[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
THE FINANCIAL COLLAPSE OF ENRON--Part 1
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 5, 2002
__________
Serial No. 107-86
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
U.S. GOVERNMENT PRINTING OFFICE
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma BART GORDON, Tennessee
RICHARD BURR, North Carolina PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia BART STUPAK, Michigan
BARBARA CUBIN, Wyoming ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois TOM SAWYER, Ohio
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York DIANA DeGETTE, Colorado
ROY BLUNT, Missouri THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia BILL LUTHER, Minnesota
ED BRYANT, Tennessee LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Oversight and Investigations
JAMES C. GREENWOOD, Pennsylvania, Chairman
MICHAEL BILIRAKIS, Florida PETER DEUTSCH, Florida
CLIFF STEARNS, Florida BART STUPAK, Michigan
PAUL E. GILLMOR, Ohio TED STRICKLAND, Ohio
STEVE LARGENT, Oklahoma DIANA DeGETTE, Colorado
RICHARD BURR, North Carolina CHRISTOPHER JOHN, Louisiana
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
Vice Chairman JOHN D. DINGELL, Michigan,
CHARLES F. BASS, New Hampshire (Ex Officio)
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Powers, William C., Jr., Chairman, Special Investigative
Committee, Board of Directors, Enron Corporation........... 15
(iii)
THE FINANCIAL COLLAPSE OF ENRON--Part 1
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TUESDAY, FEBRUARY 5, 2002
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Oversight and Investigations,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2322, Rayburn House Office Building, James C. Greenwood
(chairman) presiding.
Membes present: Representatives Greenwood, Stearns, Burr,
Whitfield, Bass, Tauzin (ex officio), Deutsch, Stupak, DeGette,
John, Rush, and Dingell (ex officio).
Also present: Representatives Barton and Green.
Staff present: Tom DiLenge, majority counsel; Mark
Paoletta, majority counsel; Michael Geffroy, majority counsel;
Jennifer Safavian, majority counsel; Casey Hemard, majority
counsel; Brendan Williams, legislative clerk; William Carty,
legislative clerk; Peter Kielty, legislative clerk; Chris
Knauer, minority counsel; and John Cordone, minority counsel.
Mr. Greenwood. This hearing of the Energy and Commerce
Committee, the Subcommittee on Oversight and Investigations
will come to order. The Chair recognizes himself for purposes
of an opening statement.
Today, we engage in the first part of a multi-day hearing
into the financial collapse of the Enron Corporation. The
principal focus of this stage of our investigation will be a
series of transactions between Enron and several partnerships
created and controlled by senior Enron officers and employees.
By now, some key events that precipitated Enron's collapse have
become familiar, though not yet fully understood by the public.
These events serve as the point of entry into our hearing
today.
In October, Enron, which until recently was considered to
be one of America's largest and most profitable corporations,
announced an unexpected after-tax charge against earnings of
more than $500 million and a reduction in shareholder equity of
more than $1 billion. The losses stem from Enron's transactions
with an entity about which we will hear a great deal over the
next few days: LJM2. It was an entity whose named was formed
using the initials of the spouse and children of its creator,
Andy Fastow, who at that time was Enron's chief financial
officer.
The news of this financial bombshell and the curious role
played by Enron's CFO in it prompted immediate concern in the
market and in the media and resulted in the SEC opening an
inquiry into the transactions involving LJM2. Enron's CFO was
put on leave and subsequently fired, in Ken Lay's words, quote,
``To restore investor confidence.''
Already reeling from this management debacle and with its
stock trading at sharply lower levels, Enron suffered an even
greater embarrassment when in November of last year the
corporation was obligated to restate its financial statements
for the years 1997 through 1999. Now, instead of showing a
strong balance sheet, the company was reporting multibillion
dollar losses in earnings and in equity. The accounting
practices, behind which these losses had until then been
hidden, had also been used to mask huge losses in two other
partnerships inspired by Mr. Fastow. These were the LJM Cayman
partnership, also known as LJM1, and yet another related party
entity, known as Chewco Investments.
The second admission by Enron's corporate team effectively
forfeited any remaining market for investor confidence in the
company. Enron's stock took its final plummet, forcing yet more
debts to come due. In a matter of weeks, a firm which had until
only recently been hailed as a shining example of American
enterprise was now forced to declare bankruptcy. An astounding
$70 billion in market value evaporated seemingly overnight,
bringing financial ruin to thousands of employees and
investors.
In recent weeks, committee investigators have sorted
through Enron's wreckage, and in particular the Chewco, LJM1,
LJM2 and associated deals, to learn what happened. We have
discovered that while thousands of hardworking employees
suffered terribly, there was a small group at the top who
carted away millions from these very deals that ultimately led
to Enron's collapse. And we have discovered a disturbing
pattern of activity that directly contributed to the demise of
this company: a web of apparent misrepresentations, half
truths, deceit and self-dealing in which a significant number
of company leaders became entangled.
You will have an opportunity to hear explanations from some
of those in positions of responsibility at the continuation of
this hearing on Thursday, but today we will focus on the
findings of Enron's Special Investigative Committee. The
Special Investigative Committee was set up by Enron's Board of
Directors to conduct an independent examination of the very
transactions the committee is now investigating. Its 200-page
report released over the weekend draws a very disturbing
picture of Enron's activities which, sadly, appears to confirm
our own findings to date.
The report describes a series of highly questionable
transactions that enriched a small number of corporate bigwigs
at the expense of the company and of its shareholders. More
disturbing still, it describes a complicated set of
transactions by these individuals which were portrayed at the
time as actions designed to guard against Enron's future
losses. But its own true purpose was to hide large and
increasingly unmanageable amounts of debt and liability.
The report uses the word ``obtuse'' to describe investor
disclosures that failed miserably to accurately convey the true
financial state of the company or the risks attendant to the
off-the-book dealings with various partnerships. It exposes a
troubling lack of governance and management oversight and the
failure on the part of outside advisors, the accountants and
legal experts responsible for evaluating these transactions to
make clear to investors what independent experts now
comprehend. Enron's accounting tactics went well beyond the
aggressive, apparently violating or circumventing several of
the accounting professions most basic rules.
Clearly, there is much troubling information in this report
for us to consider as we move forward. Our sole witness today
is William C. Powers, Dean of the University of Texas Law
School. Dean Powers was appointed to Enron's Board of Directors
just this past October to Chair this special committee. He has
graciously accepted our invitation to testify as to the
report's troubling findings. I am certain that Dean Powers'
informed testimony will contribute to the factual backdrop for
subsequent hearings with current and former Enron and Andersen
officials. I thank him for his hard work in preparing this
report in such an expedited time schedule and for his testimony
today.
The Chair recognizes the ranking member of this
subcommittee, the gentleman from Florida, Mr. Deutsch.
Mr. Deutsch. Thank you, Mr. Chairman, and I want to thank
you for holding this very important hearing, and I also want to
thank our staffs, both the majority and minority, who are
working very closely together. We actually know more than we
knew last week when this subcommittee held the first hearing on
the demise of Enron, and I am sure we will know more by the end
of the week as well.
This is some of the things that we are disclosing--or
uncovering at this point in time. This is from Enron's
documents that our staff uncovered, and it is a simplified
diagram of 1 of the 4,000 partnerships. I mean a simplified
diagram is almost comical to try to understand that one
partnership.
You know, I have had the opportunity to read through a
large part of the report, as well as the summary, and obviously
it is extensive. It is extensive in terms of understanding of
what happened, but I am going to quote from something I read
this morning that Arthur Levitt (ph) just wrote: ``Yet for all
their excesses, analysts don't have a fiduciary duty to
shareholders; board of directors do.'' Enron's board failed the
smell test. Millions lost money and careers were destroyed
while the company and its directors began to question mutual
beneficial arrangements.
The SEC and stock exchanges must now revisit the issue of
board and audit committee responsibility. Consulting contracts
for directors should be barred as well as seductions in the
form of corporate jet usage and support for directors' favorite
charities. Most important, at least half of every board must be
independent by the most rigorous definition of the term.
I think what we know at this point is that these
partnerships were used as a deception for people to understand
what the status of the company was. And what this report, Mr.
Powers' report, does is lays out some of these interlocking
relationships between management and people who got direct
benefits by these partnerships. And one of the questions--and
it is not just understanding Enron, but I think the issue for
the committee and for the Congress and really beyond that, for
the country as well, is, No. 1, are there other Enrons out
there? Because if Enron and the people involved in Enron
figured out the use of these partnerships as a way to
effectively get millions, in fact, collectively, billions of
dollars in personal theft, then the motivation is probably out
there for other companies to be doing the same thing.
But the system should not allow it. I mean I think what is
clear from your report is that both management and the board of
directors had to have been knowing what was going on. And, in
fact, if officers claim they don't know the truth, they are not
telling the truth. No one has ever accused these people of
being stupid.
Now, Business Week recently wrote, ``This is corruption on
a massive scale. Tremendous harm has befallen innocent
employees who have seen their retirement savings disappear as a
few at the top cashed out. Terrible things have happened to the
way business is conducted under the scope of deregulation.
Serious damage has been done to ethical codes of conduct held
by once trusted business professionals.''
It is difficult not to contrast professionalism of modestly
paid fire fighters and police doing their duty on September 11
with the secretive and squirrely behavior of 6- and 7- figure
accountants, lawyers, CEOs, bankers, financial analysts who
failed at their duty with Enron. And, again, I emphasize their
duty because the system is set up for this never to have
happened in the first place.
Mr. Chairman, after reading this report, I do not believe
that Enron can emerge from bankruptcy until its entire top
management has been removed. They all played a role in creating
the environment that allowed this debacle, and they cannot be
expected to now change their stripes.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the chairman of the full committee, the gentleman
from Louisiana, Mr. Tauzin.
Chairman Tauzin. Thank you, Mr. Chairman, and my
particularly thanks, first, to Mr. Dingell again for the
extraordinary corroborative work that our investigative teams
are doing in a bipartisan fashion on this issue, and to Dean
Powers for taking on this awesome responsibility and for
executing within the limits of his capabilities. We have noted
very carefully you had not the power to subpoena or to compel
testimony of witnesses or documents. You didn't have access to
all the partnership papers, and you mentioned that your report
is only as good as the information provided to you. But you
have done an excellent job and your report tracks what our
investigators on both sides of the aisle are finding in this
case, and I want to thank you for that.
But what you have basically found, and we will get into it
a lot more tomorrow and Thursday, is an aberration, I hope, in
American corporate history, an extraordinary aberration. But it
is an old story. It is a story of insider theft, just using new
wrapping and new forms and procedures to carry it out. It is a
story, as you point out over and over again in your report, of
the failure to follow accounting principles, to circumvent the
accounting principles, to organize these structures improperly.
Time after time you talk about the fact that had they followed
the rules this wouldn't have happened, that Chewco was
improperly constructed and JEDI failed for the same reason, and
all of these structures that were created to put debt off the
balance sheets ended up being shams at the end, because they
didn't follow the integrity of the accounting principles that
everyone else in the country, every other corporation in
American tends to follow.
I want to use the rest of my time in opening, Mr. Chairman,
however, to speak directly to Mr. Ken Lay. Mr. Lay, wherever
you are, I am sorry your attorneys were offended by anything
Mr. Dorgan and I had to say on Meet the Press this weekend. I
have got a little excuse for being tired. I got rear-ended by a
drunk driver that night and then attended the Washington Mardi
Gras until 2 a.m. in the morning before I read your report, Mr.
Powers. But Mr. Dorgan was not tired, and neither he nor I
misstated the facts.
Your report, Mr. Powers, points to the high probability of
security fraud at Enron. And your report lays the blame for
what happened on a host of parties, and you didn't leave Mr.
Lay out. You reminded him of his responsibility as the head of
the organization, to be a better supervisor, to actually know
what was going on if he didn't.
And I am sorry if that offended your lawyers, Mr. Lay, but
let me, please, ask you to consider for your own good, if when
Sherron Watkins reported to you in August of 2001 in a lengthy
meeting that Enron was about to implode in an accounting
scandal, if Sherron Watkins was kind enough to tell you in that
memo in 2001 in a private meeting with you, Mr. Lay, that your
company had been robbing the bank and for the last 2 years was
trying to pay it back, that is how bad things were, that is how
big the cancer was eating away at the Enron Corporation, its
employees and everyone who counted and trusted in it and
invested in it, if that wasn't enough for your lawyers to be
concerned about your testimony before a congressional
committee, get yourself some new lawyers, sir.
If when the SEC announced it was beginning an informal
inquiry and then a formal inquiry into the operations of the
security trading at Enron and the sham proceedings that went on
there, if your lawyers weren't sufficiently concerned about
your potential liability and involvement in this matter, get
yourself some new lawyers, sir.
If when the Justice Department announced that it was
conducting a formal Justice inquiry into illegalities,
potential illegalities at Enron and when the FBI arrived in
Houston to look at your books and at Arthur Andersen books only
to find out that Shredco had been hired by Enron to destroy
documents and Enron's officials--Arthur Andersen officials,
rather, had put out a retention and destruction policy that
went right through the SEC subpoena, if that wasn't enough to
warn you and your attorneys that there was real problems for
all of you, get yourself some new attorneys.
And if when Dean Powers, hired by Enron, by you and the
Board of Directors at Enron to find out what went wrong and who
wrote this report indicating that accounting principles were
ignored, circumvented and violated right and left in all these
dealings and the American public was told that you had a
billion dollars of income you didn't have and debt was hidden
from investors who should have known that the value at Enron
wasn't there, if all of that wasn't enough for you to
understand you had legal problems, and testifying in front of
Congress was a risky business, then get yourself some new
lawyers.
And I have got a suggestion for you. Maybe your family is
right, maybe you are broke, and maybe you can't afford to hire
some lawyers, maybe you can sell a house in Aspen and buy
yourself some new lawyers. But if that doesn't work, maybe you
ought to get a hold of Mr. Fastow and Mr. Skilling and they can
put together another little partnership for you and get some
investors in and get yourself some lawyers, sir, because
somebody is going to need some lawyers in this case, somebody
needs them desperately. And it took Mr. Dorgan and I on Meet
the Press to say the obvious, that the Powers report indicates
the high probability of security fraud in this case, this awful
aberration in corporate America, that accounting principles
were flaunted, ignored and circumvented right and left to the
detriment of every investor and every employee of this company,
if it took that, if took Mr. Dorgan and I saying that on
television for you to understand that you were at some risk
coming to testify in Congress without the benefit of legal
counsel or perhaps even the Fifth Amendment, then get yourself
some new lawyers, sir.
Mr. Powers, thank you for your contribution. As you point
out, this is just the beginning. Your report would change
dramatically if you had all the facts. We have got the
advantage of subpoena power, we have got the advantage of
compelling the production of documents, those that haven't been
destroyed, and we are going to find out who owns those
partnerships and those special entities, and we are going to
find out what happened, because we have some powers working
with the FBI and the SEC that perhaps you didn't have. But you
did a heck of a job for us already, and we thank you for it.
Thank you.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes for an opening statement the ranking member of the
full committee, Mr. Dingell.
Mr. Dingell. Mr. Chairman, thank you for the courtesy. I
commend you again for this hearing, and it is my hope that this
hearing will lead to a complete inquiry into the matters that
are now before us, including legislative and administrative
changes that need to be made in the process.
I wish to begin by thanking you, Mr. Powers, and your
counsel for presenting a very useful report on the related
party transactions and other matters. You have done a fine job.
I am troubled that some of those who were involved refuse to
cooperate. I believe that raises questions into which the
committee must go. I am also concerned about the limitations
raised by the participation of Mr. Herbert Winokur, a long-time
director. I will note the report is a devastating document. It
outlines an extraordinary web of corporate chicanery and
deceit. It provides a very useful starting point for this
committee and a significant road map for this committee's
efforts to unravel this sorry mess.
I will observe that it reminds me of what used to be said
by one of baseball's greats, ``This is deja vu all over
again.'' It brings me back to the days of Mr. Sam Insel and
also, perhaps, to Mr. Ponzi and other people of this kind. For
those who don't remember Mr. Insel, and I have only vague
remembrance of him, he was a fellow who built enormous
pyramids, which he built and milked for the benefit of himself
and his friends. It led to significant changes in the law,
including the creation of the SEC, the passage of the different
securities laws, the Public Utility Holding Company Act and a
wide array of other statutory changes to protect investors,
consumers, employees and pensioners. And it looks like
something of that kind has to be done again to address the
efforts of those who have brought Enron, its investors, its
employees, and its pensioners to such a sorry state today.
Your report, in often numbing detail, describes some of the
financial sleights of hand that Enron executives used to hide
the result of either stunningly inept business decisions or
outrageously corrupt behavior by themselves and their friends.
It also describes the disgusting self-enrichment by senior
executives who sold out their fiduciary duties to the
shareholders. And, it describes an extraordinary laxity, if not
worse, of those responsible for keeping such behavior in check.
One must ask, how were senior Enron executives able to use
the company as their personal financial plaything? First,
because of a massive failure of corporate governance. Was the
highly paid board of directors simply asleep, or was it
corrupt, or was it both? Second, because of an extraordinary
failure by accounting and legal professionals to provide
objective, independent, and forceful advice. Why were they
acting like trained seals to the management? Again, were they
incompetent, were they corrupt? We hope that this proceeding
and others will lead us to some intelligent answers. Third,
because of a massive failure by so-called experts in the credit
rating agencies, the investment banks and the brokerage houses.
Why didn't they ask tough questions?
What we learn today will set the stage for a much more
extensive inquiry into these matters. For example, we will also
need to learn much more about whether weakness in government
regulation of markets for financial instruments and vital
commodities may have allowed this rascality to flourish. And we
will need to reexamine the special protections that the
Congress provided accountants in the Private Securities
Litigation Reform Act of 1995, which came forth from this
committee with the enthusiastic support of some of the people
who are still on the committee. I am sure that they will enjoy
explaining their support of that proposal and also their
support of proposals which have constrained the SEC in its
efforts to lead to a more vigorous, truthful, effective, and
pro-public accounting industry.
In any event, Mr. Powers, we are grateful to you for a very
useful report, and for your appearance here today. Mr.
Chairman, I thank you.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentleman from North Carolina, Mr. Burr, for an
opening statement.
Mr. Burr. Thank the chairman. Dean Powers, welcome.
Mr. Powers. Thank you.
Mr. Burr. This almost makes law school seem fun, doesn't
it? Clearly, you have gone through some tough changes since
October; so have the employees of Enron and the confidence of
the investor in America. Let me commend you for the work of
your committee.
I think there were many that thought that reports that came
out on Enron's downfall might have a lot to do about the
definition of shredding or the definition of revenues or debt.
And in fact what you found in your investigation, the only 3
months it took, was more than, in fact, the auditors found in 4
years. It took them 4 years to make some of the changes that
you identified in 3 months. It took the Enron management 4
years to fess up to real revenue and debt numbers that you
found accurately in a three-money period. These revisions
contributed greatly to the lack of confidence that the
investors had in Enron as a company.
I am convinced that there was one thing that you did
uncover: That at Enron there was a two-headed coin. On both
sides of that coin was Mr. Fastow. No matter how you flipped it
he always won. He won because of his presence at Enron, he won
because of his presence at the partnerships that were created,
and Mr. Fastow apparently looked after one person, that person
who was on both sides of that coin. He profited when everybody
else lost. Mr. Kopper profited when everybody else lost. A
select few profited when everybody lost.
I am confident that this committee and this Congress will
not quit until we get all the facts. I am confident that the
law enforcement that is appropriate will not quit until they
find the guilty parties. I am confident that it is not going to
be fun to be a board member at Enron during that period. But I
want to thank you for your willingness to go through the
process that you have just gone through and to encourage you to
be diligent as we complete this process, however long it takes.
Thank you, Dean Powers.
Mr. Powers. Thank you.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentleman, Mr. Stupak, for an opening statement.
Mr. Stupak. Thank you, Mr. Chairman. Mr. Chairman, 2 weeks
ago, we heard from Arthur Andersen and their role about
shredding documents associated with the collapse of Enron.
Today, we hear from Mr. Powers about many of the questionable
and oftentimes repulsive financial dealings that occurred
within Enron leading up to their bankruptcy. Mr. Chairman, we
have learned through the media that even Enron has shredded
documents. I hope that this committee will have a hearing on
Enron's shredding of documents, what documents were shredded?
We have only focused on Enron's role here in the United
States but what about Enron's worldwide holdings, corporations,
limited partnerships overseas? Who got bilked overseas, who
cooked the books overseas? I hope this committee will explore
these rooms in Enron's house of cards through the committee's
jurisdiction under the Foreign Corrupt Practices Act. We
certainly must review these aspects on Enron's dealings, not
only here in the U.S. but also overseas.
I appreciate the fact that Mr. Powers has the gumption to
come here before our committee to tell us what he and his
colleagues found in their review of Enron's accounting schemes.
It is no wonder they had so many schemes when we have learned
they have had close to 1,000 accountants working at Enron.
While I believe that Mr. Powers had the best intentions in
providing the Enron Board with a comprehensive picture of
Enron's business practices over the last 5 years, I am troubled
by the fact that the report does not include full disclosure,
input from Mr. Fastow and Mr. Kopper, who had key roles in
creating and managing the special-purpose entities of LJM and
Chewco, which contributed to massive misstatements of Enron's
financial security. The report focuses on only a few of these
special-purpose entities, and I have been told that Enron has
had literally thousands of them.
The Powers report, even without full cooperation of many of
the key Enron employees and without the full cooperation of
Andersen officials or Enron's outside auditors, provides us
with an extremely disturbing tale of greedy executives, lax
oversight by senior management and a board of directors, or
maybe we should call them ``board of enablers'' who appear to
have not taken their roles very seriously.
The board of directors gave serious flexibility, serious,
dangerous flexibility to Mr. Fastow, allowing him to establish
the LJM and by not following up on the few strings that they
attached to Mr. Fastow's deal. The report shows how they robbed
Peter to pay Paul and in some cases, relating to asset
transfers, then transferred back to Peter again. As I stated in
the hearing we had with Andersen officials 2 weeks ago, I
believe the Securities Litigation Reform Act of 1995, or the
Securities Rip-off Act, as many of us refer to it, had
significant impact on the way corporations approach their
business deals.
Prior to the so-called reform, companies would likely not
have risked many of the transactions in these aggressive
accounting techniques, because they knew there was a very good
chance they would be held accountable. Now, however,
corporations are willing to take additional risk in their
business dealings, because the 1995 reform bill insulated them
from legal actions by putting up so many roadblocks for
shareholders and employees to take legal action against them.
Mr. Chairman, I fear the Powers report, even with its very
serious admonitions, only scratches the surface of what is a
thick layer of deceit atop perhaps the worst case of corporate
officer malfeasance in recent memory. In their wake lies
thousands of Enron employees and retirees with shattered
financial lives, while many of the corporate executives, many
of whom who are still working at Enron, have lined their
pockets. It will be difficult, if not impossible, for Enron to
emerge as a credible company from bankruptcy without a
comprehensive purging of Enron executives and board members who
were at the helm during this debacle. They must be held
accountable. I hope the investors in Enron will get themselves
a new board of directors and a new senior management team.
I look forward to having the opportunity to question Andrew
Fastow, Michael Kopper, Richard Causey and others later this
week with regard to the issues in the Powers report. I hope
they will come before our committee on Thursday and be open,
honest and as aggressive in answering our questions as they
were in pursuing their own financial futures. I thank you, Mr.
Chairman, and I thank our witness for being here today.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentleman from Kentucky, Mr. Whitfield, for an
opening statement.
Mr. Whitfield. Mr. Chairman, thank you very much. Mr.
Powers, we appreciate you being here today. I don't think any
of us would have very many compliments for the Board of Enron,
but I think that they obviously were forced into a situation
where they asked you to Chair a group that would do an
investigation and come forth with findings.
We understand, obviously, that you did not have any
subpoena powers and that you were not able to go in as much
detail as you would like to have done, but I think the thing
that comes out of this investigation, as in your own words, it
is appalling to think that Mr. Fastow walked away with $30
million. In one instance, he put down $25,000 and less than 2
months later walked away, or his family's foundation did, with
$4.5 million. Mr. Kopper put down $5,800 or so and walked away
with $1 million in 2 months. In order to try to meet the code
of ethics of Enron, knowing full well that they did not comply
with those codes, removed Mr. Kopper and put in his domestic
partner in some of these transactions. So I think it is very
clear that these people were not stunningly inept but they knew
precisely what they were doing, and it is a pure example of
corporate greed. And it is really sad because it has basically
wiped out the pension funds of thousands of employees who were
depending upon this upon their retirement.
So I am delighted that you are here today, and I look
forward to your testimony. I yield back the balance of my time.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentlelady from Colorado for an opening
statement.
Ms. DeGette. Thank you very much, Mr. Chairman, and I would
ask unanimous consent to put my entire opening statement in the
record.
Mr. Greenwood. Without objection.
Ms. DeGette. Thank you. When I read the report Mr. Powers
and his colleagues put together this weekend, I was stunned
both by the duplicitous nature of these deals, these limited
partnerships, which were designed to mask losses and to
accentuate profits. I was also stunned by the breathtaking
oblivion, apparently, evidenced by the Enron Board of Directors
when they looked at these. The report indicates that Mr. Fastow
and also Jeffrey Skilling, who was Enron's former CEO and at
times COO, misled the board of directors by not appropriately
disclosing their ownership in special-purpose entities. In
particular, today, I would like to discuss the gap between the
level of ignorance displayed by the board and the basic
fiduciary duties of any corporation.
What jumped out at me when I was reading the Powers report
was how little the board of directors seemed to know about the
special entities transactions. We know now from the report, and
we are all very grateful to Mr. Powers and a little amazed he
was able to do what he was without subpoena power or any of the
other powers, but nonetheless the board waived Enron conflict
of interest rules for Mr. Fastow to allow him partial ownership
and managerial duties in Chewco and LJM while still on the
payroll of Enron as a senior executive. A provision of the
waiver approval included a set of conditions that Mr. Fastow
would be required to meet, but Mr. Skilling was supposed to
oversee Mr. Fastow's activities--a little like the fox guarding
the henhouse, I may add. The report contends, though, that the
board had no knowledge of the inappropriate nature of certain
related party transactions. It is hard for us to believe that
today, in retrospect, but perhaps, Mr. Chairman, when the
committee receives the information we will be able to get with
our subpoena power, we will be able to add to this knowledge.
All of us know that boards of directors of corporations are
required to serve in a fiduciary capacity. They are entrusted
with the responsibility of acting in the best interest of
shareholders and their employees, and when you look at the
minutes of the Enron board meetings, dating back to 1997, it
appears that the board's knowledge of questionable transactions
involving Chewco, LJM, Raptor and other special entities that
are detailed in the Powers report as having substantial
problems.
Now, I was looking at the structures of a lot of these
transactions, and it is pretty amazing to me that the board
would actually approve these. Mr. Deutsch showed the simplified
Whitewing transaction. Here is the Chewco transaction. And if
you look at those, those transactions are both structured
completely differently in ways which are designed, in my
opinion and I think in probably Mr. Powers' opinion, to mask
losses and to maximize profits. This is a diagram, it looks
elegant in its simplicity compared to the other two, of the
Rhythms transaction, which I am interested in because it
involves--it is the first transaction, and it involves a
Colorado-based company.
What strikes me is all of these transactions were approved
by the Enron Board, and I was trying to think about the
investors who had Enron stock in their 401(k) programs and
their other programs. And to think about an unsophisticated
investor trying to review Enron's financial status and trying
to understand these very complex leveraging transactions. It is
clear to me that when you have a corporation as large as Enron
and when you have transactions as complex as these, it is
incumbent upon the board of directors to exercise their
fiduciary duty and to review these transactions in depth, not
to simply rubber stamp these things, and especially when
corporate employees and officers have financial interest.
This is what we need to learn as a committee, both today
and as we go forward, what did the board know and was it simple
negligence on a breathtaking level or was there much more
there? And so I look forward to hearing Mr. Powers' testimony
today. I promise, Mr. Powers, I will not ask you to analyze
each of these transactions in depth for us at this hearing, we
only have 5 minutes to question, but perhaps at a later date.
Thank you, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentlelady and
recognizes the gentleman from Florida, Mr. Stearns.
Mr. Stearns. Thank you, Mr. Chairman, and welcome, Dean
Powers. We appreciate your coming here to speak. I read your
report yesterday, and I looked for the word ``criminal'' in the
report, and obviously I would not find that, and I understand
that. In fact, this committee here is not here to look for
criminality but to investigate and let the Justice Department,
and we are well aware of what our function is, is to highlight
the problem.
But I did look at some of your testimony yesterday, and it
was reported in the Washington Post where you said, ``Dealing
with the Raptor partnerships,'' this is what you said, ``Enron
hid the problem and, `gave the false impression that Raptor had
enough money to pay Enron what they owed,' '' Now, that is
euphemistically for not only did they hide the fact but they
didn't tell the truth. Obviously, you are dean of the law
school there at the University of Texas, and you understand
when they don't tell the truth that is lying. So the
euphemistic statements you are using there are something I
think the committee and the American public should realize that
even within your report, while you are not using the word
``criminal,'' you are indicating indirectly that these people
were not telling the truth.
When you have a report like this, which is based upon
volunteers, it is not going to get to the substance of this
case, and that is why this committee and the Banking Committee
and the Senate committees are making the right decision to have
these folks come forward and to speak the truth under oath.
This whole Enron thing is much like a financial Hindinburgh
(ph). It was a marvel in the eyes of Wall Street, yet
ultimately went up in flames, with employees and investors
getting burned. And I think it is also apparent that this staff
on this committee has done an excellent job in trying to
extricate the facts here, and I think your report, Dean Powers,
is helping also.
But reading through your report, I also had the feeling of
the would have, could have, should have type of philosophy.
When you have people who are volunteering to give information
they are going to present, which is basically people not
telling the truth, self-enrichment, failures at many level,
they are going to give a picture which is not totally accurate.
So as much as your report is helpful, it is really just very,
very first step here.
You mentioned that there is failures of many levels and
many people. I am not sure that it was a conspiracy that
involved people right down to the middle or lower management. I
think, based upon what we heard earlier in hearings on this
committee and oversight, there were some people at the very top
steering this whole basic series of misstatements and actually
in violation of Enron's own code of conduct. You point out in
the report that the Enron chief accounting officer failed to
provide complete information to the Audit Committee, Enron's
senior risk officers failed to adequately scrutinize these
transactions for economic risk, and the board of directors, the
board of directors failed to provide adequate oversight, and
yet they were making large sums of money, and they had a
fiduciary responsibility to make sure that they had proper
oversight, and, last, of course, Arthur Andersen failed to
provide objective accounting judgment. So this is a flawed,
flawed company.
I am concerned that because the Special Investigative
Committee lacked the power to compel parties, Dean Powers, that
some of this information, while very good, is not necessarily
going to be as relevant as it should, but I do commend for your
honest effort here, and I appreciate, again, you coming here
this morning. Thank you, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes for an opening statement the gentleman from
Louisiana, Mr. John.
Mr. John. Thank you, Mr. Chairman, and also thank you for
convening this hearing into the findings of the SIC, the
Special Investigative Committee.
I believe before this committee or any other person
prejudges what went wrong at Enron, who is to blame and what
Congress can do about it, I think common sense dictates that we
closely review all of the available facts. The report produced
here today by Mr. Powers is an important piece of the puzzle
that our constituents, Americans and certainly former Enron
employees are demanding that we solve. I think it is very
apparent and clear from the report that, at a minimum, a
systematic failure of checks and balances within Enron and
between the company and its outside advisors allowed certain of
its current and former employees and officers to engage in
related party transactions that put self-enrichment before the
interests of the company and its shareholders. It seems
unimaginable to me that and many Americans and anyone who is
following what has gone on that so many people involved, from
the directors, senior management, auditors and lawyers, could
have been completely unaware of what was happening and that the
blame rests with only a few bad actors.
Beginning with the formation of Chewco, Enron became a
Ponzi scheme of self-dealing partnerships which were designed,
in your own words, to mislead investors about the true
financial state of the company and ultimatly resulted in its
financial implosion. Mr. Chairman, the investigative report
clearly shows that there was not simply a worm in Enron's
apple; it was instead rotten to the core.
The question for this committee is why thousands of
employees and investors had to lose just about everything that
they owned before anyone knew of this mess. Either the
accounting system did not provide warnings of Enron's troubles
or it was too easy to manipulate the rules to hide information
from public scrutiny. Either way, I believe this report raises
many more questions than it provides answers.
Mr. Chairman, I look forward to working with you to find
out the answers of what has gone on here, and I thank Mr.
Powers for his report; it was very enlightening.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentleman from New Hampshire, Mr. Bass.
Mr. Bass. Thank you, Mr. Chairman, and thank you, Mr.
Powers for being here today, and I will be brief so you can get
on with your testimony.
To say that your report is troubling would probably be the
understatement of the century, and, as you know, market
confidence is based on expectations of firm accounting
principles and honorable corporate governance, both of which
obviously have not occurred in this particular situation. Legal
and management structure of entities like Enron, accounting
entries, accounting restatements and so on, really need to
become know to this committee. It is part of a fact-finding
nature of what we are attempting to do. But I also believe that
we need to, as quickly as possible, develop the facts, find out
what went wrong, find out who is to blame, but what is more
important about this subcommittee's and full committee's
challenge is to come up with policy recommendations for changes
to make sure that, first of all, this sort of thing isn't going
on as we speak still, and, second, that we can take action
legislatively if necessary to make sure that the public is
protected and the capital markets' confidence is regained so
that we can move forward in 2001 and 2002 with more confidence.
So I appreciate your taking the time, which will be quite a
lot of time, to be here today. I appreciate the efforts that
you have undertaken as a member of the Board of Directors of
Enron to produce this report, which is long and thorough. We
will get to the bottom of this, and hopefully we will move
forward with something that will be productive in the very near
future. Thank you, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentleman, Mr. Rush.
Mr. Rush. Thank you, Dean Powers, for your attendance here
and for your report, and I want to thank you, Mr. Chairman, for
holding this hearing on the findings of the so-called Enron
Powers Report, or in Superbowl terminology, the Enron play-by-
play book.
Mr. Chairman, I, like most observers of the Enron collapse,
was appalled to hear that thousands of Enron employees whose
savings disappeared while top Enron executives cashed in their
stock for millions with the release of the Powers report that
shock has turned to utter outrage and disbelief. This report is
a crucial piece to the puzzle of Enron in that it reveals a
culture where every self-imposed standard enacted by Enron was
broken. All of this was simply done in an attempt to satisfy a
gluttonous appetite for corporate wealth.
In particular, I commend the Powers Committee for its
unflinching criticism of Kopper and Fastow who created a
profiteering network of friends and associates designed to
bleed Enron at the expense of its investors. And while I
believe that this criticism is well-deserved, I am also
interested in the degree to which the board of directors have
escaped close scrutiny and criticism.
In raising this issue, I do not question the integrity of
Mr. Powers, who I know is a well-respected legal scholar. What
I do question is the betrayal of Ken Lay who holds a Ph.D in
economics as a naive and absent-minded professor who simply
goofed by not spotting all of the evil-doings going on all
around him. In the case of LJM transaction, I question the
casting of the board of directors as a group of well-meaning
and trustworthy corporate Governors who, despite their
negligence, were unwitting victims of Andy Fastow and Michael
Robert Kopper.
That said, I await the various detailed responses that this
report will certainly bring about from Arthur Andersen and
others. I also await testimony from those parties who refuse to
participate in this study, and with those responses I am
certain that a more full and accurate picture of who knew what
and when will emerge.
Mr. Chairman, at the end of the day, I suspect that Mr. Lay
and the rest of the Enron board will not be viewed as a hapless
bunch of know-nothings, but rather as a group of well-educated,
well-seasoned and shrewd business people who intentionally
blinded themselves to a situation which reeks so badly that it
couldn't help but be detected by even the most novice of
business student.
Whether Enron was a ship of pirates, a ship of fools or a
combination of the two, it is my hope that today's hearing
takes us a step closer to enacting bold, new legislation.
Indeed, that legislation should ensure that no ship which is
destined to sink with the life savings of thousands of innocent
investors ever, ever, ever sets sail again in this nation.
Thank you, and I yield back the balance of my time.
Mr. Greenwood. The Chair thanks the gentleman, and the
Chair thanks Mr. Powers for your forbearance this morning. Mr.
Powers, you are aware that the committee is holding an
investigative hearing and when doing so has had the practice of
taking testimony under oath. Do you have any objection to
testifying under oath?
Mr. Powers. None whatsoever.
Mr. Greenwood. Appreciate that. The Chair then advises you
that under the rules of the House and the rules of the
committee you are entitled to be advised by counsel. Do you
desire to be advised by counsel during your testimony today?
Mr. Powers. No, I don't.
Mr. Greenwood. Okay. In that case, if you would please rise
and raise your right hand, I will swear you in.
[Witness sworn.]
Mr. Greenwood. Appreciate that. You are now under oath, and
you may give a 5-minute summary of your written statement. We
thank you.
STATEMENT OF WILLIAM C. POWERS, JR., CHAIRMAN OF THE SPECIAL
INVESTIGATIVE COMMITTEE OF THE BOARD OF DIRECTORS OF ENRON
CORPORATION
Mr. Powers. Thank you, Mr. Chairman. Mr. Chairman,
distinguished members of the subcommittee, my name is William
Powers, and I am the dean of the University of Texas Law
School. As you know, for the last 3 months, I have served as
the chairman of the Special Investigative Committee of the
Board of Directors of Enron, and I very much appreciate the
opportunity to come here today and testify.
During October of last year, questions were raised about
Enron's transactions with partnerships that were controlled by
its chief financial officer, Andrew Fastow. In the middle of
October, Enron announced that it was taking an after-tax charge
of more than $500 million against earnings because of
transactions with one of those partnerships. Enron also
announced a reduction in shareholder equity of more than a
billion dollars.
At the end of October, the Enron board established a
special committee to investigate these matters. It then asked
me if I would join the board for the purpose of chairing that
committee and conducting that investigation. With the help of
counsel and professional accounting advisors, we have spent the
last 3 months doing that, conducting the investigation we were
charged to conduct.
Our committee's report was filed on Saturday. It covers a
lot of ground and I hope it will be a helpful starting point
for the necessary further investigations by congressional
committees, by the Securities and Exchange Commission and by
the Department of Justice. As several members of the
subcommittee have noted in their statements, we see this report
as just a start, merely a beginning. A copy of the executive
summary of our report is attached to my statement here.
Many questions currently part of the public discussion,
such as questions dealing with the employees' retirement
savings--and let me add, matters dealing with the employees'
retirement savings and their loss of their savings nest egg is
one of the most tragic aspects of this story--that is an
important issue that requires much investigation. Also public
questions about sales and trading in securities of Enron by
Enron insiders, those also are important public questions.
There were, however, questions beyond the scope of the charge
we were given, and they are questions beyond what we could do
in a 3-month period. Again, these are matters of vital
importance, but they were not matters we addressed in our
report, and they need further study by relevant congressional
committees, the Department of Justice and other agencies.
What we were charged with was investigating transactions
between Enron and partnerships controlled by its chief
financial officer, or people who worked in his department. That
is what our report discusses. And, frankly, Mr. Chairman, as I
said before, what we found was appalling.
First, we found that Fastow, and other Enron employees
involved in these partnerships, enriched themselves, in the
aggregate, by tens of millions of dollars that they should have
never received. Fastow got at least $30 million, Kopper at
least $10 million, two others $1 million each, and still two
more in amounts that we believe were in the range of hundreds
of thousands of dollars. So there was self-enrichment.
Second, we found transactions that were improperly
structured. But if they had been structured correctly, Enron
could have kept assets, under accounting rules, especially
debt, off of its balance sheet. But Enron did not follow those
accounting rules.
Finally, we found something more troubling than individual
instances of misconduct or a failure to follow accounting
rules. We found a systematic and pervasive attempt by Enron's
management to misrepresent the Company's financial condition.
Enron management used these partnerships to enter into
transactions that it could not, or would not, have done with
unrelated commercial entities. Many of the most significant
transactions apparently were not designed to achieve bona fide
economic objectives.
As our report demonstrates, these transactions were
extremely complex. And I won't try to describe them in detail
here, but I do think it would be useful if I could give just
one example. It involves efforts by Enron to hedge against
losses on investments that Enron had.
Enron is not just a pipeline and energy trading company. It
also had large investments in other businesses, some of which
had appreciated substantially in value. These were volatile
investments, and Enron was concerned because it had recognized
the gains when these investments appreciated, and it didn't
want to recognize the losses if the investments declined.
Therefore, Enron purported to enter into certain hedging
transactions in order to avoid recognizing losses from the
investments. The problem was that the hedges weren't real. The
idea of a hedge is normally to contract with a creditworthy
outside party that is prepared, for a price, to take on the
economic risk of an investment. If the value of the investment
goes down, that other party will bear the loss, but that is not
what happened here. If you cut through the complexity of these
partnerships and transactions, here Enron was essentially
hedging with itself.
The outside parties with which Enron hedged were the so-
called Raptors. The purported outside investor in them was a
Fastow partnership. In reality, these were entities in which
only Enron had a real economic stake, and whose main assets
were Enron's own stock. The notes of Enron's corporate
secretary, preparing for the minutes from a meeting of the
Financial Committee of the board, a meeting that was regarding
these Raptors, captures the reality of these transactions.
Those notes say, quote, ``Does not transfer economic risk but
transfers P+L volatility.''
If the value of Enron's investments fell at the same time
that the value of Enron stock fell, the Raptors would be unable
to meet their obligations, and the hedges would fail. This is
precisely what happened in late 2000 and early 2001 when two of
these Raptor vehicles lacked the ability to pay Enron on the
hedges. Even if the hedges had not failed, though, in the sense
I just described, the Raptors still would have paying Enron
with the stock that Enron had provided in the first place; that
is, Enron would simply be paying itself back.
By March 2001, it appeared that Enron would be required to
take a charge against earnings of more than $500 million to
reflect the inability of the Raptors to pay. But then rather
than take that loss, Enron compounded the problem by making
even more of its own stock available to the Raptors--$800
million worth. It gave the false impression that the Raptors
had enough money to pay Enron on the money it owed, on the
money that the Raptors owed. This transaction was apparently
hidden from the board, and it certainly was hidden from the
public.
Let me say that while there are questions about who
understood what concerning these many very complex
transactions, there is no question that virtually everyone
knew, everyone from the board of directors on down, everyone
understood that the company was seeking to offset its
investment losses with its own stock. That is not the way it is
supposed to work. Real earnings are supposed to be compared to
real losses. As a result of these transactions, Enron
improperly inflated its reported earnings for a 15-month
period, from the third quarter of 2000 through the third
quarter of 2001. It overstated its earnings or inflated its
reported earnings by more than $1 billion. This means that more
than 70 percent of Enron's reported earnings for this period
were not real.
Now, how could that have happened? The tragic consequences
of the related-party transactions and accounting errors were
the result of failures at many levels, by many people: a flawed
idea, self-enrichment by employees, inadequately designed
controls, poor implementation, inattentive oversight, simple,
and not-so-simple, accounting mistakes, and overreaching
culture that appears to have encouraged pushing the limits.
Whenever this many things go wrong, it is not just the act
of one or two people. There was misconduct, to be sure, by
Fastow and other senior employees of Enron, there were failures
in the performance of Enron's outside advisors, and there was a
fundamental default in leadership and management. Leadership
and management begin at the top, with the CEO, Ken Lay. In this
company, leadership and management depended as well on the
chief operating officer, Jeff Skilling. And the board of
directors failed in its duty to provide leadership and
oversight of the company.
In the end, this is a tragedy that could and should have
been avoided. I hope that our report is a first step. It will
take from the committee and other agencies, but I do hope that
our report and the work of this committee will help reduce the
danger that this tragedy will happen again to some other
company. Thank you, Mr. Chairman.
[The prepared statement of William C. Powers, Jr. follows:]
Prepared Statement of William C. Powers, Jr., Chairman of the Special
Investigative Committee of the Board of Directors of Enron Corporation
Mr. Chairman and distinguished Members of the Committee. My name is
William Powers. I am the Dean of the University of Texas Law School.
For the past three months, I have served as Chairman of the Special
Investigative Committee of the Board of Directors of Enron Corporation.
I appreciate the opportunity to come and testify before you today.
As you know, during October of last year, questions were being
raised about Enron's transactions with partnerships that were
controlled by its Chief Financial Officer, Andrew Fastow. In the middle
of October, Enron announced that it was taking an after-tax charge of
more than $500 million against its earnings, because of transactions
with one of those partnerships. Enron also announced a reduction in
shareholder equity of more than a billion dollars. At the end of
October, the Enron Board established a Special Committee to investigate
these matters, and then asked me if I would join the Board for the
purpose of chairing that Committee, and conducting that investigation.
With the help of counsel and professional accounting advisors, we have
spent the last three months conducting that investigation.
Our Committee's Report was filed on Saturday. It covers a lot of
ground and will, I hope, be a helpful starting point for the necessary
further investigations by Congressional Committees, by the Securities
and Exchange Commission, and by the Department of Justice. A copy of
the Executive Summary of our Report is attached to my Statement here.
Many questions currently part of public discussion--such as
questions relating to the employees' retirement savings and sales of
Enron securities by insiders--are beyond the scope of the charge we
were given. These are matters of vital importance, but they are not
matters we addressed in our Report.
We were charged with investigating transactions between Enron and
partnerships controlled by its Chief Financial Officer, or people who
worked in his department. That is what our Report discusses. What we
found was appalling.
First, we found that Fastow--and other Enron employees involved in
these partnerships--enriched themselves, in the aggregate, by tens of
millions of dollars they should never have received. Fastow got at
least $30 million, Michael Kopper at least $10 million, two others $1
million each, and still two more amounts we believe were at least in
the hundreds of thousands of dollars.
Second, we found that some transactions were improperly structured.
If they had been structured correctly, Enron could have kept assets and
liabilities (especially debt) off of its balance sheet. But Enron did
not follow the accounting rules.
Finally, we found something more troubling than those individual
instances of misconduct and failure to follow accounting rules. We
found a systematic and pervasive attempt by Enron's Management to
misrepresent the Company's financial condition. Enron Management used
these partnerships to enter into transactions that it could not, or
would not, do with unrelated commercial entities. Many of the most
significant transactions apparently were not designed to achieve bona
fide economic objectives.
As our Report demonstrates, these transactions were extremely
complex. I won't try to describe them in detail here. But I do think it
would be useful to give just one example. It involves efforts by Enron
to ``hedge'' against losses on investments it had made.
Enron was not just a pipeline and energy trading company. It also
had large investments in other businesses, some of which had
appreciated substantially in value. These were volatile investments,
and Enron was concerned because it had recognized the gains when these
investments appreciated, and it didn't want to recognize the losses if
the investments declined in value.
Therefore, Enron purported to enter into certain ``hedging''
transactions in order to avoid recognizing losses from its investments.
The problem was that the hedges weren't real. The idea of a hedge is
normally to contract with a credit-worthy outside party that is
prepared--for a price--to take on the economic risk of an investment.
If the value of the investment goes down, that outside party will bear
the loss. That is not what happened here; here, Enron was essentially
hedging with itself.
The outside parties with which Enron ``hedged'' were the so-called
``Raptors.'' The purported outside investor in them was a Fastow
partnership. In reality, these were entities in which only Enron had a
real economic stake, and whose main assets were Enron's own stock. The
notes of Enron's corporate secretary, from a meeting of the Finance
Committee regarding the Raptors, capture the reality: ``Does not
transfer economic risk but transfers P+L volatility.'''
If the value of Enron's investments fell at the same time that the
value of Enron stock fell, the Raptors would be unable to meet their
obligations, and the ``hedges'' would fail. This is precisely what
happened in late 2000 and early 2001 when two of these Raptor vehicles
lacked the ability to pay Enron on the ``hedges.'' Even if the hedges
had not failed in the sense I just described, the Raptors would have
paid Enron with the stock that Enron had provided in the first place;
Enron would simply have paid itself back.
By March 2001, it appeared that Enron would be required to take a
charge against earnings of more than $500 million to reflect the
inability of the Raptors to pay. Rather than take that loss, Enron
compounded the problem by making even more of its own stock available
to the Raptors--$800 million worth. It gave the false impression that
the Raptors had enough money to pay Enron what they owed. This
transaction was apparently hidden from the Board, and was certainly
hidden from the public.
Let me say that while there are questions about who understood what
concerning many of these very complex transactions, there's no question
that virtually everyone, from the Board of Directors on down,
understood that the company was seeking to offset its investment losses
with its own stock. That is not the way it is supposed to work. Real
earnings are supposed to be compared to real losses.
As a result of these transactions, Enron improperly inflated its
reported earnings for a 15-month period--from the third quarter of 2000
through the third quarter of 2001--by more than $1 billion. This means
that more than 70 percent of Enron's reported earnings for this period
were not real.
How could this have happened? The tragic consequences of the
related-party transactions and accounting errors were the result of
failures at many levels and by many people: a flawed idea, self-
enrichment by employees, inadequately-designed controls, poor
implementation, inattentive oversight, simple (and not-so-simple)
accounting mistakes, and overreaching in a culture that appears to have
encouraged pushing the limits.
Whenever this many things go wrong, it is not just the act of one
or two people. There was misconduct by Fastow and other senior
employees of Enron. There were failures in the performance of Enron's
outside advisors. And there was a fundamental default of leadership and
management. Leadership and management begin at the top, with the CEO,
Ken Lay. In this company, leadership and management depended as well on
the Chief Operating Officer, Jeff Skilling. The Board of Directors
failed in its duty to provide leadership and oversight.
In the end, this is a tragedy that could and should have been
avoided. I hope that our Report, and the work of this Committee, will
help reduce the danger that it will happen to some other company.
Mr. Greenwood. Thank you, Dean Powers. We appreciate your
testimony, and we know you testified just yesterday, and expect
you will be testifying for days to come.
The Chair recognizes himself for 5 minutes for purposes of
inquiry. Chewbaca, JEDI Capital, Kinobi Holdings, Obi Wan
Holdings, Enron executives seem to have had a fascination with
Star Wars. My question, Dean Powers, is this: Is Ken Lay the
Luke Skywalker of this of this tale or is he the Darth Vader?
Mr. Powers. Well, he is not the Luke Skywalker. He
certainly is responsible for allowing this to happen. I think
there were red flags that certainly should have indicated to
him that this was happening.
Mr. Greenwood. Well, let me go right to your testimony. One
of the things you just said was that, ``Virtually everyone from
the board of directors on down understood that the company was
seeking to offset its investment with its own stock. This is
not the way it is supposed to be. Real earnings are supposed to
be compared to real losses.'' So I take it from that you mean
that Ken Lay knew that.
And if you look at the law, the law is pretty clear about
what is deceptive. It is deceptive to employ any device, scheme
or artifice to defraud, to make any untrue statement or
material fact or to admit to state a material fact necessary in
order to make the statements made in the light of the
circumstances under which they were made, et cetera. So connect
the dots, it seems to me, that here was a company that in its
financial statements was misleading and that everyone knew,
including Ken Lay, that it was misleading its investors in its
financial statements. So how do we get beyond the assumption,
the conclusion, that Mr. Lay is guilty, as guilty as anyone
else of intentionally defrauding his investors?
Mr. Powers. Well, it is absolutely true that Mr. Lay fully
understood that they were using their own stock to offset these
losses in their other investments. And that is the problem.
Mr. Greenwood. Not only that they were doing that, but they
were not sharing that reality with their investors.
Mr. Powers. Absolutely, that is correct. Well, can I just--
--
Mr. Greenwood. You interviewed Mr. Lay. About how much time
did you spend interviewing Mr. Lay?
Mr. Powers. I think it was a couple of hours. Four hours.
Mr. Greenwood. Four hours? Okay. And so on this direct line
of questioning about what Mr. Lay understood and when he
understood and, as Mr. Tauzin said, certainly we know in August
he was advised of this, what was Mr. Lay's story about--how did
he defend himself from this obvious line of questioning, which
is did he in fact--was he complicit in intentionally defrauding
his investors?
Now, it seems to me when you look at motive, we sort of
understand some of Mr. Fastow's motives, because there was
self-dealing involved. Mr. Fastow seems to be the Betty Crocker
of cookbooks. But Mr. Lay also had a motive, it would seem, for
the investors not to understand that the stock was overvalued,
and that is because he was a holder of millions of dollars of
stock.
Mr. Powers. Well, when we interviewed Mr. Lay, he certainly
understood that as elaborate as these schemes were, ultimately
they were using Enron stock to hedge against these investment
losses. He understood that. I can tell you what his story was:
He didn't understand or appreciate that there was anything
wrong with that. I don't know whether that is credible; I am
saying that was his story, that he didn't--the story was the
accountants had signed off on it; he assumed it was an okay
accounting device.
Mr. Greenwood. Was it credible to you? Do you think it is
credible?
Mr. Powers. It is very hard--we did present him with
documents and in a sense cross examine, but we did not have the
devices available to us, and that is a reason why our report is
a first start. It certainly is something that people would want
to go into a great deal further. It raises questions, I agree.
Mr. Greenwood. You repeatedly note in your report that
Andersen, Enron's outside auditor and internal consultant on
these transactions, refused to fully cooperate with your
inquiry by making certain documents and persons available for
your review. Can you be more specific about what Andersen
provided you with and what they would not, both in terms of
persons and documents?
Mr. Powers. Okay. When we started the investigation, we
started asking Andersen if we could see documents and
interview--see their work papers and interview their
accountant. We wanted to do that after we developed the basic
understanding, but as we went forward with the investigation,
they would say, ``Well, we will do that,'' but we never got to
interview their accountant. We did see some of their work
papers, we did not see the work papers for 2001, which are
crucial; we did not see those. We did see some of the papers.
We asked for copies. A few days later, Enron fired Andersen,
and we were told that at that point Andersen would no longer
cooperate. By that point, we had not been able to talk and get
their explanations of these work papers. We have not been able
to talk with their accountant.
Mr. Greenwood. Thank you, Mr. Powers. The Chair recognizes
the gentleman from Florida, Mr. Deutsch, for purposes of
inquiry.
Mr. Deutsch. Thank you, Mr. Chairman. One of the mandates
of your committee was to recommend discipline at Enron. What
discipline is the committee going to recommend?
Mr. Powers. We did not recommend discipline in the end, and
the reason was we have been going non-stop getting this done.
My testimony had been requested, we wanted to get this report
out, and thought that, frankly, being exhausted at the end of
it, we didn't want make judgments about discipline. And I think
the facts speak for themselves, and others are going to have to
make those judgments. But we did not, in the end, recommend any
discipline, but we did not mean to imply by that that there
should not be discipline imposed here.
Mr. Deutsch. Let me follow-up on some of the comments that
the chairman was mentioning. If the company keeps billions of
dollars of potential liability off of its balance sheets so
that its shareholders and investors don't know about it, as
Enron did, isn't that fraud?
Mr. Powers. Well, there are legitimate accounting devices
that--I am not an expert in the area of securities fraud--but
that companies use to keep transactions and debt, using
structured financing, off their balance sheets. And if they
don't use the proper structures and don't reveal the proper
structures, then there are serious questions about fraud.
Mr. Deutsch. So, again, I mean what you are really saying
is that as good the--you are really not an expert in securities
fraud.
Mr. Powers. That is correct, or enforcement of what
penalties should be imposed here.
Mr. Deutsch. Let me go directly to the Raptor transactions.
You stated, and I am quoting, ``Virtually everyone from the
board of directors on down understood the company was seeking
to offset its investment loss with its own stock. That is not
the way it is supposed to work,'' closed quote to your
statement. If everyone understood that except the shareholders,
and it is wrong, isn't it fraud on the shareholder?
Mr. Powers. I don't feel I am in a position to, under the
securities law, answer that question. The shareholders--there
was not transparent disclosure of what was going on in these
transactions with the shareholders, absolutely.
Mr. Deutsch. Let me just stop. By any definition of common
usage would you say it is fraud? Putting away your attorney's
hat and a securities lawyer, which you are not, I mean I think
that is in a sense what our job is, because that is clearly our
intention in the statute, and fraud is fraud.
Mr. Powers. Right.
Mr. Deutsch. I mean if people don't understand it--your
quote of not understanding it except for the shareholders, the
whole purpose of the system is the shareholders are supposed to
know what is going on.
Mr. Powers. Absolutely. My only hesitation is fraud
normally requires a certain state of mind, and I am not in a
position to ascertain the state of mind of every one of these
individuals. If there is a state of mind----
Mr. Deutsch. And it doesn't necessarily require state of
mind, because if you have an instance inferring to that, then
you can infer the state of mind. You said that when an
additional $800 million of stock was added to the Raptor
accounts by Enron so it wouldn't have to show a loss, it was,
quote, ``apparently hidden from the board,'' close quote. What
do you mean? Did you interview all the board members to
determine what they knew and what they didn't know?
Mr. Powers. Yes. We interviewed--formally interviewed nine
board members. That was a restructuring deal that--much else
was known by the board, but that was a restructuring deal in
early 2001 that there was agreement, as the evidence showed,
that was not brought before the board.
Mr. Deutsch. And can the company issue $800 million in
stock without the approval of the board?
Mr. Powers. They couldn't issue the stock. This was stock
that was already owned by the company because of contracts it
had with outside parties. And that avoided the necessity to
actually issue new stock. They transferred stock the company
owned to these structures, and I am sure that is why already-
owned stock was used.
Mr. Deutsch. So, again, I mean clearly an intention to keep
that information from the board itself?
Mr. Powers. Absolutely. I have no doubt that that was
intentional by the people that restructured--Fastow and others.
It was intentionally keeping that from the board, and therefore
keeping it from the public, absolutely.
Mr. Deutsch. Let me ask one question, and, again, I didn't
see it in the report, but it just is a disturbing issue, and,
again, you mentioned the limitations specifically on the 401(k)
issue. But as someone who has spent 3 months--the last 3 months
looking at Enron, one of the real disturbing issues, not just
the lock-out provision on Enron stock but the switching of the
managers of the 401(k)s to basically have a 60-day additional
lock-out, which, again, from an outside-looking-in perspective,
I mean there is different levels of evil that have occurred in
this process. I mean that is about at the highest level that I
can think of. I mean have you looked at that decisionmaking
process at all or you were just not able to look at that?
Mr. Powers. We did not look at that. We did a great deal.
We reviewed, I think, over 400,000 pages of documents,
interviewed 60 people, and we did not look into the 401(k)s and
the lockout.
Mr. Greenwood. The time of the gentleman has expired. The
Chair recognizes the chairman, Mr. Tauzin.
Chairman Tauzin. Thank you, Mr. Chairman. Dean Powers, when
I was attending law school at LSU, it was apparent to me that
Latin was going to be important to me, and in preparation for
that, I took a non-credit Latin course. And the reason I did
was because in the law we use Latin, because it is so precise.
Terms like res judicata and res ipsa loquitur have special
meanings in the law and jurisprudence. But I want to help get
away from that, and I hope you will help me, as dean of law
school, to put this in lay terms so we can understand it in a
layman's sense.
Basically, what you have presented to us is a report that
details how these partnerships and the deals, some two dozen
deals structured by either Chewco or LJM1 and 2--LJM1 and 2, by
the way, I think were the initials of the wife and children of
Mr. Andrew Fastow.
Mr. Powers. That is correct.
Chairman Tauzin. Structured by him. These deals structured
by this partnership failed the basic test of structural
compliance and operational compliance with current accounting
principles; is that right?
Mr. Powers. That is right, and their whole concept was
flawed.
Chairman Tauzin. Now, just for a second, let us think about
what would be a legitimate function of a special-purpose
entity, an SPE, or a partnership like LJM. Legitimately, Enron
had some problems, it had some assets like Rhythms, which they
put $10 million in and all of a sudden it was worth $500
million because of inflation and the value of the stock market
and the run-up of the stocks. Like many corporations holding a
risky stock like that, they probably had a need to put that
risk off, to share that risk with someone else if the stock
fell dramatically so it didn't hurt their own stock. That is a
legitimate function that corporations use special-purpose
entities and they use partnerships in some cases to do. Isn't
that premised upon the notion, however, that there is a real
independent sharing of the risk, that the company really gives
the risk over to someone else to either take, in whole or in
part, in order to hedge potential loss to its own stockholders
if a company like Rhythms suddenly lost its value, which it
did, which it eventually did? Isn't that, in layman's terms,
what occurs in these partnerships, in these SPEs?
Mr. Powers. I can't add anything that would clarify it more
than your statement; that is absolutely correct.
Chairman Tauzin. Now, what you found and we have been
finding is that, No. 1, in the case of Chewco, it was
structured wrong. They didn't have enough outside investment to
meet the standards of independence. And you also found some
clear questions. We have found many, many clear questions of
how independent these operations were. On Thursday, we will
detail, for example, how these sweetheart deals were being
struck between the partnerships and the corporation, how
managers of the partnerships were actually threatening people
at Enron with firing if they aggressively negotiated for Enron.
They threatened others with loss of their bonuses. We had a
weird situation where the bonus came from the partnership, and
the salary came from Enron. Incredible conflicts of interest
where employees were invited in to share in the profits of some
of these outside ventures and profits guaranteed at 2,500
percent in one case and where the risk to Enron and its
shareholders was never really properly transferred. In fact,
Enron continued to guarantee the losses to the partnerships.
The only person protected was the manager of the partnerships.
It was guaranteed they could take their money out, plus profit.
So what we have at Enron, as I see from your report, and as
we are beginning to see, is a failure of the independence of
these organizations, or these deals, or these SPEs and the
failure to properly shift the risk away from the corporation
when a hedge fund was created or a put was attempted, if you
will, on stock that was kind of risky, that they were concerned
about, in a scheme that guaranteed money to the managers of the
partnership but nevertheless left the stockholders of Enron
completely at risk, all the while creating the impression that
Enron was making money and was free of debt when the debt was
still there.
Now, if I were a corporation in America using one of these
vehicles legitimately, then my company would be protected from
that loss when it occurred; I would have shared that risk with
the partnership, or the special-purpose entity, and my
shareholders would have been the better off for it. But in the
case of these entities that were created and these deals that
were cut, where the risk did not transfer, can you give me any
purpose for doing that, other than to hide debt from investors,
other than possibly to enrich the managers of the business, the
account that was doing it, or to create a false impression of
income to the corporation? Can you give me any other reason to
do it?
Mr. Powers. I cannot, and I would just add that the
statement that you just made, Congressman Tauzin, is exactly
correct.
Chairman Tauzin. So, Mr. Chairman, if I can, and I will
conclude, what you are concluding is what I have concluded,
that if your facts are correct, and if our investigation
continues to bolster the evidence of the situation as I have
just described it, there was no legitimate purpose in the
construction of some of these deals, except the defrauding of
investors who were putting their money into Enron, and in some
cases, the defrauding of investors who were putting their money
into these partnerships, because we have also found, by the
way, that some banks were told they would get special bond
deals if they would put the money up to fund the partnership.
And I want to end it maybe with this and see if you agree
with me. What we really have here, as I said earlier, is a case
of inside theft. It is a deal where whoever managed the deal
was using the credit of the corporation, which remained liable
for the deal, to borrow money from other investors to the
partnership so that they could take it and go home with it,
while the corporation remained fully at risk, not only for the
new loans but for all the risk of the stock, such as Rhythms,
which might decline in value, and eventually collapse the
corporation.
Mr. Powers. These partnerships were definitely using
Enron's assets and credit to then create partnerships that
enriched themselves.
Chairman Tauzin. And they were benefited two ways. One way,
they got money out of it. Enron was borrowing money, in effect,
that they took home. Enron had debt, but it was called income,
miraculously, under these plans. And, second, because they kept
the investing public and the employees of Enron who had their
401(k) plans tied to the Enron stock, because they kept them in
the dark as to what was going on, Enron stock kept inflating in
value, because we all thought it had a billion dollars of
income it didn't have, and it had a lot less debt than it had.
So they benefited twice. Their stock values are going up.
They can then sell, even though the employees couldn't sell it.
And they were sucking money out of the partnerships that Enron
was putting up the credit for. Now, how can anybody look at all
that and conclude that the FBI doesn't need to be over there
with the search warrant and a potential set of handcuffs is
beyond me. If there isn't consumer fraud here, I don't know
where we are going to find it. Thank you very much.
Mr. Greenwood. The Chair thanks the chairman and recognizes
the ranking member of the full committee, Mr. Dingell, for
purposes of inquiry.
Mr. Dingell. Mr. Chairman, Mr. Powers, I begin by
complimenting you on a fine report. I have limited time so I
have got to ask you questions in a way that you can respond
pretty much with a yes or no, and I say that with apologies to
you because of the respect I have for you.
Now, I would like to go to Vincent & Elkins. Isn't it true
that they helped to structure many of the deals that were the
subject of your investigation?
Mr. Powers. They did work on the deals. As I point out in
the report, I disqualify myself from making judgments about
those, but they did work on these deals.
Mr. Dingell. Now, Vincent & Elkins concluded that they
facts in its preliminary investigation revealed it did not
warrant, and I now quote, ``further widespread investigation by
an independent counsel or auditors.'' Is that right?
Mr. Powers. I believe they did say that in their
conclusion.
Mr. Dingell. Now, if you were in Mr. Lay's position with
Mr. Watkins' letter in your hand, would you have asked the law
firm that represented your company in many of these
transactions to review these same transactions?
Mr. Powers. If I were in Mr. Lay's position, I would have
asked for a much more extensive investigation.
Mr. Dingell. And by somebody who was in fact independent as
opposed to somebody who had been involved in the structuring of
the deal; is that not so?
Mr. Powers. If I had been Mr. Lay, I certainly would have
considered that.
Mr. Dingell. That would have been the proper way. Now, Mr.
Jordan Mintz, then general counsel of Enron Global Finance, was
so concerned about the LJM deals that he sought outside counsel
to investigate the structure and the propriety of these
transactions. Were you aware of that fact?
Mr. Powers. Yes.
Mr. Dingell. Did you know that Mr. Mintz went out of his
way to hire a firm other than V&E because of the conflicts
inherent in the firm's relationship with Enron?
Mr. Powers. Yes. Mr. Mintz did use another firm.
Mr. Dingell. Do you believe that V&E should have had the
professional judgment to recuse itself from the investigation
because of its role in structuring many of these controversial
partnerships?
Mr. Powers. Well, I disqualified myself from evaluating
those, and I don't think I have enough information to make a
judgment on that.
Mr. Dingell. So it would not seem improper that they should
have done the same thing.
Mr. Powers. I would have to focus on those facts more than
I have.
Mr. Dingell. All right. Now, isn't it true that most of Ms.
Watkins' concerns related to accounting issues?
Mr. Powers. Yes.
Mr. Dingell. Isn't it also true that V&E agreed with Enron
management that it wouldn't examine accounting issues as a part
of its investigation into the Watkins memo?
Mr. Powers. I would have to go back and look at the letter,
because, again, I haven't focused on that.
Mr. Dingell. Factually, it would appear to be correct,
however.
Mr. Powers. I don't have any reason to disagree.
Mr. Dingell. Does this instill in you great confidence in
the V&E investigation?
Mr. Powers. Again, I disqualified myself from making
judgments on that, and so I am not informed enough about it.
Mr. Dingell. Would I be unfair in assuming that they should
have followed your wisdom in these matters?
Mr. Powers. They weren't asked to do the kind of
investigation that I was asked to do.
Mr. Dingell. Now, how much V&E bill Enron for the
investigation?
Mr. Powers. I don't know.
Mr. Dingell. Mr. Baxter committed suicide, as you well
know, several weeks ago--a very tragic event. Did V&E ever
interview Mr. Baxter as a part of its investigation into Ms.
Watkins' allegations?
Mr. Powers. I don't know whether they did or not.
Mr. Dingell. Did your committee interview Mr. Baxter?
Mr. Powers. Yes, we did.
Mr. Dingell. Ms. Watkins alleged--I wonder why you would
and they would not interview Mr. Baxter.
Mr. Powers. Well, we conducted a very thorough 3-month
investigation.
Mr. Dingell. Are you telling me they did not?
Mr. Powers. They didn't conduct a 3-month investigation, I
don't think.
Mr. Dingell. Now, Ms. Watkins alleged numerous accounting
failures, but Enron and Vincent & Elkins agreed not to look at
these transactions. How can we call this a complete report?
Mr. Powers. Our report or----
Mr. Dingell. No, the Vincent & Elkins report, which did not
look at accounting failures and accounting matters?
Mr. Powers. Again, I did not myself pursue what they looked
into and what they didn't. Other people on the committee did.
Mr. Dingell. Do you have any reason to believe that anyone
at Enron took Ms. Watkins' allegations seriously?
Mr. Powers. Well, they responded to some extent. The
management at Enron didn't take it seriously enough.
Mr. Dingell. It is also clear that people at Enron were
told not to worry because Vincent & Elkins was reviewing them;
isn't that right?
Mr. Powers. I don't remember, but I have no reason to
disagree with that.
Mr. Dingell. Can you think of another reason why they might
not have taken them seriously?
Mr. Powers. I am sorry, why the management didn't take
the----
Mr. Dingell. Seriously Ms. Watkins' allegations.
Mr. Powers. Well, they were very troubling allegations.
Mr. Dingell. They were.
Mr. Powers. Yes.
Mr. Dingell. But were they taken seriously? Did you find
any evidence in your inquiry that these allegations were taken
seriously by Enron?
Mr. Powers. I think they were not taken seriously enough,
certainly.
Mr. Dingell. Did you find any evidence that Vincent &
Elkins went into these allegations?
Mr. Powers. Again, I did not, myself, personally. The
report deals with that. I disqualified myself from that,
because Vincent & Elkins has done a tremendous amount of pro
bono work for the law school and has been a supporter of the
law school, and I thought it would be better for the report if
I didn't participate in that.
Mr. Dingell. Well, I applaud that, but I am just curious of
did they--well, never mind. Mr. Chairman, I thank you for your
kindness. Mr. Powers, I have asked you some rather not so nice
questions, but you continue to enjoy my respect.
Mr. Powers. Well, thank you very much.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentleman from North Carolina, Mr. Burr.
Mr. Burr. Thank you, Mr. Chairman. Dean Powers, you noted
in your report that there were individuals that you did not
have the opportunity to have Q&A with. Was that--that was
requested of those individuals, they just denied to
participate; is that correct?
Mr. Powers. Yes, especially Fastow and other people in
these partnerships. We tried to interview them and they
declined.
Mr. Burr. You also referred to a limited amount of Andersen
documents. Did you make requests for documents from Andersen
that they denied you access to those documents?
Mr. Powers. We asked them for all of their work papers over
this period of time.
Mr. Burr. And did they produce all their work papers?
Mr. Powers. They did not. They did not produce work papers
over the period of 2000. We negotiated with them, it dragged
on, and we did not get them.
Mr. Greenwood. Will the gentleman yield just for 5 seconds.
To put a point on Mr. Burr's question on interviewing Mr.
Fastow, I believe, according to your report, you had a brief
interview with Mr. Fastow.
Mr. Powers. Yes, that is correct.
Mr. Greenwood. Clarify that.
Mr. Powers. At some point, Mr. Fastow's lawyer said that he
would be interviewed, and I was not personally there, but I
think it was an extremely short interview, because he simply
wouldn't cooperate.
Mr. Greenwood. How short?
Mr. Powers. Well, I think the--it took an hour, but I don't
think there were--very little information was forthcoming. Can
I correct, the work papers that we didn't get were from 2001.
Mr. Burr. And for the papers that you didn't get, did
Andersen give you an explanation as to why they couldn't
produce them or wouldn't produce them?
Mr. Powers. It dragged out, and then finally we--the
company discharged them, and they called us back and said, ``We
won't cooperate any further.''
Mr. Burr. So Andersen refused to cooperate.
Mr. Powers. From that point on. That was in January.
Mr. Burr. Dean, your committee, in 3 months, discovered a
tremendous amount. They discovered some things that it took
Andersen 4 years to correct or amend in financial statements.
Based on the information you have, was Andersen misled by Enron
management?
Mr. Powers. I am not in a position to say that they were
never misled by Enron management on any details. They certainly
had a great deal of information about the structure of these
transactions.
Mr. Burr. Were they in collusion with Enron management?
Mr. Powers. I don't think I have the information from our
investigation to know that. They certainly were working
contemporaneously on the accounting of these structures.
Mr. Burr. Were they competent to handle the Enron audit?
Mr. Powers. I think Arthur Andersen is a competent
accounting firm.
Mr. Burr. Let me ask you, Dean, going back to Mr. Dingell's
questions, relative to V&E and specifically their
investigation, and I understand where you are on it, but there
is a news report that says that individuals from Enron limited
greatly what they asked V&E to look at, that they didn't ask
them to look at accounting structures; as a matter of fact, the
told them not to. Is that your understanding of the
instructions that were given by Enron management to V&E on that
investigation?
Mr. Powers. I think that is in our report, yes.
Mr. Burr. And you also referred to others within the
committee that looked at V&E, not you.
Mr. Powers. Yes.
Mr. Burr. Those others were on your special committee?
Mr. Powers. Yes, that is correct, the other two members and
counsel.
Mr. Burr. And what they found, relative to V&E's
participation, would be found in your report?
Mr. Powers. Oh, yes, absolutely.
Mr. Burr. In its entirety.
Mr. Powers. And the committee investigated that and
interviewed people. I just recused myself from it.
Mr. Dingell. Mr. Chairman, would the gentleman yield,
because he has raised a question, and I think it is valuable?
Mr. Greenwood. Be happy to.
Mr. Dingell. Here is reading from Vincent & Elkins'
document entitled, ``Preliminary Investigation of Allegations
of an Anonymous Employee.'' It says, as follows, in the second
page: ``In preliminary discussions with you, it was decided
that our initial approach would not involve second-guessing the
accounting advice and treatment afforded by AA and that there
would be no detailed analysis of each and every transaction and
that there would be no full-scale, discovery-style inquiry.''
The letter is directed to Mr. James B. Derrick, Jr., and I
believe it would useful, Mr. Chairman, it goes in the record at
a suitable place. And I thank the gentleman for his patience.
Mr. Greenwood. Without objection.
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Mr. Burr. Reclaiming my time, Dean, it is my understanding
that under Enron's code of conduct Mr. Fastow would have to
have received the blessings of Mr. Lay, who was then CEO and
chairman of the board, to participate in the partnerships.
Certainly, their accounts might have been out of your report,
but Mr. Lay said he was not asked and did not grant his
blessings. Is that your understanding?
Mr. Powers. My understanding is that he would have to get
approval by the Office of the Chair.
Mr. Burr. And----
Mr. Powers. And that included----
Mr. Burr. [continuing] Mr. Lay was the Chair.
Mr. Powers. He was the Chair, but there were three people
in what was called the Office of the Chair.
Mr. Burr. Did you find any of those three that granted
permission to Mr. Fastow?
Mr. Powers. Even though the structure was to go to the
Office of the Chair, they actually took that to the board on
LJM1 and LJM2, and the board made the findings necessary to
permit Mr. Fastow to participate in those partnerships.
Mr. Burr. So the board of directors actually signed off on
it.
Mr. Powers. Yes.
Mr. Burr. And did they also sign off on Mr. Kopper's
involvement in partnerships?
Mr. Powers. No.
Mr. Burr. Was he not under the same code of conduct at
Enron, that he would have had to have received the chairman,
CEO or board's permission to participate in the partnerships.
Mr. Powers. Yes, but he did that surreptitiously, I
believe.
Mr. Burr. So he got nobody's approval----
Mr. Powers. Correct.
Mr. Burr. [continuing] to participate in the partnerships.
Mr. Powers. That is correct.
Mr. Burr. How much did Andersen play in the actual
structure of the partnerships?
Mr. Powers. We don't know how much they actually--whether
they designed them. They were contemporaneously to the
development; that is, before, for example, Raptor was put in
place. They were doing accounting work--it is hard for us to
know exactly what they were doing. We have their bills, but
whether it was actually designing, doing the accounting,
approval work, but they were doing it contemporaneously to the
design of these structures, not simply after they had been
year-end and being audited.
Mr. Greenwood. The time of the gentleman has expired.
Mr. Burr. I would ask unanimous consent for 1 additional
minute.
Mr. Greenwood. Without objection.
Mr. Burr. I thank the Chair. Let me clear up one thing.
Now, Mr. Kopper participated in partnerships, not with the
approval of the CEO, the chairman or the board, but it is my
understanding that Mr. Fastow and Mr. Skilling were aware of
his participation in these partnerships. Is that also your
understanding?
Mr. Powers. Skilling told us that he knew about Chewco and
Kopper's involvement in Chewco.
Mr. Burr. So he would have to have known----
Mr. Powers. And Fastow knew, yes.
Mr. Burr. So both of them would have to have know of Mr.
Kopper's involvement.
Mr. Powers. Yes.
Mr. Greenwood. And signed off on it?
Mr. Powers. Not in anything that is--he may have verbally
said, ``Go ahead and do it.'' He didn't sign off on it in a way
that the approval is supposed to be obtained.
Mr. Greenwood. In a document.
Mr. Powers. Yes.
Mr. Burr. On 10-6, Enron took a $544 million after-tax
charge. They also, at the same time, reduced shareholder equity
by $1.2 billion. Less than a month later, Enron restated its
financial statement for 1997 through 2001 because of, and I
quote, ``accounting errors'' relating to the transactions with
these different partnerships. Who made the accounting errors,
Enron, the partnership, Andersen or everybody?
Mr. Powers. Enron, and to the extent that Andersen was
doing the audits, Andersen and Enron.
Mr. Greenwood. The time of the gentleman has expired. The
Chair recognizes the gentleman from Michigan, Mr. Stupak.
Mr. Stupak. Thank you, Mr. Chairman. Thank you, Mr.
Chairman. Mr. Powers, if your committee isn't going to make any
recommendations of discipline to the Board of Directors of
Enron, then who is going to make disciplinary or who is going
to put forth disciplinary charges against these people?
Mr. Powers. Well, I think whether the government brings
charges, the appropriate government officials are going to have
to make, I don't think--one, frankly, we ran out of time, but I
think many of these questions as to what Enron would do to
these people will become moot. If they don't, somebody is going
to have to make that determination. We did not.
Mr. Stupak. Whether it does or does not, I guess, sitting
from where we are sitting, it sort of seems like we have seen
all the egregious actions. Someone has a responsibility here to
hold people accountable, at least from an employment setting,
but yet we are looking the other way and let someone else deal
with it, and that seems to be the attitude with Enron----
Mr. Powers. Yes.
Mr. Stupak. [continuing] we will just look the other way
and let these things go.
Mr. Powers. Well, I don't think--I doubt if Enron is going
to be able to look the other way on these. Enron came out with
a press release, I believe, on Saturday, it might have been
Sunday, that appointed a committee to restructure--to look into
restructuring the board, and I would anticipate that process
will go forward with the cooperation of the Creditors
Committee.
Mr. Stupak. Was the--the charge you received in your
committee to do this investigation, was that one of your
charges, to make recommendations as to any action that should
be taken?
Mr. Powers. Yes, it was. I believe the understanding would
be that it would be an ongoing company when we finished our
investigation, and that turned out not to be true.
Mr. Stupak. Well, will your investigation continue now and
look at any of this possible disciplinary action, at least from
an employment setting?
Mr. Powers. We haven't made that determination. I will take
the opportunity to say being the dean of the University of
Texas Law School is a demanding, full-time job, and my fervent
hope is I can return to that task.
Mr. Stupak. But even--and I am sure you will return and do
an incredible job there, but will you remain on the board then
at Enron?
Mr. Powers. I anticipate that I will not.
Mr. Stupak. Okay. Well, I guess, you know----
Mr. Powers. I would like to--I need to fulfill my
obligations to the SEC, and I will do that. But otherwise I
anticipate that I will not.
Mr. Stupak. Okay. Well, we just don't want--you know, I
guess I said in my opening statement, there are a lot of these
people who are responsible for this whole debacle who are still
sitting there--still drawing salaries, still sitting on boards,
still sitting in key senior management positions. And I would
think if we are ever going to clean this thing up and come out
of bankruptcy as a credible company, the board and, as I said
in my opening, maybe senior management should be replaced. I
just thought it was odd that your committee had an opportunity
to at least make some recommendations like that, and once again
it was sort of left at the wayside.
Mr. Powers. But by not doing that, we did not in any way
mean to indicate that what you are suggesting is not the
appropriate outcome.
Mr. Stupak. So other than the SEC, who else would take
disciplinary action or action against these individuals?
Mr. Powers. The Department of Justice I think will be
looking into these.
Mr. Stupak. Okay. You indicated to Mr. Dingell's question
that in fact you did talk to Cliff Baxter.
Mr. Powers. I didn't personally, but the committee did.
Mr. Stupak. Your committee did. And he was the vice
president in Mr. Lay's office. You said there were three people
in there?
Mr. Powers. He was, for a time, a vice chairman and part of
the Office of the Chair.
Mr. Stupak. Okay. And, actually, in the Watkins memo, I
believe she said that you should talk to Mr. Baxter, especially
on the LJM and Raptor transactions.
Mr. Powers. Yes, that is correct.
Mr. Stupak. So what did Mr. Baxter say then about--did you
ask him about these two transactions or your committee ask him
about these two transactions in particular?
Mr. Powers. We interviewed him, and he was troubled by
these transactions and expressed that in his interview as well.
Mr. Stupak. How long did this interview take place? You
said the one with Mr. Fastow was an hour.
Mr. Powers. People think a couple of hours. I am not sure
the person who interviewed Mr. Baxter.
Mr. Stupak. Would these interviews be recorded or would
there be notes of these interviews available?
Mr. Powers. Yes.
Mr. Stupak. Would you make them available to the committee?
Mr. Powers. I certainly would. I would support that. Much
of this is the property of the company, and I am not in a
position to authorize releasing it. I personally, and the
committee would certainly support releasing those; we want to
cooperate in every way we can and provide information to this
committee.
Mr. Stupak. It may be something that we have to talk to the
chairman later, if need be. To cover everyone's grounds here,
we may have to do a subpoena or something like that. It just
looked like he was a critical part in the Watkins memo, and
unfortunately we will never have a chance to talk with him. So
if there is some interview there that we can review that may
give us more leads, it would probably be prudent----
Mr. Powers. From my point of view, I am happy to do what I
can to bring that about.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentleman from Kentucky, Mr. Whitfield?
Mr. Whitfield. Dean, from your discussion with those people
who did interview Mr. Baxter, was there anything particular
that stood out with the committee as to your interview with
him? Was there any----
Mr. Powers. One would not have looked through all of the
interviews and thought this is somebody who particularly would
be in danger.
Mr. Whitfield. Now, what are your areas of expertise in the
law?
Mr. Powers. I teach torts and products liability, I teach
some legal philosophy, and then I have also taught contracts
and some other subjects.
Mr. Whitfield. I see.
Mr. Powers. Insurance law.
Mr. Whitfield. In your report, you talk about the two
characteristics of SPEs: One, there must be 3 percent equity by
an independent group, and, two, that there not be any control
by Enron. And there were a number of those transactions that
obviously did not meet that criteria, which meant that the
financial statements should be consolidated. From your
information or from your knowledge, is that a violation of any
law?
Mr. Powers. I don't know. Whether it is just a violation of
accounting principles or law--if it is misrepresented on the
financials, that might pick up the securities reporting laws,
but just the mere accounting violations, I don't know the
answer to that question.
Mr. Whitfield. So you are not aware of that?.
Mr. Powers. I am not, correct.
Mr. Whitfield. Now, Vincent & Elkins is no longer legal
counsel for Enron; is that correct?
Mr. Powers. I don't know the answer to that.
Mr. Whitfield. I thought that you had indicated to me that
they had been dismissed by Enron.
Mr. Powers. No, Andersen. I do know that Andersen was
dismissed by Enron, because that was the reason they gave us
for not cooperating further.
Mr. Whitfield. What was Mr. Fastow's position with Enron?
Mr. Powers. He was the chief financial officer.
Mr. Whitfield. Do you happen to know what his salary was?
Mr. Powers. I don't know myself. It was very substantial,
but I don't have the figure in my head right now.
Mr. Whitfield. But from these independent transactions that
he was involved in, you said that he received at least $30
million from those.
Mr. Powers. That is what the evidence indicates to us, yes.
Mr. Whitfield. And when he realized that he was not going
to be able to manage Chewco, he did bring in Mr. Kopper; is
that correct?
Mr. Powers. Yes.
Mr. Whitfield. And Mr. Kopper did report directly to Mr.
Fastow; is that correct, at Enron?
Mr. Powers. Yes, at Enron, that is correct.
Mr. Whitfield. And then once Mr. Kopper took his management
position in the SPE, at some point Enron entered into
negotiations to purchase back the interest of Chewco; is that
correct?
Mr. Powers. Yes, that is correct.
Mr. Whitfield. And the gentleman that was negotiating for
Enron on behalf of Enron's interest, did he also report to
Fastow at Enron?
Mr. Powers. It was Fastow himself who negotiated that, I
believe.
Mr. Whitfield. Oh, Fastow himself negotiated with Kopper?
Mr. Powers. Yes.
Mr. Whitfield. But wasn't there one incident in another
transaction where an employee of Enron was negotiating with
Kopper and Mr. Fastow intervened?
Mr. Powers. Yes.
Mr. Whitfield. And that person reported to Mr. Fastow,
correct?
Mr. Powers. I believe that is correct, yes.
Mr. Whitfield. And Mr. Fastow basically ordered him or told
him to accept the terms as Mr. Kopper offered it; is that
correct?
Mr. Powers. Right, correct.
Mr. Whitfield. Do you know the name of that employee?
[Pause.]
Mr. Powers. Thank you for your indulgence, Congressman.
There is a lot of detail here, and it is hard to keep it all
straight, and I want to be accurate. In one of them, it was
Bill Brown.
Mr. Whitfield. Bill Brown?
Mr. Powers. Yes. In the other, we would want to go back and
check the records, if we have that.
Mr. Whitfield. But Bill Brown did report to Fastow at
Enron.
Mr. Powers. Yes.
Mr. Whitfield. Did Mr. Fastow's wife work at Enron?
Mr. Powers. Yes, she did.
Mr. Whitfield. Was she in the same general area of the
company that he was in or do you know?
Mr. Powers. I am not sure. She was in the finance area,
generally.
Mr. Whitfield. Okay. So she was in the finance area with
Mr. Fastow?
Mr. Powers. Yes.
Mr. Whitfield. And--I see my time has expired here anyway,
so----
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentlelady from Colorado, Ms. DeGette.
Ms. DeGette. Thank you, Mr. Chairman. Mr. Powers, it looks
to me from Martindale Hubble that your specialty is really
products liability.
Mr. Powers. Yes.
Ms. DeGette. That is your academic specialty, right?
Mr. Powers. That is one of them.
Ms. DeGette. Okay. Certainly not securities issues.
Mr. Powers. Absolutely.
Ms. DeGette. And Wilmer, Cutler & Pickering was your legal
counsel and Deloitte and Touche was your accounting firm.
Mr. Powers. Yes, that is correct.
Ms. DeGette. Are these three gentlemen behind you with one
or the other of those firms?
Mr. Powers. They are from Wilmer, Cutler & Pickering.
Ms. DeGette. I know you have been getting advice from them
today, and I am wondering if you can identify for the record
who they are?
Mr. Powers. Yes. Bill McLucas, Chuck Davidow and Joe
Brenner.
Ms. DeGette. Thank you very much.
Mr. Powers. And I have just been trying to get factual
information from them.
Ms. DeGette. No, you are doing great. You are doing a lot
better than I could do in your position, certainly.
Mr. Powers. Thank you.
Ms. DeGette. I want to follow up on a couple of questions
that Chairman Tauzin asked you about Rhythms. In your report,
you noted that the Rhythms transaction was the first business
dealing that Enron had with the LJM partnership, and that it is
significant because, No. 1, it was the first time Enron
transferred its own stock to an SPE and used the SPE to hedge
an Enron investment. No. 2, it was the first and perhaps most
dramatic example of how the purportedly arms-length
negotiations between Enron and the LJM partnerships resulted in
economic terms skewed toward LJM and enriched Fastow and
others. And, third, because in Rhythms the investors included
Enron employees who were secretly offered financial interests
by Fastow, right?
Mr. Powers. Yes, that is correct.
Ms. DeGette. Okay. I want to walk through this a minute,
because I thought the chairman got us to a good point, but I
think we need to talk about why this was inappropriate. The
first thing that happened was in March 1998, Enron invested $10
million in Rhythms, which was a privately held company,
correct?
Mr. Powers. Yes, that is correct.
Ms. DeGette. And then on April 7, 1999, Rhythms went public
at $21 a share, and then it spiked up to $69 that day.
Mr. Powers. Yes.
Ms. DeGette. Right?
Mr. Powers. Yes.
Ms. DeGette. The second thing that happened was by May
1999, Enron's investment in Rhythms was worth about $300
million, but Enron was prohibited from selling its shares by
the end of 1999, right?
Mr. Powers. Yes, that is correct.
Ms. DeGette. And so then what happened was Skilling was
afraid that because Rhythms was so volatile he wanted to hedge
the position to capture the value already achieved and to
protect against further volatility, right?
Mr. Powers. Yes, that is correct.
Ms. DeGette. And, in fact, I can tell you Rhythms was a
very volatile company, because it just went out of business
last year.
Mr. Powers. Yes.
Ms. DeGette. So it was very volatile. All of those would be
generally accepted business practices.
Mr. Powers. Absolutely. There is nothing wrong with that if
the hedges were proper.
Ms. DeGette. Right, there is nothing wrong with that. But
here is where the problem came in and here is where the
beginning of the precedent for the later partnerships started.
Enron wanted to take advantage of the increase in value in
Enron stock, but it can't--under general accounting principles,
it can't recognize an increase in its own value of its stock as
income, right?
Mr. Powers. Yes, that is absolutely correct.
Ms. DeGette. So what it wanted to do was look at this as a
trapped value, right?
Mr. Powers. That is what they wanted to do.
Ms. DeGette. So then what happened is Fastow and others
developed a plan to hedge the Rhythms investment by taking
advantage of the value in Enron shares covered by the forward
contracts, and that is when they created the limited
partnership, SPE, right?
Mr. Powers. Yes, that is correct.
Ms. DeGette. And it was capitalized with the appreciated
Enron stock, right?
Mr. Powers. Yes.
Ms. DeGette. And that is where the hedging transaction
created the problem, and that is where the problem was, right?
Mr. Powers. Absolutely.
Ms. DeGette. And that is against general accepted
accounting principles, as far as we know, right?
Mr. Powers. Yes. You have captured it exactly.
Ms. DeGette. And SEC law too, as far as we know.
Mr. Powers. I would have to look at SEC law, but it
certainly ought to be looked into.
Ms. DeGette. Right. Okay. And this was kind of the model
then for what happened afterwards.
Mr. Powers. Yes.
Ms. DeGette. Okay. Let me talk to you for a few minutes
about Rick Causey. He is Enron's chief accounting officer, was
and still is today, right?
Mr. Powers. I have heard newspaper reports that he--I heard
reports when I presented this document to the board on Saturday
that he had resigned the week before.
Ms. DeGette. Okay. But he was up until a----
Mr. Powers. Up until last week.
Ms. DeGette. [continuing] couple of days ago.
Mr. Powers. And I don't know that he--that report may be
accurate. I am just saying I got that report.
Ms. DeGette. Okay. You mean you don't always trust the
press. Based on the accounting advice your investigation
received, you concluded in your report that Mr. Causey's
accounting judgment, ``went well beyond the aggressive.''
Mr. Powers. Yes.
Ms. DeGette. What does that mean?
Mr. Powers. I think Mr. Causey was not providing proper
accounting supervision in the company.
Ms. DeGette. That, in your view, is well beyond the
aggressive?
Mr. Powers. Yes.
Ms. DeGette. Thank you. Thank you, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentlelady and
recognizes the gentleman from Florida, Mr. Stearns.
Mr. Stearns. Thank you, Mr. Chairman. I am just curious,
the chairman opened up his questions with a reference to Star
Wars and Luke Skywalker and Darth Vader. When you and your
colleagues interviewed Kenneth Lay, did he feel like he was
Darth Vader? I mean did he feel like he was a bad guy?
Mr. Powers. He certainly did not indicate that to us.
Mr. Stearns. Did he feel like he was a noble public servant
and doing the right thing?
Mr. Powers. That certainly was the attitude he conveyed.
Mr. Stearns. So all during the 4 hours, he felt that he had
done nothing wrong.
Mr. Powers. I think he felt that he had not been watching
carefully enough, but he certainly indicated that he thought
he--I am reporting what he said--that----
Mr. Stearns. Well, that is what I am asking you to do.
Mr. Powers. [continuing] he had been betrayed and should
have looked more carefully.
Mr. Stearns. So his position has been that he was betrayed,
he was high above and didn't know all the details.
Mr. Powers. That was the position, yes.
Mr. Stearns. Okay. Mr. Winokur served as chairman of
Enron's Finance Committee.
Mr. Powers. Yes.
Mr. Stearns. Did you folks interview Mr. Winokur regarding
his role as chairman of the Finance Committee?
Mr. Powers. Yes, we did.
Mr. Stearns. And you went into his understanding of the LJM
transaction?
Mr. Powers. Yes.
Mr. Stearns. Okay. Your committee reports, quote, ``We have
identified some evidence that in three of the transactions
where Enron ultimately bought back LJM's interest, Enron had
agreed in advance to protect the LJM partnerships against
loss.''
Mr. Powers. Yes, we say that.
Mr. Stearns. Okay, you say that. That is on page 12.
Mr. Powers. And that is correct.
Mr. Stearns. Okay. How did Enron do this, and if that was
true, and Mr. Winokur is chairman of the Finance Committee, is
that something that he could accept in his role to have them,
as you say, protect LJM's partnership against loss by
guarantying?
Mr. Powers. Well, we didn't have any evidence that the
Finance Committee, or the Chair of the Finance Committee, was
aware of those sort of side agreements to buy back from LJM1.
Mr. Stearns. But wasn't his role to understand these
transactions?
Mr. Powers. Our understanding was that these were informal
side assurances that don't worry----
Mr. Stearns. Well, wait a second. On October 11, 1999, Mr.
Winokur presented the LJM2 proposal to the board of directors.
Mr. Powers. Yes.
Mr. Stearns. Okay. That is what the minutes show. And he
said that he put in controls, indicated he discussed the
controls that would be used to guaranty LJM/Enron's transaction
would be fair to Enron.
Mr. Powers. Yes.
Mr. Stearns. And so he had some knowledge of this, although
you are just saying----
Mr. Powers. Well, he had knowledge of the structure, and he
had knowledge of the kinds of transactions that would take
place between Enron and LJM, and the committee put in controls
to attempt, unsuccessfully, to mitigate the risks of conflict.
Mr. Stearns. Okay. What kind of controls did he put in
place to, as you say, mitigate, to prevent the loss?
Mr. Powers. Causey and Rick Buy and Skilling were supposed
to look at these transactions and approve them to ensure that
they were either arms length, or similar to arms length
transactions and were not sweetheart deals. Those were the
controls that were put in place.
Mr. Stearns. Well, it is one thing to put in controls, but
then you have got to implement them. So what did he do to make
sure and go back--trust and verify, as we would say? What did
he do?
Mr. Powers. Right. I think the board and the committee did
not--I am not saying they did not do anything to go back, but
they certainly--the controls were not followed.
Mr. Stearns. So you admit that he had no trust and verify
of his controls in place.
Mr. Powers. Well, I wouldn't say no trust and verify,
inadequate trust and verify.
Mr. Stearns. On page 105 of the report, it notes that Jeff
Skilling's signature is missing from the LJM2 approval sheet
for Raptor I. What knowledge did Skilling have of the Raptor I
transaction?
Mr. Powers. Skilling certainly knew about the transaction
that set up the Raptors.
Mr. Stearns. But why wouldn't he sign it?
Mr. Powers. I am sorry?
Mr. Stearns. Why wouldn't he sign it?
Mr. Powers. This is an approval sheet for hedging--
individual hedging deals between the Raptors and Enron after
the Raptors had been set up. It wasn't an approval sheet to
approve the setting up of the Raptors. The board did that.
Mr. Stearns. So in your opinion, his signature wasn't
needed?
Mr. Powers. I am sorry. This was an approval sheet for
setting up that Raptor. He didn't sign it; he was at the board
meeting that approved it.
Mr. Stearns. And so why didn't he sign it? I mean I am not
asking you.
Mr. Powers. Right.
Mr. Stearns. I mean just don't you think that that shows
something?
Mr. Powers. Right.
Mr. Stearns. And what do you think that shows, the fact
that he doesn't sign it, as a lawyer?
Mr. Powers. He was at the board meeting that approved it.
He was at the board meeting that approved it. I really don't
know whether--I don't know why he didn't sign it.
Mr. Stearns. But the thing that strikes me here is Winokur
was, as chairman of the Finance Committee, he was responsible
for putting in the controls and then making sure the controls
were implemented. Now, wasn't he part of this report? Wasn't he
on your board on this report?
Mr. Powers. He was. He did recuse himself from the
judgments about the board. Mr. Troubh and I had several
conversations with counsel independently without Mr. Winokur
when we made our conclusions about the board.
Mr. Stearns. Do you think Skilling knew about these side
agreements that were protecting these partnerships and ensuring
that Enron would guaranty them?
Mr. Powers. From the evidence that I have seen, I don't
know that I can answer that. There is a great deal of evidence
that he knew about the transactions.
Mr. Stearns. And you are saying Mr. Winokur had no idea
also about these side agreements, and he never followed up with
a trust and verify, he never did some verification of the
controls that he put in place?
Mr. Powers. I think these are going to take further
investigation. I can say what we were able to ascertain from
our interviews and evidence, and we don't have any evidence
that he was aware of those side agreements.
Mr. Stearns. Thank you, Dean.
Mr. Greenwood. The time of the gentleman has expired. The
Chair recognizes the gentleman from Louisiana, Mr. John.
Mr. John. Mr. Powers, on Friday, the Wall Street Journal
reported that Mr. Lay told other Enron officials that he had
never heard of Chewco. In your 4-hour interview with him, did
he indicate anything to that effect or did he tell you that?
Chewco.
Mr. Powers. He was at the Executive Committee meeting that
approved the transaction. He did say at his interview that he
didn't recall the name.
Mr. John. Thank you. The rest of my questions really are
going to be focused on the accounting side with Mr. Causey,
because I think that it is very important. Your report
specifically states that Mr. Causey was charged by the board of
directors with a substantial role in the oversight of Enron's
relationship with the LJM partnerships; in fact, he was
supposed to review and approve every transaction----
Mr. Powers. Yes, that is correct.
Mr. John. [continuing] within LJM to determine if it was in
the best interest of Enron.
Mr. Powers. Yes.
Mr. John. And then he was supposed to report that to the
board of directors, correct?
Mr. Powers. Yes.
Mr. John. Mr. Causey told the board everything was fine,
even though his approvals came after the deals were finalized.
Without Mr. Skilling's signature and your report concludes that
many of the most significant transactions apparently were
designed to accomplish favorable financial statement results,
not to achieve bona fide economic objectives or a transfer of
risk. Again, according to your report on page 4, the
transactions did not follow the applicable accounting rules.
What was Mr. Causey's excuse in your interview with him for not
carrying out these duties?
Mr. Powers. In this interview, he said that he thought he
was responsible only for signing off on the accounting, which,
in our view, was not consistent with what his charge was by the
board.
Mr. John. But he was in fact the chief accounting officer.
Mr. Powers. He was.
Mr. John. In fact, in one instance, involving a Fastow
partnership named Talon, on page 108 in your report----
Mr. Powers. Yes.
Mr. John. [continuing] Mr. Causey actually backdated a
document of a swap so that Enron would not have to show about
$75 million on its quarterly financial statements. Backdating
documents to hide losses from shareholders, is that fraud?
Mr. Powers. Well, backdating is extremely serious. I would
have to trace through what was then reported to the
shareholders to determine--and backdating the intent does seem
easy. And I don't--I need to check. There was backdating, we
did find evidence of backdating in some of these transactions,
which is, individually, very serious. I would have to check.
Mr. John. As it relates to Talon.
Mr. Powers. Yes. That is the first Raptor vehicle, and
there were hedges with the Raptor vehicle, and we found very
compelling evidence that some of those transactions were
backdated.
Mr. John. And in your own words, these are very serious
when you----
Mr. Powers. Yes, very serious.
Mr. John. Mr. Powers, Mr. Causey told our investigators
here that he didn't see the collapse of Enron coming and awoke
to it once the Wall Street Journal began reporting on the
company's troubles in October of last year. In your expert
opinion, shouldn't the chief accounting officer and the person
responsible of approving every single transaction with Mr.
Fastow's entities, have identified some warning signs? Don't
you think there should have been some warning signs before
October of last year.
Mr. Powers. Absolutely.
Mr. John. If so, what do you think he should have seen or
did not come--what do you think--give me maybe an idea of what
maybe he should have at least notified the board of, or Mr.
Fastow, or alerted them?
Mr. Powers. Well, as we document in the report, these were
not real transactions, and he was the chief accounting officer,
and should and I think did--he certainly knew about the nature
of the transactions. And has subsequently turned out, that
structure made the company extremely fragile economically,
because it wasn't solidly backed, and he should have warned the
board about that, he should have talked to senior management
about it. He was the chief accounting officer, he should have
done something about it.
Mr. John. Real quick, if you could summarize, I guess, Mr.
Causey's failures as the lead accountant of the company, how
would that summary read?
Mr. Powers. He was not an effective check on Mr. Fastow,
and the accountant needs to be an effective check.
Mr. John. Was it a lack of his credentials and his training
and background?
Mr. Powers. Not to my knowledge.
Mr. John. Thank you.
Mr. Greenwood. The time of the gentleman has expired. The
Chair recognizes the gentleman from New Hampshire, Mr. Bass.
Mr. Bass. Thank you, Mr. Chairman. Dean Powers, you have
obviously overseen a very detailed report here, an
investigation, and in the very end of your testimony, in the
last very paragraph, in the first sentence, you say, ``In the
end, this is a tragedy that could and should have been
avoided.'' Without getting into the kind of detail where you
are discussing what individuals did or didn't do, who signed
what, who was reporting to who, who transferred money from here
to there, how could this tragedy have been avoided, in your
opinion?
Mr. Powers. Well, as somebody who invests at a very, very
modest level myself, I see the idea of statements to the public
that there should be transparency in the financial condition of
a company. And if there was more transparency about the
finances of Enron, the market would have reacted to that and,
frankly, adjusted in ways that wouldn't have let Enron get away
with it, if there had been more transparency.
Mr. Bass. Well, then what, in your opinion, aspects of the
regulatory structure created an environment in which there
wouldn't be the kind of transparency that should have been with
Enron?
Mr. Powers. I want to give the judgments that I feel I can
give. I am not, in any way, an expert in securities regulation
and how that regulatory structure would have or might have
detected some of these problems.
Mr. Bass. Well, is, in your opinion, the Enron
investigation, in general, then, primarily a criminal or a
justice-related investigation dealing with individuals who may
have broken the law? Or are there thematic conclusions from
your report that require increased or more aggressive oversight
on the part of either regulators or policymakers, like the
Congress?
Mr. Powers. Well, I think there certainly was individual
wrongdoing that needs to be investigated by the proper
authorities. But I think there are larger issues that are
raised by what we found in our report.
Mr. Bass. What larger issues are you thinking about?
Mr. Powers. Yes, they deal with 401(k) plans, they deal
with the accounting industry. Not having looked into them and
not being an expert, I don't know that I have particular
suggestions, but I do think those are important issues that the
Congress and the committees need to look into.
Mr. Bass. This may be a repetitive question, but the second
sentence in your last paragraph says that you hope that our
report and the work of your committee will help reduce the
danger that it will happen to some other company. How do you
think that?
Mr. Powers. Well, I think by bringing to light what
happened, I hope that your committee, other congressional
committees at least have a starting point as to some of the
problems, and that this will help, in a small way, to focus
attention on some of these problems and that our Congress,
State legislators, other regulatory and policymaking groups
will respond to some of these problems.
Mr. Bass. One last question, Dean Powers. Were there any
questions that--are there any questions that have come about as
a result of the report that you are presenting or the
investigation that you conducted that you don't have answers to
at this point?
Mr. Powers. You mean with respect to the particular events?
Mr. Bass. Yes.
Mr. Powers. Oh, absolutely. Much more needs to be done. Who
knew what when? We, again, did not have subpoena power, did not
have true cross examination power, and I think this report is
just a start.
Mr. Bass. Thank you, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentleman. The
gentleman from Florida, Mr. Stearns, made reference to a
document that I would, without objection, enter into the
record. It is an excerpt from the October 11 and 12, 1999 Enron
Corporation Board of Directors meeting.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T7985.010
[GRAPHIC] [TIFF OMITTED] T7985.011
[GRAPHIC] [TIFF OMITTED] T7985.012
Mr. Greenwood. The Chair recognizes the gentleman from
Illinois, Mr. Rush.
Mr. Rush. Thank you, Mr. Chairman. Mr. Powers, I want to
commend you on your stamina. This has been a very long session,
and you have certainly stood up quite well.
Mr. Powers. Thank you.
Mr. Rush. Again, I commend you for your stamina. Our
investigators were also told that Enron had more than 900
accountants reporting to Mr. Causey, and I think that my
colleague from Louisiana, Mr. John, pointed to this direction.
And this 900 accountants does not include the nearly 100
accountants that Arthur Andersen supplied to audit Enron. How
is it possible that Mr. Causey could not see this train wreck
coming when he apparently had almost 1,000 accountants on the
Enron work force?
Mr. Powers. I think it is that Mr. Causey, as the chief
accountant, would have seen these problems.
Mr. Rush. You think that he actually saw this problem.
Mr. Powers. I think he certainly should have, and I would
expect that he would have.
Mr. Rush. Okay. Well, with all these accountants, 900
accountants of its own, who had access to all these internal
records, in your opinion, how can Enron blame Arthur Andersen
alone for not revealing the accounting shenanigans that were
taking place? And are Enron's accountants simply incompetent or
not well trained or shouldn't they have known Enron's numbers
even more than Andersen should?
Mr. Powers. We certainly did not intend to, and I don't
think we have, made judgments or, as you put it, blamed
Andersen alone. I think the Accounting Department within Enron
and people outside the Accounting Department, including all of
the people in management and the board, bear responsibility for
this.
Mr. Rush. Well, I want to return quickly, if I could, back
to Mr. Fastow. One conclusion surfaces from our investigation
into Enron is that on one was minding the store. It was almost
like the fat rat was in the cheese factory, and the cat was on
vacation. No single person appeared willing to come forward and
say it was their job to take a big picture view of the
multitude of deals and transactions taking place to assess how
much risk the company was assuming. Shouldn't that job have
been the chief financial officer's job or Mr. Fastow's job?
Mr. Powers. Well, I think the chief financial officer--I am
sorry, the chief financial officer or the chief accounting
officer?
Mr. Rush. The chief financial officer.
Mr. Powers. The chief financial officer. Well, the chief
financial officer is certainly responsible for the financial
aspects of the company, and certainly these were within the
financial areas of the company. The problem with Mr. Fastow
wasn't in a position to mind the store, because he was
personally and directly involved in these transactions.
Mr. Rush. Well, isn't it true also, according to your
report, you term Mr. Fastow as a, quote, ``walking conflict of
interest,'' and that Mr. Fastow got more income from his
outside businesses in 2 years than he did from Enron; is that
accurate?
Mr. Powers. He certainly got very substantial income from
these outside investments.
Mr. Rush. Mr. Fastow, I call him ``Fast Andy,'' Fast Andy
was known to curse and abuse people who got in the way of his
partnerships. He told Mr. Jeff McMahon, the treasurer, that he
couldn't work with him because McMahon was, quote, ``screwing
up his deals.'' Where was the chairman at in all of this? Why
didn't the chairman put a stop to this?
Mr. Powers. Well, McMahon went and complained to Skilling,
and Skilling then transferred McMahon to another part of the
company. And Skilling, from our information, then didn't do
anything about McMahon's very accurate and serious issues that
he had raised with Skilling.
Mr. Rush. I have one final question, Mr. Chairman, if I
could. I want to get back to the Talon transaction. Mr. Fastow
negotiated directly with Mr. Causey, putting together a deal
that gave LJM2 $41 million for basically nothing, according to
your report on page 108; is that right?
Mr. Powers. I want to clarify this.
[Pause.]
Mr. Powers. I think it was Ben Glisan who was involved in
that negotiation, and I don't want to be inaccurate about the
other person involved in it. I would have to go back and look
more carefully.
Mr. Rush. Thank you, Mr. Chairman. I yield back.
Mr. Greenwood. The Chair thanks the gentleman. The
gentleman from Texas, Mr. Green, is recognized for 5 minutes.
Mr. Green. Thank you, Mr. Chairman, and, again, I would
like to thank you for your courtesy as allowing me as the
member of the full committee but not of the subcommittee to
come in and ask questions. I want to continue following up what
my colleague from Chicago mentioned on that LJM2, the $41
million. Sorry, I didn't hear the answer. Do you think he
violated Mr. Fastow--by negotiating directly, Mr. Causey
violated an agreement not to negotiate with these entities?
Mr. Powers. I think Fastow was negotiating on LJM. There is
lots that Fastow did wrong, but in that negotiation, I believe
he was negotiating on LJM's side. He was not negotiating----
Mr. Green. On Enron's side.
Mr. Powers. [continuing] on Enron's side. Now, the idea of
Fastow and Causey doing a real arms-length negotiation is very
problematic.
Mr. Green. Okay. And Mr. Causey, by representing Enron,
could have stopped that negotiation, I guess.
Mr. Powers. Well, that kind of negotiation with LJM had
been approved. He and others could have identified the
inappropriate nature of the conflict of the whole structure.
Mr. Green. Who else is in a position to stop or disagree
with the inappropriateness, as you said, of the whole
structure? Our staff was told yesterday anyone with an
understanding of how general partners are paid would have
quickly understood that Mr. Fastow would get at least $15
million from the LJM2 alone. Was anyone at Enron or his board,
were they that inexperienced in the world of finance that they
couldn't do the same calculations?
Mr. Powers. That is certainly a question that we had. LJM1,
I think the board looked into more carefully. It was a much
smaller partnership, and those calculations came to a much more
reasonable number. When LJM2 was set up, it was a much larger
partnership. I think there was a sense that it was like LJM1,
therefore let us go ahead and approve it. The problem was it
was a much larger partnership, and if one had run these
numbers, it would have suggested that Fastow might have a quite
substantial return.
Mr. Green. On page 43 of your report, it indicates Mr.
Fastow had planned to merge Chewco until he was told that the
participation be revealed in Enron's proxy statement.
Mr. Powers. Yes, that is correct.
Mr. Green. And at that point, Mr. Fastow substituted Mr.
Kopper?
Mr. Powers. Yes.
Mr. Green. If anyone in the company knew this, do you think
the board knew it?
Mr. Powers. I don't----
Mr. Green. And why do you think they knew it?
Mr. Powers. We don't have any evidence that they did.
Mr. Green. What are the--a CFO in a corporation, I know
they have typically defined, particularly a company as large as
Enron, have defined responsibilities. Isn't that person the
person the investors and the shareholders depend on to give a
credible picture of the company's finances?
Mr. Powers. Well, the chief financial officer and the chief
accounting officer, yes.
Mr. Green. If Mr. Fastow was doing his job properly, would
this train wreck would have happened?
Mr. Powers. If Mr. Fastow had been doing his job properly,
it would have substantially reduced. I can't say in hindsight
whether it would have prevented it. They would have never
gotten into these deals if he had been--if he had been raising
questions about them, I think there is a substantial likelihood
that this train wreck would not have happened.
Mr. Green. So the debt just kept piling up. So Enron had
too much debt, and too many bad investments kept piling up.
Mr. Powers. It had a great deal of debt, and it had--I
think if they had taken the--well, one can't tell what had
happened. It wasn't just that they didn't take the loss on the
investments and as they were happening take charges. They had
these hedging arrangements that, in a sense, were acting as
though those losses were not there.
Mr. Green. Did your committee specifically find out what
actions Mr. Fastow failed to do, to take, as CFO, that might
dramatically have mitigated the events that overtook Enron?
Mr. Powers. Well, he should have come forward and disclosed
that he was self-dealing with the company on a much larger
scale than he had ever indicated.
Mr. Green. Thank you, Mr. Chairman.
Mr. Greenwood. The time of the gentleman has expired. The
Chair would note his intention to initiate another round of
questions. Mr. Powers, are you good for another half hour or
so, or would you like a break?
Mr. Powers. No, I am fine, Mr. Chairman.
Mr. Greenwood. Okay. In that case, the Chair recognizes
himself for 5 minutes. Mr. Powers, on page 43 of your report,
it reads, ``Fastow told Enron employees that Jeffrey Skilling,
then Enron's president and chief operating officer, had
approved his participation in Chewco as long as it would not
have to be disclosed in Enron's proxy statement.'' Who are the
employees that Fastow told that to? How do you know that? If
you need to consult----
Mr. Powers. Well, let me read the statement. Could I----
Mr. Greenwood. Please.
Mr. Powers. One of the people he told was Bill Brown, who I
mentioned before, and Mr. Brown has notes that reflect that.
Mr. Greenwood. Do you have those notes that you could share
with us?
Mr. Powers. We don't have them here, and, again, I will
support cooperating in every way, and I think the company will
as well. I don't, myself, have the authority to dispose of the
company----
Mr. Greenwood. Do you know what Skilling said about that?
Did Skilling comment on that observation?
Mr. Powers. I believe Skilling said that he didn't----
Mr. Greenwood. There is a footnote that says, ``Skilling
told us that he recalled Fastow----
Mr. Powers. Yes. Thank you.
Mr. Greenwood. [continuing] proposing that the Chewco
outside investors be members of Fastow's wife's family, and
Skilling told Fastow he did not think that was a good idea.''
Mr. Powers. Correct.
Mr. Greenwood. Okay.
Mr. Powers. Thank you.
Mr. Greenwood. The Special Committee's report states Jeff
Skilling appeared to be entirely uninvolved in the review of
the Chewco transactions, despite, quote, ``representations made
to the board that he had undertaken a significant role.''
Mr. Powers. Yes.
Mr. Greenwood. That is from page 10. What were these
representations and who made them?
Mr. Powers. I believe these are the LJM transactions.
Chewco was more of an investment fund, and the LJM transactions
were the transactions where there was more self-dealing. And
Skilling represented to the board, or to the Finance Committee,
I would have to clarify that Fastow represented to the board
that these controls would be put in place. Skilling was at that
board meeting when those representations were made, and the
representations were that Skilling and Causey and Buy would
review the transactions to make sure that they were at arms
length and not self-enriching to Fastow.
Mr. Greenwood. The Special Committee's report states that
the critical piece of missing information relating to the
Chewco transaction was the side agreement for the $6 million
Enron collateralization of the partnership outside $11.4
million equity investment by Big River Funding, LLC, which is a
partnership controlled by Michael Kopper and his domestic
partner, William Dodson. At least one Enron official, Ben
Glisan, knew of these facts. Andersen says it knew nothing
about this aspect of the Chewco transaction. What evidence did
you uncover about who knew what and when with respect to this
side agreement on Chewco?
Mr. Powers. Well, we were able to ascertain that Glisan was
involved in setting up--in doing the work around Big River and
Little River. And he would have known that the loans from
Barclay's were being backed by reserve accounts that had been
provided by distributions from JEDI, but let me make sure I get
this right. I am told we don't have notes that definitely pin
that down.
Mr. Greenwood. How did you discover this side agreement?
Who found out about that?
Mr. Powers. Well, when these issues--there is some
unclarity as to whether we have those notes or not. Let me just
clarify. I am sorry. We do have notes that show that Glisan was
at meetings where the reserve accounts were described.
Mr. Greenwood. And we would ask that you share those notes
with our staff.
Mr. Powers. The same thing.
Mr. Greenwood. Thank you.
The Special Committee's report also states that if Glisan
in fact knew about the $6 million side agreement, it is,
``implausible that he or any other knowledgeable accountant
would have concluded that Chewco met the 3 percent standard.''
That is from page 53. Since the Special Committee's report
concludes that Glisan knew about the side agreement, are you in
effect saying that he knowingly approved faulty accounting for
this transaction?
Mr. Powers. To the extent he was at that meeting and to the
extent that he knew, our view is that a knowledgeable
accountant like Glisan would know that was faulty accounting.
We did not come across anyone who, once they understood the Big
River and Little River loans were backed by essentially Enron
dispersements from JEDI, everybody agreed immediately that that
was an improperly funded SPE.
Mr. Greenwood. My understanding is that the $6 million side
agreement was not discovered until late October of 2001, after
Enron started to look more closely into this transaction. Do
you know who at Enron discovered this side deal and how the
discovery actually took place?
Mr. Powers. No, I am sure we do.
[Pause.]
Mr. Powers. I want to clarify one thing. It may very well
be that people at Enron knew about this before it came up in
October. The larger Enron group, the accounting and legal
staff, went back and started looking into it as events started
to unfold in October. And I don't have the individuals, but,
again, I think----
Mr. Greenwood. Was it found in Enron's documents? Was it
found in Vincent & Elkins' documents?
Mr. Powers. In Enron's documents and I think both.
Mr. Greenwood. Both? Okay. The Chair recognizes the
gentleman from Florida, Mr. Deutsch.
Mr. Deutsch. Thank you, Mr. Chairman. I know we have been
talking about Mr. Powers, so let me just go back to a question.
Actually, Mr. Fastow widely reported questionable activities,
directly or indirectly, paramount to fraud on Enron
stockholders. It was his concealment of the lack of independent
equity in these partnerships that kept the losses off Enron's
books for at least 2 years. Isn't that fraud on the
shareholders?
Mr. Powers. My only hesitation is I don't know myself the
securities definition of fraud because that is not my field. It
is misrepresenting things to the shareholder.
Mr. Deutsch. All right. The Wall Street Journal reported
last week that Mr. Fastow and Mr. Skilling dreamed up all of
these partnerships to hide debt and hedge losses. Mr. Fastow
was required under the company's code of conduct to reveal his
interests in these partnerships in writing to Mr. Lay and Mr.
Skilling. Did Mr. Skilling received such a document in writing,
as required under the agreement?
Mr. Powers. The evidence we have is that Skilling got a
handwritten note from Fastow.
Mr. Deutsch. Have you seen it?
Mr. Powers. Yes--oh, no. That is just reported to us.
Mr. Deutsch. Did Mr. Skilling ever ask for legal advice,
either from inside or outside the company, on the procedures
for waiving the code of conduct and what was appropriate and
what was not?
Mr. Powers. I don't know. Not to my knowledge.
Mr. Deutsch. Did Mr. Skilling ever consider that an
officer's loyalties might be conflicted if he was receiving
more income from his non-Enron business than from his Enron
job?
Mr. Powers. Did he consider that?
Mr. Deutsch. That is correct.
Mr. Powers. The interview with Fastow did not reveal much
information where we could get an answer to that question.
Mr. Deutsch. Right, but it would seem Mr. Skilling, in
terms of evaluating where his loyalties would be.
Mr. Powers. Oh, I am sorry. Yes, certainly, Mr. Skilling
and everyone involved in approving LJM1 and LJM2 understood
that there would be a conflict of loyalties that Fastow had.
Mr. Deutsch. And Mr. Skilling and the board could have
required Mr. Fastow to share his offering documents and reveal
his fee structure; is that correct?
Mr. Powers. That is correct. I believe the board and
management could have done that.
Mr. Deutsch. And why didn't they?
Mr. Powers. Their explanation is that they wanted to make
the LJM partnerships as, ``independent'' as possible, and
looking into the financial structure of the partnerships would
somehow be inconsistent with that. We still think they could
have gotten K-1s and other information about Mr. Fastow's
remuneration.
Mr. Deutsch. Right. And, again, it seems as if your concern
is really a conflict, that would be almost a requirement to
understand that.
Mr. Powers. I would think, at a minimum, you would want to
know what the compensation for Ms. Fastow would be.
Mr. Deutsch. Did Mr. Skilling ever ask to see any of the
offering papers of the Fastow entities?
Mr. Powers. Not to my knowledge.
Mr. Deutsch. According to a Fortune magazine article, Mr.
Skilling errantly responded to those who questioned how Enron
made its money by saying, ``People who raise questions are
people who have not gone through our business in detail and who
want to throw rocks at us.'' Based upon your own investigation,
don't you think that as chief executive officer, Mr. Skilling
himself knew how Enron was cooking the books?
Mr. Powers. I think Mr. Skilling knew a great deal about
these transactions and how losses were being hedged with
Enron's own stock, yes.
Mr. Deutsch. And in fact, Mr. Powers, doesn't your report
state that Skilling, and I quoted from the report, ``had direct
responsibility for ensuring that those reporting to him
performed their oversight responsibilities properly and that
Skilling did not appear to have given much attention to these
duties.'' Are you saying that Mr. Skilling was inattentive and
didn't understand his own company or--I mean is that the answer
or is this again a case of fraud?
Mr. Powers. Well, at a minimum, he wasn't attending to his
own company. He claims in his interview that he knew very
little about them. Causey and others say that he was very
involved in them. And to answer that question, I think the
proper investigators and authorities are going to have to
ascertain what his state of mind was.
Mr. Deutsch. Right. And the last question: Mr. Skilling was
supposed to review and sign off on each of these deals, these
are the partnerships. He didn't, but he allowed Mr. Causey to
tell the board that everything was fine. As CEO and also
president and chief operating officer, wasn't Mr. Skilling's
primary obligations, again, I mean violated by that action?
Mr. Powers. Yes. I don't think he performed his function.
Mr. Deutsch. Thank you.
Mr. Whitfield [presiding]. The gentleman's time has
expired. At this time, we will call on the chairman of the
entire committee, Mr. Tauzin.
Chairman Tauzin. Thank you, Mr. Chairman. Dean Powers, the
New York Times reports that Mr. Skilling may not have been
aware of what was happening, but he was certainly, and this is
a quote, ``in no mood to hear anybody question what went on at
Enron.'' The quote is, ``In early April, when Enron reported
its freshly scrubbed, and apparently falsified, first quarter
profits, Mr. Skilling bristled when one questioner on the
conference call tried to ask questions about the company's
balance sheet. He used a vulgarity to describe the question,
stunning many who were listening to the call.'' We produced
documents indicating that when members in the corporation sent
signatures sheets around to indicate approval of all these
transactions that LJM1 and LJM2 were conducting, and everybody
signed except one person. There is one signature missing--
Jeffrey Skilling's. Did you see those documents? Did you have
any questions about why Mr. Skilling didn't sign those approval
documents?
Mr. Powers. Yes.
Chairman Tauzin. What did you learn?
Mr. Powers. He didn't explain it. He was at the board
meeting, though, that voted on it.
Chairman Tauzin. Yes. You do know that Jordan Mintz sent
him a memo saying, here are all the documents. Please sign
them.
Mr. Powers. Yes.
Chairman Tauzin. Did he explain why he didn't sign them?
Three times I think he tried to call. Mintz was doing
everything he could to get Mr. Skilling on the record as saying
these deals were okay and everything was honkey-dory, and Mr.
Skilling wouldn't sign them.
Mr. Powers. Absolutely. I understand he should have signed
them, it was his responsibility to sign them, and he didn't
sign them.
Chairman Tauzin. And we just don't know why.
Mr. Powers. He didn't explain that to us.
Chairman Tauzin. I will take you to page 95, because the
question of corporate self-dealing and profiteering is a pretty
interesting one. In the report you issued, on page 95, you talk
about the--I think it is the South Hampton deal.
Mr. Powers. Yes.
Chairman Tauzin. In which a group called the Fastow Family
Foundation, which was composed of people like Glisan. We just
heard about Enron employee, Mr. Glisan, who later became
treasurer of Enron.
Mr. Powers. Right. It was the Family Foundation and Glisan.
Chairman Tauzin. And also Mordaunt.
Mr. Powers. And Mordaunt.
Chairman Tauzin. And Mordaunt and Glisan were part of the
Family Foundation, as well as separate investors, right?
Mr. Powers. No, I don't think they were part of the Family
Foundation.
Chairman Tauzin. Well, let us go back to your report on
page 93: ``The limited partners were the Fastow Family
Foundation, signed by Fastow, the director, Glisan,
Mordaunt''--you mean they were separate investors.
Mr. Powers. Yes.
Chairman Tauzin. They were not part of the foundation.
Mr. Powers. We don't know who was in the Family Foundation.
Chairman Tauzin. We don't know.
Mr. Powers. Yes.
Chairman Tauzin. But the Family Foundation puts up 25
grand. Big Doe Foundation, whatever that is, puts up another
bunch of money, and Glisan and Mordaunt, as well as some of the
other Enron employees, including Yaeger Patel, I think, who was
married--at the time some of the negotiations were going on,
they were engaged, the two Patels. They later signed as
marriage partners, and they were operating on different sides
of the table. Talk about a sweetheart deal, that was really
interesting.
But these players, Glisan and Mordaunt, put up $5,800 each.
Within 6 weeks, they each received $1 million, and they
apparently told you they don't know--nobody explained to them
why they got such a big return in 6 weeks, but they took the
money. And you asked the question, ``The magnitude of these
returns raises serious questions as to why Fastow and Kopper
offered these investments to other employees.'' I think the
answer comes in the next paragraph. You talk about what those
other employees did. You have Glisan who has presented to the
Raptor I transaction to the board. He was called the business
unit originator and the person negotiating for Enron. He is the
guy on the other side of the table, and Fastow says, ``Come on
in and be an investor on this side of the table, and you make a
million dollars as a result in 6 weeks.'' And you asked the
question why they offered him this deal?
You also asked the question why Mordaunt was involved?
Well, we find out Mordaunt was a lawyer. She was involved in
the initial Rhythm transaction, general counsel structured
finance. She becomes later the general counsel of Enron
Communications and later the Enron Broadband Services Board
where all this broadband capacity was transferred out to one of
these partnerships in an attempt to show a lot of profit that
never existed. And you asked why they were interested in
bringing her in and letting her earn a million dollars? Isn't
the answer quite obvious?
Mr. Powers. Well, let me say why we asked the question.
Chairman Tauzin. Yes.
Mr. Powers. We tried to be very careful in this report----
Chairman Tauzin. I know.
Mr. Powers. [continuing] not to draw surmises and
conclusions, but certainly this is extremely suggestive as to
why this happened. We understand that, and we tried to lay out
the facts as best we could.
Chairman Tauzin. And I alluded to it, and we are going to
discuss it more on Thursday, but you, too, discovered, as we
did, that in some cases, other than offering them a chance to
invest, partnerships in some cases actually threatened
employees with firings and losses of bonuses; is that correct?
Mr. Whitfield. The gentleman's time is expired.
Mr. Powers. We did find pressure, yes. The exact nature of
it I would have to go back and check, but we did find pressure.
Chairman Tauzin. I think we got some of your answers. Thank
you.
Mr. Whitfield. The gentleman from Michigan is recognized
for 5 minutes.
Mr. Dingell. Mr. Chairman, I thank you for your courtesy. I
find at page 9 of your report this footnote which says this:
``One member of the Special Investigative Committee, Mr.
Herbert S. Winokur, Jr., was a member of the board of the
directors and the Finance Committee during the relevant period.
The portions of the report describing and evaluating the
actions of its board and its committees are solely the views of
the other two members of the committee, Dean William C. Powers,
Jr., the University of Texas Law School, and Raymond S.
Troubh.'' What does that mean, and why is that there, and what
does it tell us?
Mr. Powers. Well, when the committee was set up, in fact
when it was originally set up, there were no new directors. I
was brought in to Chair the committee and then Mr. Troubh was
brought in to be on the committee. Other members were taken off
the committee, and Mr. Winokur was left on the committee, so
that there was a majority on the committee of outside, that is,
new directors that didn't have any involvement in these
transactions. We felt that Mr. Winokur was a very good source
of information about the backgrounds of some of these
transactions, and it was invaluable to have that information.
When it came time to----
Mr. Dingell. You could have gotten that from him under the
cooperation you were promised from the company, could you not?
Mr. Powers. Well, the interviews were for a period of time
and couldn't go back, and there were lots of--especially early
on, there was a great deal of information that we needed. When
it came time to judging the board, we thought the report would
speak more forcefully if Mr. Troubh and I made those judgments.
That was a judgment we made as to how to best go forward with
this investigation. And I think the report hopefully indicates
we had an unvarnished position.
Mr. Dingell. I don't criticize the report, but doesn't it
indicate that Mr. Winokur was essentially participating in an
investigation of himself?
Mr. Powers. Well, it was an investigation of a number of
things, and it did include himself. And when it came to
judgments about the board Mr. Troubh and I had independent
meetings of the committee with counsel and approved and decided
what would go in the report about the board.
Mr. Dingell. Thank you. Mr. Winokur told the board he was
familiar with and recommended approval of a plan by Mr.
Skilling and Mr. Fastow to sell 50 percent interest in JEDI, an
affiliate of Enron and Chewco; isn't that correct?
Mr. Powers. Yes.
Mr. Dingell. The minutes record that Mr. Winokur states he
was going to meet further with Mr. Fastow the next day,
presumably on this matter since it was the only one on the
agenda involving Mr. Fastow. Did that meeting occur?
Mr. Powers. During his interview--we did interview Mr.
Winokur; he didn't recall whether that meeting occurred.
Mr. Dingell. Okay. According to the board's minutes, Mr.
Fastow reviewed the economics of the project, the financing
arrangements, the corporate structure of the acquiring company
with the board. I presume this had previously been reviewed
with the Finance Committee; is that correct?
Mr. Powers. I believe so. Yes.
Mr. Dingell. Now, Mr. Fastow told the board that Chewco was
a special purpose vehicle not affiliated with the company or
CalPERS, since the board was approving a bridge loan of $383
million and a corporate guaranty of $250 million loan to
Chewco, an unknown entity. Did Mr. Winokur or any board member
ask who controlled Chewco?
Mr. Powers. I would have to go back to the particular--that
was the Executive Committee, it wasn't the Finance Committee,
and we don't know whether they asked those questions.
Mr. Dingell. Was due diligence done by the Enron board
officers or counsel?
Mr. Powers. I don't know if I am in a position to say
whether the diligence was due. That is a very complicated legal
question, and----
Mr. Dingell. It should have----
Mr. Powers [continuing] we tried to lay out what happened.
Mr. Dingell. Due diligence should have been done on this
matter, should it not?
Mr. Powers. Due diligence should be done on all corporate
matters.
Mr. Dingell. Now, Chewco understood that it did not have
the necessary--in your report, you state Enron employees
involved in Chewco understood that it did not have the
necessary 3 percent in outside equity required to stay off
Enron's books. If the employees understood that, did Mr.
Winokur and the Finance Committee also understand it?
Mr. Powers. I think that when Chewco was originally set up,
it was widely understood that it did not have the 3 percent
equity.
Mr. Dingell. Did it ever get the 3 percent equity?
Mr. Powers. Well, then the idea was that it would be
reconstituted or restructured to get the 3 percent equity.
Mr. Dingell. Did it ever get the 3 percent----
Mr. Powers. And then they attempted to but did not because
of the guarantees that were given to the loans, to Big River
and Little River.
Mr. Dingell. Did Mr. Winokur or any other member of the
Finance Committee ever ask who was providing the outside
equity?
Mr. Powers. I don't know.
Mr. Whitfield. The gentleman's time is expired.
Mr. Dingell. Mr. Chairman, I thank you. There are a lot of
other fine questions here.
Chairman Tauzin. Would the Chair--I ask unanimous consent
that the gentleman have 30 seconds that could be yielded to me
just to put a fact in the record.
Mr. Dingell. I yield to my friend, if I get the time.
Chairman Tauzin. I thank the Chair. I simply wanted to make
sure I had in the record that in the South Hampton deal, the
$25,000 investment in March by the Fastow Family Foundation
paid back $4.5 million in May to that foundation.
Mr. Powers. Yes, that is correct.
Chairman Tauzin. Thank you, Mr. Chairman.
Mr. Whitfield. The gentleman from North Carolina is
recognized for 5 minutes.
Mr. Burr. Thank you for your patience and your willingness
to go through all this. You have helped us to sort out a lot of
things.
Mr. Powers. Thank you, Congressman.
Mr. Burr. I am going to try to clarify some things that we
have already been over, so be patient with me. Did your
committee interview Sherron Watkins?
Mr. Powers. We asked to, but she wouldn't.
Mr. Burr. She declined.
Mr. Powers. Right, she declined.
Mr. Burr. Do you or do the folks who are with you know the
reason that she chose to decline?
Mr. Powers. I don't know if she stated it. We communicated
with her lawyer, and he said that she was going to be
interviewed by a lot of other people and did not want to be
interviewed by us, which I must say I don't fault her for.
Mr. Burr. To your knowledge, or the knowledge of your
committee, was Sherron Watkins interviewed in any way, shape or
form by V&E when they carried out their investigation?
Mr. Powers. Yes.
Mr. Burr. And do we know the specifics of whether they
agreed or disagreed with the claims that she had made in the
letter to Mr. Lay?
Mr. Powers. Well, they wrote a letter to Mr. Lay reporting
on that.
Mr. Burr. Were you----
Mr. Powers. I am sorry, to Jim Derrick, who was the chief
financial officer--who was the general counsel.
Mr. Burr. Is it true that the lawyers for V&E were told not
to review the underlying accounting for the partnerships or the
very area that Ms. Watkins had raised questions about?
Mr. Powers. That is what I understand from the letter.
Again, I haven't looked into that carefully.
Mr. Burr. So what would a law firm hired to investigate ask
Ms. Watkins if her claims were about the underlying accounting
procedures and the lawyers were told not to investigate that?
What could you possibly glean from it if you can't ask her
about the accusations that she made, or at least you were
instructed not to?
Mr. Powers. Right.
Mr. Burr. Is that not your understanding, though, of what
they were told?
Mr. Powers. It is my understanding from what I have heard
today. I did not focus on what Vincent and Elkins did.
Mr. Burr. Let me go back to the special-purpose entities,
if I could, and I think you agreed with Chairman Tauzin earlier
that there was no economic purpose for the creation of the SPEs
in their structure that they eventually ended up, am I correct?
Mr. Powers. Well, the deals made with the Raptors are where
we say there was--the hedges, there was no economic purpose.
SPEs are very common in business, and there are legitimate
reasons to use SPEs.
Mr. Burr. And I realize that, and I think that it will
become a very common word used in the next several months. But,
specifically, the way these were designed, is it safe to say
that the architect of these SPEs would have known it is not for
economic purposes?
Mr. Powers. Well, I would distinguish between Chewco and
the Raptors.
Mr. Burr. Okay.
Mr. Powers. When we found out what the Raptors were about,
it is apparent to us and our conclusion is they weren't for
economic purposes. And so somebody who is knowledgeable in
accounting that designed them, I would say they would know that
these were for accounting rather than economic purposes. Chewco
I think is different.
Mr. Burr. In layman's terms, they were designed to hide
debt, weren't they?
Mr. Powers. Well, the Raptors were designed to offset
losses and therefore show other earnings on the income
statement and other than that didn't have an economic purpose.
Mr. Burr. Is it safe to say that anybody that participated
in the architecture of these SPEs would have known what the
intent was of creating them?
Mr. Powers. I would think that the architect, the people
that put together the Raptors understood why they were being
put together.
Mr. Burr. Let me ask you if your committee looked at who
participated in the compensation packages for Fastow and his
involvement in the partnerships, Kopper or any other
individual? I mean Fastow didn't create his own compensation
package within the partnership, did he?
Mr. Powers. I assume that was a negotiation with the
limited partners in those partnerships, and we have not had
access to those materials.
Mr. Burr. I think alluded, at least in some of the SPEs
that the board signed off on it, the Board of Enron.
Mr. Powers. Well, the board signed off on the creation, and
we are told that the LJM compensation to Fastow was LJM
business, and they didn't look into it.
Mr. Burr. And is that common practice for a board not to
have interest or did the board not know of Enron's backdoor
exposure?
Mr. Powers. Well, I think there was interest on the board
on Fastow's compensation. The thought was, the explanation was
that it would be somehow inappropriate to pierce LJM, because
they were supposed to be independent. We don't agree with that.
Mr. Burr. Did you have any----
Mr. Whitfield. The gentleman's time has expired.
Mr. Burr. If I could finish this question, Mr. Chairman.
Were you aware of whether Skilling knew of the compensation
package?
Mr. Powers. He says he--well, we don't know.
Mr. Burr. Lay?
Mr. Powers. He said he didn't know. Both knew that Fastow
would be getting some return, but the magnitude of the
compensation package Lay says to us he didn't know.
Mr. Burr. And the board would be a no.
Mr. Powers. The board did not know. The board says they
didn't know.
Mr. Burr. I would only say this, Mr. Chairman, in
concluding: I find it unusual, and I hope you do, Dean Powers,
that in this case the two CEOs and chairman of the board could
have the structure of what was created here and, one, been
ignorant of the structure and, two, been ignorant of the
compensation package that went along with it, because, in
essence, it was Enron's money. I thank you.
Mr. Powers. Thank you.
Mr. Whitfield. The gentleman from Michigan is recognized
for 5 minutes.
Mr. Stupak. Thank you, Mr. Chairman, and, Mr. Powers,
thanks again for being here and being patient with all of our
questions.
Mr. Powers. Thank you.
Mr. Stupak. You said earlier in some testimony that Mr. Lay
did not understand that hedging with Enron stock was not okay
and that accountants told him it was okay, therefore he went
along with the accountants; is that right?
Mr. Powers. I said that is what he said to us.
Mr. Stupak. Okay. That is what he said to you. Did he say
who the accountants were who told him it was okay? Would that
be Mr. Causey?
Mr. Powers. Certainly Mr. Causey, and I think Andersen.
Mr. Stupak. Andersen Consulting, or the Andersen the firm.
Mr. Powers. Yes, Arthur Andersen. I believe that is what he
said in his interview.
Mr. Stupak. Okay. Michael Kopper, who is he at Enron?
Mr. Powers. He was in the Finance group, and I don't know
exactly what his job was. He was not senior management.
Mr. Stupak. Wasn't he a former vice president involved in
these partnerships like Chewco and a couple others?
Mr. Powers. Well, he was involved--he did have an interest
in Chewco, yes, absolutely.
Mr. Stupak. Okay. And that is the deal that went from
$125,000 to, what, $10 million? Mr. Kopper took $125,000
investment into Chewco, and it went to $10 million?
Mr. Powers. Yes, that is correct.
Mr. Stupak. How could that--I mean how is that conceivable?
I mean how is that--is that even legal to--I mean the return on
that is astronomical in a short period of time.
Mr. Powers. That is an extremely abnormal rate of return.
Mr. Stupak. How quickly did that turn around to $10
million?
Mr. Powers. A little more than 3 years.
Mr. Stupak. Can you think of any legal way in which you
could do that, take $125,000 and turn it into $10 million in 3
years at Enron, in the partnerships----
Mr. Powers. Not without taking on a tremendous amount of
risk, and we don't see that he did take on risk.
Mr. Stupak. They took no risk, because it was all backed up
by Enron stock, right?
Mr. Powers. Well, I can't say that he took no risk. These
are very complex transactions. There were ways in which the
investors could lose money. There were options on Enron stock,
but little risk.
Mr. Stupak. If it is a possibility, did any investor in any
of these partnerships lose any money?
Mr. Powers. Not that I am aware of.
Mr. Stupak. Okay. Mr. Kopper also received up to $2 million
in management fees relating to Chewco, and yet in your review,
you were unable to identify, and I am going to quote now, ``how
these payments were determined or what, if anything, Mr. Kopper
did to justify these payments.''
Mr. Powers. Yes.
Mr. Stupak. How is it possible to have an employee make in
excess of $2 million and no one knows what he did to earn it?
Mr. Powers. Well, these were investment funds, and they
were simply managing these investments, and the work would have
been relatively simple back office work, and it was never
explained to us why that would justify a $2 million fee.
Mr. Stupak. This $2 million, whose money would that be?
Mr. Powers. That would be----
Mr. Stupak. It is relating to Chewco and----
Mr. Powers. It is very complicated. It would have been paid
out of JEDI----
Mr. Stupak. Okay.
Mr. Powers. [continuing] which was another one of these
entities, not related parties, so we didn't probe into JEDI. It
was paid out of JEDI, but ultimately that is coming out of the
interest of Enron. So when you track it all back, Enron is
effectively paying.
Mr. Stupak. So when we go through this simplified Whitewing
leveraging transaction, all those pyramids and circles and
boxes and squares and parts of South America and all over this
country, that is really--when it is all said and done, that is
really Enron's money.
Mr. Powers. Well, there are some outside investors in
these, this 3 percent rule, et cetera, but Enron has very
substantial interests in these entities.
Mr. Stupak. And Enron is really the employees' 401(k) plan,
their pension plan and the shareholders who invested in Enron.
They are really the ones who really are left here--after we get
done with all these nice pyramids and everything else, they are
the guys who are left holding the empty promises.
Mr. Powers. The employees and the shareholders and the
people with their retirement nest eggs and the 401(k) plans are
tragic and terrible victims of this.
Mr. Stupak. So whether Kopper made $10 million over 3 years
or $2 million for consulting on Chewco, it was those
investors--the bottom line, it was really their money that
got----
Mr. Powers. They were the ones that got hurt.
Mr. Whitfield. The gentleman's time has expired. The
gentleman from Florida is recognized for 5 minutes.
Mr. Stearns. Thank you, Mr. Chairman. Dean Powers, you and
I talked a little bit about Mr. Winokur and his
responsibilities, as he is a board member. Now, I would like
you to go to Rick Causey who was, I understand, the chief
accounting officer, an officer of Enron himself, and then Rick
Buy who, as I understand, his title was chief risk officer.
Mr. Powers. Yes.
Mr. Stearns. So now we are moving into the corporate
officers, the people who worked, the employees of Enron, and I
just want to go into a little bit about what their
responsibilities were, and did you interview both these
individuals?
Mr. Powers. I didn't personally, but the committee, yes, it
did interview those individuals.
Mr. Stearns. And were they forthright with you?
Mr. Powers. They certainly answered our questions.
Mr. Stearns. Causey and Buy stated they participated in the
LJM transaction reviews in a limited capacity.
Mr. Powers. Yes, that is what they said.
Mr. Stearns. And they said this is, I guess, that we on the
committee are having a little trouble understanding. Buy stated
that the Global Finance Group made the strategic decisions
regarding the deals, and that his risk review had nothing to do
with the big picture. Causey stated that his review of the
transaction was to make sure that the accounting treatment was
accurate, and he did not participate in the strategic
decisions. So we have an idea what they feel. What do you think
they did?
Mr. Powers. I think they had very limited review of the
transactions between Enron and LJM2, and that they were charged
with the responsibility of having much more robust and
substantial review.
Mr. Stearns. So who charged them with this responsibility?
Did the board of directors?
Mr. Powers. The board, yes.
Mr. Stearns. The board of directors, in your opinion,
charged them with the responsibility to have a thorough
understanding of these LJM transactions.
Mr. Powers. And ensure that there were transactions that
would be for the benefit of Enron.
Mr. Stearns. Why didn't these two officers who were
employees of the corporation and had the great title of chief
accounting officer and chief risk officer, I mean I would think
if you or I had those titles of risk and accounting, that we
would not think, well, we are not really here to make sure
these agreements are accurate. We don't participate in
strategic decisions. If you are going to be in charge of risk,
you have got to understand what the strategic decisions. So
where do you think--am I missing something or as a dean do you
think we are missing something? The board thought they had the
responsibility and yet they are telling you they didn't have
that responsibility or authority.
Mr. Powers. Right. In my view, they didn't fulfill their
responsibilities with respect to review of these transactions.
Mr. Stearns. And why do you think that was?
Mr. Powers. We don't know that for certain. I think they
were unwilling to stand up to Andy Fastow.
Mr. Stearns. And what about--do you think--you think that
is it, that Fastow intimidated them that much; is that it?
Mr. Powers. I don't know Fastow. I have talked to people
around the company. He was a very aggressive person and was in
charge. I don't know this to be the case. The most plausible
explanation to me--we don't have any evidence that Causey or
Buy participated. Something may come out later, but we didn't
find any evidence of that.
Mr. Stearns. Dean Powers, in all deference to you, it
sounds like you are suspending disbelief here. I mean either
they were intimidated by him or they are complicit in the
operation.
Mr. Powers. Well, I think they certainly understood how LJM
wanted to and how the Raptors were working; certainly, Causey
did. So complicit in that sense I agree with. We didn't find
any events of financial participation, which does not mean
that----
Mr. Stearns. No, I understand.
Mr. Powers. [continuing] we will come out. I think they
were intimidated by Fastow.
Mr. Stearns. That is what you think.
Mr. Powers. Partly.
Mr. Stearns. I am just curious why they didn't mention the
problem, the accounting problem or the risk problem to the
Audit and Compliance Committee and the Finance Committee.
Mr. Powers. Because doing so would have brought down
scrutiny on these deals that Fastow was participating in, and
for whatever reason they didn't do that.
Mr. Stearns. The board of directors was similarly not
informed on March 2001 that Raptor deficit grew to
approximately $500 million or that it would require a charge
against Enron's earning in that quarter if not addressed prior
to March 31, 2001. The board of directors was not informed that
the Raptors SPEs were restructured on March 26, 2001 to avoid
the anticipated charge to earnings. And the board was not
informed about the transfer of approximately $800 million of
Enron stock contracts that was part of the restructuring.
Causey and Buy were aware of the deficit and restructuring. Why
did they fail to mention them to the board? And you are saying
they were totally intimidated. That is what you are
conjecturing.
Mr. Powers. They wanted to--I think at that point, at the
point that you are describing with the restructuring, I think
now they would have a motivation--I don't know what happened--
of not having come out all the structures that had been there
before.
Mr. Stearns. Dean Powers, my last question.
Mr. Powers. Yes.
Mr. Stearns. Did you ever ask him the same questions I am
asking you? Why didn't they refer--based upon all this
restructuring and all this loss and this $800 million of Enron
stock contracts as part of the restructuring, did your group
ever say to Mr. Causey and Mr. Buy, ``Hey, fellas, why didn't
you tell the board of directors?''
Mr. Powers. We did ask them that question----
Mr. Stearns. And what was his answer?
Mr. Powers. [continuing] and his answer, what he said was
by the time of the next board meeting, they had fixed the
problem; in fact, they had and it kept going on. But by the
time of the next board meeting, they thought they fixed it, so
they didn't mention it. I do not think----
Mr. Stearns. Who said they fixed the problem?
Mr. Whitfield. The gentleman's time has expired.
Mr. Stearns. Okay. Thank you.
Mr. Whitfield. The gentlelady from Colorado is recognized
for 5 minutes.
Ms. DeGette. Thank you, Mr. Chairman. Mr. Powers, I assume
you are familiar with the corporate governance guidelines of
the Board of Directors of Enron, are you?
Mr. Powers. Yes.
Ms. DeGette. I was just looking over these a little while
ago. Dr. Jaedicke, as I understand, is the chairman of the
Audit and Compliance Committee, or was during the relevant
time; is that right?
Mr. Powers. Yes, and I believe still is.
Ms. DeGette. Okay. And what these guidelines say is the
Audit and Compliance Committee serves as the overseer of
Enron's financial reporting process, system of internal
controls and corporate compliance process, and it provides
reasonable assurance that Enron conducts its business in
conformance with appropriate legal and regulatory standards and
requirements. Do you think that the Audit and Compliance
Committee met those standards?
Mr. Powers. If I could just preface it, that the committees
of the board are entitled to rely on statements by management,
unless they have reason to believe those statements by
management are unreliable.
Ms. DeGette. Well, yes, I understand, but----
Mr. Powers. So whether they met that obligation I don't
know. I don't think the board generally looked hard enough into
these very complicated transactions, knowing of these conflicts
of interest.
Ms. DeGette. Well, and case in point, annually the Audit
and Compliance Committee was given a deal approval sheet by
which they were supposed to look at the related party
transactions, right?
Mr. Powers. Yes.
Ms. DeGette. And that is the sheet we were talking about
before where everybody signed it but Skilling, right?
Mr. Powers. No.
Ms. DeGette. No?
Mr. Powers. There is an approval of LJM----
Ms. DeGette. Right.
Mr. Powers. [continuing] which Skilling was supposed to
approve--was at the board, he did approve it, he just didn't
sign off on the sheet.
Ms. DeGette. Right, but he didn't sign it.
Mr. Powers. Then there are the--once LJM was set up, there
are the individual hedging deals between Enron.
Ms. DeGette. Okay. Right, right. You are right, you are
right. But did the Audit Committee review those?
Mr. Powers. They had a meeting where Causey said, ``Here
are the transactions,'' and they didn't do anything more than
that.
Ms. DeGette. They didn't do anything more than that.
Mr. Powers. Correct.
Ms. DeGette. That would seem to me, if I were one of the
small investors who had all my 401(k) invested in this Enron
stock, I would think that that would not provide me with
reasonable assurance that these deals were being conducted in
conformance with appropriate legal and regulatory standards and
requirements. I don't know.
Mr. Winokur was the chairman of the Finance Committee,
which under the guidelines reviews and makes recommendations to
the board and management on matters concerning both current and
long-range financial strategy and planning, including, without
limitation, budgets, dividends, equity offerings, debt and
other financing, foreign exchange policy, investment policy and
trading limits policy, correct?
Mr. Powers. Yes, that is correct.
Ms. DeGette. Now, in reviewing everything you have
reviewed, do you think the Finance Committee fulfilled its
obligation?
Mr. Powers. Not knowing the details of the standards of
securities law, I don't know the answer from a legal point of
view.
Ms. DeGette. Yes, but Mr. Powers, you know what happened
here with these financial----
Mr. Powers. I don't think they oversaw these transactions
sufficiently.
Ms. DeGette. Thank you. Now, do you have any idea what were
the limits of the directors and liabilities insurance that the
Enron Board had? That might be of interest to many of the board
members.
Mr. Powers. I think I do, but I would like to check.
Ms. DeGette. Thank you.
Mr. Powers. I am not absolutely sure. My understanding is
it is $350 million.
Ms. DeGette. Thank you. Now, quickly, I just want to talk
about the South Hampton deal, because we had mentioned that
before. And in your report, you talked about Ms. Mordaunt who
is the lawyer--in-house lawyer for Enron, Kathy Lynn, who is an
employee in the finance area, and Ann Yaeger Patel, who is also
an employee at Enron Global Finance. You said that they
appeared to have violated Enron's code of conduct by accepting
interest in the South Hampton Place deal without the consent of
Enron's chairman and CEO, correct?
Mr. Powers. That is correct.
Ms. DeGette. Can you talk for a minute about what the South
Hampton deal was, briefly?
Mr. Powers. When the Rhythms net was unwound, there was a
partnership formed to take the distributions from that
transaction, and this was a partnership formed to take in some
of the distributions from that unwind.
Ms. DeGette. Now----
Mr. Whitfield. The gentlelady's time has expired.
Chairman Tauzin. Mr. Chairman, could I ask unanimous
consent the gentlelady have 2 additional minutes? I think she
is on a good trail here.
Mr. Whitfield. Without objection, the gentlelady has 2
additional minutes.
Ms. DeGette. Thank you very much, and thanks to the
chairman of the full committee. Didn't some of these employees
also work for LJM and get bonuses from that partnership?
Mr. Powers. I believe so, yes.
Ms. DeGette. And that is the partnership you just said a
few minutes ago in which Mr. Fastow, in exchange for $25,000,
got $4.5 million for his Family Foundation, right?
Mr. Powers. That was the South Hampton partnership, yes.
Ms. DeGette. Right, that is the one we are talking about
right here.
Mr. Powers. Yes, exactly.
Ms. DeGette. Now, on page 16 of your report, you also say
that two other employees who each invested $5,800 in the South
Hampton deal each received a million dollars in the same time
period, correct?
Mr. Powers. Yes.
Ms. DeGette. Who were those two employees, and how did they
get those returns, if you have any idea?
Mr. Powers. That was Yaeger--I am sorry, Glisan and
Mordaunt.
Ms. DeGette. Okay.
Mr. Powers. Glisan and Mordaunt.
Ms. DeGette. Now, Mordaunt is a lawyer who worked on some
of these deals for Enron, correct?
Mr. Powers. Yes.
Ms. DeGette. And now when she talked to committee staff, it
is my understanding that she never asked Mr. Kopper what the
investment was, because it was such a small amount of money.
Then 1 day Mr. Kopper said, ``Where do we wire the money,'' and
then low and behold it was a million dollars. She didn't ask
questions then either. Now, as an attorney for Enron, Mr.
Powers, don't you think that Ms. Mordaunt had an ethical
responsibility to know where the money was coming from and if
it conflicted with her client's interests?
Mr. Powers. Yes.
Ms. DeGette. Thank you. No further questions.
Chairman Tauzin. But would the gentlelady----
Ms. DeGette. Oh, happy to yield.
Chairman Tauzin. Before that, the gentlelady yield. Didn't
Ann Yaeger, later Ann Yaeger Patel, contribute $2,900 and take
about $500,000 back?
Mr. Powers. Yes, that is my understanding.
Chairman Tauzin. And didn't Kathy Lynn, another Enron
employee, contribute $2,330 and take back about $500,000 as
well?
Mr. Powers. Yes.
Chairman Tauzin. And they were in the same position as
these two employees that the gentlelady just discussed; is that
right?
Mr. Powers. They weren't lawyers.
Chairman Tauzin. They weren't lawyers, but they were
employees of Enron----
Mr. Powers. Absolutely.
Chairman Tauzin. [continuing] in violation of the code of
ethics, investing in a partner to whom Enron was dealing and
taking out an extraordinary rate of return. Did you ask them if
they ever questioned why they got so much money back?
Mr. Powers. Yes. They declined to be interviewed.
Chairman Tauzin. Who do they work for?
Mr. Powers. They work for Enron.
Chairman Tauzin. But for whom at Enron?
Mr. Powers. They work for LJM now.
Chairman Tauzin. Now, but who did they work for at the
time?
Mr. Powers. They worked for Enron in the Finance Group.
Chairman Tauzin. In the Finance Department.
Mr. Powers. Yes.
Chairman Tauzin. And who was their immediate supervisor?
Mr. Powers. I don't know who their immediate supervisor
was. Fastow was----
Chairman Tauzin. I am thinking it was Michael Kopper; is
that correct?
Mr. Powers. It may be, but I don't----
Chairman Tauzin. I would like you to supplement that
answer, if you can determine it, for the record.
Mr. Powers. Okay.
Chairman Tauzin. Thank the gentlelady.
Mr. Whitfield. The gentleman's time has expired.
Ms. DeGette. Reclaiming my time.
Mr. Dingell. Could I ask unanimous consent the gentlelady
have 1 additional minute?
Mr. Whitfield. Is the gentleman asking that the chairman
have an additional minute or the lady from Colorado?
Mr. Dingell. The gentlewoman from Colorado.
Mr. Whitfield. Without objection, the gentlelady from
California is recognized for 1 additional minute.
Ms. DeGette. Colorado, please.
Mr. Whitfield. I mean Colorado. What did I say?
Ms. DeGette. I yield to my friend from Michigan.
Mr. Dingell. And I thank my dear friend. I have a
curiosity. How many of these people have cooperated with you
and been fully--of those mentioned, and have been fully
forthcoming in terms of all of the events and the production of
records?
Mr. Powers. Of these people we are talking about? Mordaunt
did talk with us, and I think Mordaunt, even before she talked
with us, did go to talk to the general counsel of the company.
Mr. Dingell. How about the others?
Mr. Powers. The others have not cooperated with us.
Mr. Dingell. Would you name then those who have not
cooperated?
Mr. Powers. I think Glisan, Yaeger, Patel----
Ms. DeGette. Lynn?
Mr. Powers. Yes, Lynn and of course Kopper has not either.
Mr. Dingell. And I gather that Andersen has not permitted
the committee to review all its working papers too; is that
right?
Mr. Powers. Well, yes. Andersen--we had long negotiations
with Andersen. We have seen some of their papers, we haven't
seen other papers. We never got to interview them. When Enron
finally discharged them, they then said, ``We are not''--we had
been discussing interviewing their employees and then they
finally said no.
Mr. Dingell. Did Andersen tell you why they are not
cooperating with you?
Mr. Powers. Well, they told us they weren't cooperating
with us because Enron discharged them. That was what they said.
Mr. Dingell. Do they not have a continuing fiduciary duty
to their former client to discuss matters which went on between
Andersen and Enron?
Mr. Powers. To be honest, after discharge, whether they do
or not, I don't know the answer to that question.
Mr. Dingell. What does your logic tell you?
Mr. Powers. I think they ought to cooperate fully with
getting to the bottom of this. Legally, whether their fiduciary
ends, I just don't know the answer to that.
Mr. Whitfield. The gentleman's time has expired.
Mr. Dingell. And I thank the gentlewoman; I thank the
Chair.
Mr. Whitfield. The Chair will now grant himself 5 minutes.
Dean Powers, this relates to the Chewco transaction, and I
think Mr. Greenwood touched on this, but on the issue of trying
to meet the reserve account for the Barclay's Bank, in your
report, you stated that others told us that those matters
involving the $6 million side agreement and reserve accounts
were known openly and discussed. Could you tell me who those
others were, the names of those others?
Mr. Powers. I am not sure we know, other than people said
that it was being discussed. Of the people that told us,
Shirley Hudler is one person.
Mr. Whitfield. Shirley Hudler?
Mr. Powers. Yes. I think there may have been other people
that have told us that I don't recall now.
Mr. Whitfield. Okay.
Mr. Powers. There were also notes from meetings where this
issue was discussed to some extent, and I don't know now
whether there is an indication of who was at those meetings or
if there was, who they were.
Mr. Whitfield. We would ask that you supply those notes.
Can you do that?
Mr. Powers. The same thing. It is not my property to
dispose of, but we will certainly address that to Enron.
Mr. Whitfield. Okay. You will talk to Enron.
Mr. Powers. And we will support that request.
Mr. Whitfield. Okay. Now, let me ask you this: Do you think
that the transfer by Mr. Kopper of his ownership interest in
Chewco's limited partner to his domestic partner, William
Dodson, resolved the accounting and disclosure issues, as
Enron, Andersen and Vincent & Elkins apparently all did?
Mr. Powers. I am not sure we know whether he was his
domestic partner at the time, which would be relevant to this.
Kopper and Dodson didn't talk with us. If it was his domestic
partner at the time, that certainly raises an issue of whether
Kopper still had control.
Chairman Tauzin. Would the chairman yield?
Mr. Whitfield. Yes.
Chairman Tauzin. My understanding is our investigators have
determined that they were. I believe that they were.
Mr. Powers. Yes. I am not saying they weren't. That was a
fact that we were unable to track down.
Chairman Tauzin. Thank you.
Mr. Whitfield. Did you find any evidence that despite this
transfer of ownership interest that Mr. Dodson actually
exercised any control over the limited partners or exercised
control?
Mr. Powers. I don't think we know what Mr. Dodson did.
Mr. Whitfield. So you don't have any evidence on that. Now,
on page 61 of your report, you discussed the buyout of Chewco
by Enron, in which Enron paid Chewco Kopper $10 million. Did
you find any evidence of improper influence by Fastow or others
on Kopper's behalf in that transaction?
Mr. Powers. Yes. Fastow is the one that negotiated with
Kopper on this deal.
Mr. Whitfield. So he was negotiating with the person that
reported to him at Enron?
Mr. Powers. Yes.
Mr. Whitfield. Okay. And what did Mr. McMahon tell you
about his involvement in this transaction and the conversations
he had with others about it, including Mr. Fastow?
Mr. Powers. I believe he knew about these negotiations and
had complained that $10 million was too much.
Mr. Whitfield. Did he indicate what he would consider to be
the appropriate price?
Mr. Powers. My recollection is about a million dollars,
but----
Mr. Whitfield. A million dollars.
Mr. Powers. About a million dollars.
Mr. Whitfield. So he was aware of that then, okay. You have
already indicated that your conversations with Fastow were
quite short, and that is correct, right?
Mr. Powers. It took about an hour, but there is very little
information.
Mr. Whitfield. Did he tell you about his involvement in
this deal at all? Did he talk about his involvement in that
transaction?
Mr. Powers. He gave--sorry.
Mr. Whitfield. On page 61, footnote 17, it indicates that,
``Fastow told us that he had not participated in these
negotiations.''
Mr. Powers. Right. And then we had a document that
demonstrated that wasn't true, and at that point he stopped
talking to us, or meaningfully talking to us.
Mr. Whitfield. And what was that document?
Mr. Powers. It was a document that demonstrated he had
participated in these negotiations.
Mr. Whitfield. And you have that document.
Mr. Powers. Yes.
Mr. Whitfield. Okay. And we would also like to have that,
and if you would talk to Enron about that and----
Mr. Powers. Okay.
Mr. Whitfield. [continuing] support us in our efforts.
Mr. Powers. And I will say we will support providing
whatever information and backup of this information the
committee needs.
Mr. Whitfield. And we appreciate that very much. The
Special Committee's report states how facetious earnings from
the Raptors accounted for more than 80 percent of Enron's
earnings from the last two quarters of the year 2000. Even if
no one knew about the problems lurking with the Raptors at that
time, wouldn't the very fact that 80 percent of earnings are
coming from transactions with a partnership headed by Enron's
CFO have been enough to send off alarms in the investor and
analyst communities?
Mr. Powers. Yes. I think it was a little over 70 percent,
but, yes, I would think that would be something that would have
set off concerns in the investor community.
Mr. Whitfield. Okay. And what was Enron's Board of
Directors' understanding regarding the Enron/LJM2 services
agreement?
Mr. Powers. The board members that we talked to said they
understood--well, some said they didn't know about that. Those
who did said they assumed it was a very minor services
agreement for back office booking of transactions, and that it
was not significant.
Mr. Whitfield. And did the members of the board of
directors understand that Enron's own employees were
negotiating on behalf of LJM2 against Enron?
Mr. Powers. Yes. They understood that Fastow was
representing LJM1 and LJM2.
Mr. Whitfield. Any others, other than Fastow, that they
understood?
Mr. Powers. They say that they didn't know that other Enron
employees were then over on the services agreement working for
Fastow and negotiating on the basis of LJM.
Mr. Whitfield. But the entire board was aware of Fastow's
involvement.
Mr. Powers. Yes, yes.
Mr. Whitfield. Okay. All right. That is the end of my
questions. I recognize the gentleman from Illinois for 5
minutes.
Mr. Rush. Thank you, Mr. Chairman. Mr. Powers, I want to
get back to this question of bona fide economic objectives. And
in your estimation, how common is it for corporations to misuse
SPEs merely to accomplish favorable financial results and not
achieve bona fide economic objectives or risks--or transferring
risk? And is this abuse specific to certain industries? And I
also would like for you just to give us some examples of what
you would call a bona fide economic objective or transfer of
risk.
Mr. Powers. Okay. In answer to the first part of your
question, I don't know how widely used, how they are used by
other companies, and I hope and I am quite sure other companies
are looking into how they are using.
I think there are two different kinds of transactions here.
One is a hedging transaction, and there is nothing
inappropriate about a hedging transaction to take risk from a
company. We all do it, in a sense, when we buy insurance, as
long as you are really buying insurance, rather than just
setting up something to look like a hedging transaction that
isn't accomplishing that purpose. That is the first issue.
The second are these SPEs to, as we say, put debt off the
books, and I would just give two examples. If I buy 100 shares
of Ford Motor Company, I risk the value of my equity but not
all the balance sheet of the Ford Motor Company when I
consolidate it into my financial statements, and that seems
appropriate. If I own almost--you know, if I own all of the
Ford Motor Company, maybe it should be different. When I lease
equipment rather than buy equipment, one of the considerations
I may take into account is I don't want to have the debt on the
equipment on my balance sheet. So these are extremely difficult
policy questions for the accounting industry, for Congress, for
the Securities and Exchange Commission to sort out how these
ought to be used. But I do think it would be unfair to come
away with the Enron experience thinking that all hedges or all
special-purpose vehicles are inappropriate. They are not; they
are often and I desperately hope by most people in the country
used in appropriate ways.
Mr. Rush. With that in mind, I know you are not a
securities expert--you have testified about that on more than
one occasion this afternoon--but do you have an opinion or
opinions in terms of how we, as Members of Congress, can avoid
the abuses of SPEs that were perpetuated by Enron without doing
away with what you have clearly defined as the more legitimate
purposes and benefits of SPEs?
Mr. Powers. Well, I look at it, from a non-securities
expert, as a fairly simply issue: There ought to be
transparency. To the extent that the problem here is that the
existing laws might have been enforced, then enforcement. To
the extent that the existing laws aren't requiring enough
transparency, then maybe the existing laws need to be changed.
But transparency is absolutely crucial, and that was one of the
problems here.
Mr. Rush. I want to try to get quickly back to the question
of Mr. Richard Buy here, who is the Enron senior risk officer.
In staff interviews with Mr. Buy, he suggested, similar to the
findings of your report, that his group was not charged with
the responsibility of evaluating Enron's big picture risk as it
related to all of these activities in total. What then is the
role of someone who is the risk management officer, the risk
manager, is it just to look at a risk change here or a risk
change there or a willy nilly look at this or do they have to
be more focused and more concerted in their efforts?
Mr. Powers. As I indicated at the outset of my testimony,
Enron isn't just a pipeline and energy trading company; it has
a very significant investment portfolio. And a primary, if not
only, job of the risk assessment group was to evaluate the
risks of those investments, diversification, what doing due
diligence on the investments and things like that. I am not an
expert on this, but as an investment manager, that was one of
the roles.
Mr. Rush. Mr. Chairman, one additional question here.
According to your report, the board of directors also charged
Mr. Buy with a substantial role in the oversight of Enron's
relationship with the LJM partnerships, and he was supposed to
review and sign off every deal. Why then was Mr. Buy not in a
position to see the multitude of problems and conflicts facing
these partnerships and Enron? Do you any thoughts on that?
Mr. Powers. Well, I think he was in a position to see that
these were not arms-length deals.
Mr. Rush. So you say he was in a position.
Mr. Powers. He might not have been in a position to see the
complexities of the underlying transactions, but he was in a
position to monitor the arms-length nature of many of these
deals.
Mr. Rush. Thank you, Mr. Chairman. I yield back.
Mr. Whitfield. The gentleman's time has expired. The
gentleman from Texas is recognized for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. First, Mr. Powers, I
appreciate you spending all this time with the subcommittee
this afternoon. I may be the last questioner, but let me ask
you some questions about Arthur Andersen accounting firm. In
your report, it stated that, ``Evidence available to us,'' and
I am quoting, ``suggests that Andersen did not fulfill its
professional responsibilities in connection with its audits and
Enron's financial statements or its obligations to bring to the
attention of Enron's Board concerns about Enron's internal
controls.'' What specifically should Andersen have been doing
that it was not doing?
Mr. Powers. Well, we have, throughout the morning and
afternoon, talked about many, many things in the accounting,
including the overall structure of hedging with one's own stock
that were, we think inappropriate, but at a minimum very
questionable. And in their audit should have brought those to
the attention of the Audit Committee.
Mr. Green. Since Arthur Andersen earned $5.7 million in
consulting fees to set up the LJM deals, how could they not
have known about the outside equity was bogus?
Mr. Powers. Well, they may have known that, but the source
of the money to back the Big River and Little River loans was
from Barclay's, and the only reason it wasn't equity was it was
backed with a reserve account that came from a distribution
from JEDI in a very complicated way, and I must say, it is not
possible, even in a thorough audit, to see every little
movement of money. Again, I am not an accountant who goes
through these audits. I would not be surprised by that claim
that we didn't know that. I don't know whether it is true or
not. And I don't think--in the report, we have not stated
otherwise. We don't know whether Andersen was aware that the
Big River and Little River loans in Chewco were backed by
reserve accounts, which made them not equity but debt.
Mr. Green. You also mentioned that Andersen participated in
the structuring and accounting treatment of the Raptor
transactions and charged again over a million dollars for its
services, yet it apparently failed to provide the oversight to
prevent those transactions from going forward. Was Andersen
purely--and I hate to say this about such a great company I
thought of so many years, their partnership--was it purely
incompetent in its duties or simply taking advantage of a
company that appears to be out of control? In other words, was
Andersen there as a whistleblower or to earn fees?
Mr. Powers. Well, I don't know why Andersen did not
recognize these issues. What we do say is that as the Raptors,
for example, were being developed, Andersen was providing
accounting services of some sort, whether we call them
consulting, or real-time accounting. They were providing real-
time accounting as those were being developed, and they did not
bring to the attention of the board--they did not bring
independent judgment to bear on those transactions. If they
did, they didn't do it adequately.
Mr. Green. I guess it is frustrating being from Houston and
seeing the tragedy and the devastation from Enron and the
collapse, and I guess--and I have read lots of articles--I
guess Enron could be the Michael Milken in a tall, shiny
skyscraper in downtown Houston. And it is just such a shock to
watching a company over 15 or 16 years grow and be so
successful and aggressive but aggressive to the point where
they created these multiple partnerships. It is just
astonishing, I guess.
Mr. Powers. Well, Congressman, being not too far up the
road from Houston and being in Houston quite a bit----
Mr. Green. Hundred and sixty-two miles; I have driven it
lots of times.
Mr. Powers. [continuing] this is a terrible tragedy for
Houston and our part of the country. Yes, there is a lot of
technical material we have talked about today, but I think you
are absolutely right to bring that point that this is a great
human tragedy for many individuals.
Mr. Whitfield. The gentleman's time has expired.
Mr. Green. Thank you, Mr. Chairman.
Mr. Whitfield. I understand the chairman of the entire
committee seeks recognition?
Chairman Tauzin. I seek recognition with the consent of the
members to do something on behalf of our investigation,
collectively, and ask the gentleman a few more questions, if
you don't mind. Would the gentleman yield?
Mr. Whitfield. Without objection.
Chairman Tauzin. On behalf of our investigation, Dean
Powers, has the alleged shredding of documents at Enron impeded
the investigation of your committee in any way?
Mr. Powers. I don't think so. We haven't seen some hole
that, ``Where is that?'' Having said that--and we haven't had
the opportunity to go through a lot of documents. We haven't
been able to download a lot of e-mail. So there is a great deal
of material.
Chairman Tauzin. Do you admit going in that you had limited
access to documents?
Mr. Powers. Correct.
Chairman Tauzin. Are you aware of why shredding is
occurring at Enron as late as January and what is being
shredded? Why did they hire a company called Shredco to come in
and do all this shredding?
Mr. Powers. I don't know. I can't answer that.
Chairman Tauzin. Well, you have not asked that question in
the purview of your investigation? Didn't it disturb you that
all this shredding is going on while you are trying to do this
investigation for the board?
Mr. Powers. Well, I mean I read about it in the paper, and
we did ask, are there areas of documents that we are not
getting, are there transactions that we can't understand? And
we came to the conclusion that we were trying to move ahead
expeditiously, that there were not gaps in our----
Chairman Tauzin. Did you ask the question, why is all this
shredding going on?
Mr. Powers. We did talk to the FBI about that and
cooperated with the FBI and----
Chairman Tauzin. This is going on while the FBI is there in
Houston?
Mr. Powers. No, no. They came in after the----
Chairman Tauzin. After the shredding?
Mr. Powers. [continuing] after the shredding had started.
Chairman Tauzin. Just to put in this perspective, my
understanding from the investigators, Mr. Dingell, is that the
web site of the shredding company, Shredco, opens up with a
statement, ``You think you got rid of it, now you are being
sued. Call us, we guarantee destruction.'' And Enron would hire
a company with that as their invite to come in and shred
documents in the middle of all this. Doesn't that disturb you?
Mr. Powers. Well, I agree these allegations of shredding
are extremely serious allegations that the FBI ought to look
into.
Chairman Tauzin. And to put this in perspective, because
you had limited access to documents anyhow, you can't know
whether documents were being shredded that may have aided and
assisted you in understanding the intricacies and the
involvement of parties in these affairs.
Mr. Powers. Right. We can't know whether some of those
documents would have helped us or whether even if they had not
been shredded we would have gotten them.
Chairman Tauzin. Thank you, Mr. Chairman.
Mr. Whitfield. Dean, I know you will be disappointed, but
that probably concludes the hearing. And on behalf of the
committee, I want to thank you so much for being here today and
testifying. Your report of the Special Investigative Committee
has been particularly helpful to us as we continue our efforts
to get to the bottom of this and to determine what we can do
from preventing this in the future. So thank you very much for
joining us.
Mr. Powers. Thank you.
[Whereupon, at 2:45 p.m., the subcommittee was adjourned.]