates=20 Charles M. Elson=20 Director, Center for Corporate Governance, University of Delaware=20 Brian Rance=20 Partner, Freshfields Bruckhaus Deringer=20 Roman L. Weil=20 Professor, University of Chicago Graduate School of Business=20 Bala G. Dharan=20 Professor, Graduate School of Management, Rice University=20 Baruch Lev=20 Professor, Stern School=20 of Business, New York University=20 Bevis Longstreth=20 Debevoise & Plimpton=20 Committee: Senate Committee on Health, Education, Labor and Pensions=20 Chairman: Edward M. Kennedy=20 Democrat, Massachusetts=20 Date: Thursday, 10 a.m.=20 Focus: Enron's handling of its 401(k) plan and its employee stock-selling r= ules. Pension law, how to better protect investors.=20 Expected witnesses:=20 Barbara Boxer=20 Senator, Democrat, Calif.=20 Jon Corzine=20 Senator, Democrat, N.J.=20 Jan Fleetham=20 Former Enron employee, Bloomington, Minn.=20 Steve Lacey=20 Former Enron employee, Salem, Ore.=20 Betty Moss=20 Former Polaroid employee, Smyrna, Ga.=20 James Prentice=20 Chairman, administrative committee, Enron Corp. savings plan=20 Alicia Munnell=20 Professor, Peter F. Drucker Chair in Management Sciences, Boston College Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Southern California Living; Features Desk As If The Enron Story, With a Plot as Thick as Pea Soup It all started with= a deal on carnivals, then snowballed into a carnival of deals. ROY RIVENBURG TIMES STAFF WRITER 02/04/2002 Los Angeles Times Home Edition E-1 Copyright 2002 / The Times Mirror Company Although the White House refuses to cough up details on Vice President Dick= Cheney's meetings with Enron, we surreptitiously snagged the information t= hrough other channels.=20 In exchange for a year's supply of Milk-Bones, we had President Bush's dogs= slip their master a drugged pretzel, then fetch us the documents when he p= assed out watching football. From there, we pieced together this exclusive inside look at the Enron scan= dal:=20 * July 31, 2001: In the first sign of trouble, Enron boss Ken Lay is warned= about the company's questionable financial dealings, including the expendi= ture of $2 billion on those carnival games where you try to knock over a st= ack of milk bottles with a baseball. "We thought we could win a really cool= stuffed animal," a memo explains. "It seemed like a great investment at th= e time."=20 * Aug. 1, 2001: Lay promises to personally investigate and fix the problem,= but winds up losing another $750 million on the basketball toss and the pi= ngpong-ball-into-the-goldfish-bowl game. "They looked so easy," he tells a = colleague later. "Before I knew it, I'd gone through the employee pension f= und."=20 * Sept. 18, 2001: Enron's board tries to have accountant Arthur Andersen st= raighten out the mess, but a mix-up causes Enron to accidentally hire Pea S= oup Andersen, a well-known restaurant in Buellton.=20 * Oct. 2, 2001: Saddled with enough pea soup to fill Lake Erie (plus $250 m= illion in Saltine crackers), Enron executives hastily arrange a series of m= eetings with Dick Cheney. For security reasons, the meetings take place at = several of the vice president's "undisclosed locations": inside a phone boo= th in Poughkeepsie, N.Y.; aboard the International Space Station; and posin= g as a department store Santa in Duluth, Minn. Cheney promises to consider = revising U.S. energy policy to list pea soup as a "promising new alternativ= e power source."=20 * Nov. 18, 2001: Enron replaces Pea Soup Andersen with actress Loni Anderso= n, who quickly funnels company money into a byzantine network of dummy corp= orations, offshore entities and a fictitious Cincinnati radio station.=20 * Nov. 22, 2001: As the company's financial picture grows dimmer, Lay urges= employees to buy Enron stock. He also advises them to diversify their port= folios with investments in Kmart and Global Crossing.=20 * Dec. 2, 2001: Enron files the biggest bankruptcy petition in U.S. history= . The Dow index soars, led by companies that make paper shredders.=20 * Jan. 29, 2002: Appearing on NBC's "Today" show, Lay's wife, Linda, tearfu= lly says her family is near bankruptcy. "We might have to compete on 'Who W= ants to Be a Millionaire' just to get some pocket change," she wails. When = asked if she understands the public's anger toward her husband, she says ye= s, but cautions critics: "Before you judge him, first walk a mile in his cu= stom-fitted, gold-leaf-embroidered Louis Vuitton moccasins."=20 * Jan. 30, 2002: Reacting to the plight of the Lay family, the Red Cross de= livers emergency rations of caviar, Dom Perignon and steak tartare.=20 * Jan. 31, 2002: "Today" show correspondent Lisa Myers, stung by criticism = that she wasn't tough enough in her interview with Linda Lay, conducts a fo= llow-up segment in which she ambushes Lay with a barrage of hard-hitting qu= estions, including: "What's your favorite color?" "Who does your hair?" and= "Which herbs and spices do you think the Colonel uses in his secret recipe= ?"=20 * Feb. 2, 2002: In the first glimmer of hope for a comeback, Enron official= s announce that they have received word from Ed McMahon that the company ma= y already have won the Publishers Clearinghouse Sweepstakes. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Sarah Palmer Internal Communications Manager Enron Public Relations (713) 853-9843