Publicized Letter to Lay Involved Struggle Over Enron's Direction
The Wall Street Journal, 01/16/2002

Text of Letter to Enron's Chairman After Departure of Chief Executive
The New York Times, 01/16/2002

THE NATION THE ENRON INQUIRY Memo Warned of Enron's Setup Being Seen as 'Hoax' Probe: Full text suggests that a senior executive was not telling Kenneth Lay anything new. She ridicules accounting procedures and forecasts the company's collapse.
Los Angeles Times, 01/16/2002

ENRON'S COLLAPSE: THE EMPLOYEE
Author of Letter To Enron Chief Is Called Tough
The New York Times, 01/16/2002

THE NATION A Regular Life in Unusual Times Profile: Enron insider Sherron Watkins led a quiet existence before becoming a key figure in the firm's scandal.
Los Angeles Times, 01/16/2002

Law Firm Releases Enron E-Mails Detailing Lockdown
Dow Jones News Service, 01/16/2002

ENRON'S COLLAPSE: THE INVESTIGATION
Justice Dept.'s Inquiry Into Enron Is Beginning to Take Shape, Without Big Names
The New York Times, 01/16/2002

Deals & Deal Makers: NYSE Halts Trading in Enron, Moves to Delist Energy Company
The Wall Street Journal, 01/16/2002

NYSE Moves to Delist Enron Stock
Los Angeles Times, 01/16/2002

Accord for Enron Trading Operations Leaves UBS Free Not to Inject Capital
The Wall Street Journal, 01/16/2002

SWITZERLAND: UBS says has no acquisition plans for Enron Europe.
Reuters English News Service, 01/16/2002

UBS CEO Rules Out Big Acqusitions
Dow Jones International News, 01/16/2002

UBS Enron bid values affiliate at US$4M: Enron Canada Corp.: Unit of failed parent holds cash of at least $220-million
National Post, 01/16/2002

The Enron Effect: Government's Job Being Rethought
The Wall Street Journal, 01/16/2002

Law Firm Reassured Enron on Accounting --- Vinson & Elkins Discounted Warnings by Employee About Dubious Dealings
The Wall Street Journal, 01/16/2002

ENRON'S COLLAPSE: THE LAW FIRM
Legal Counsel In Many Ways Mirrors Client
The New York Times, 01/16/2002

ENRON'S COLLAPSE: THE BANKS
Lenders Differ in Disclosing Their Exposure to Troubles
The New York Times, 01/16/2002

Citigroup's Enron Financing Stirs Controversy
The Wall Street Journal, 01/16/2002

Enron, Argentina take down J.P. Morgan Chase earnings
Associated Press Newswires, 01/16/2002

JP Morgan Chase's Shapiro says Enron exposure totalled 450 mln usd in Q4
AFX News, 01/16/2002

Citigroup's Enron Deal Stirs Creditor Outcry
Dow Jones Business News, 01/16/2002

FOCUS Analysts, ratings agencies image hurt by Enron; legal impact unlikely
AFX News, 01/16/2002

`Lockdowns' of 401(k) Plans Draw Scrutiny --- Enron Employees' Losses Suddenly Put Practice in Spotlight
The Wall Street Journal, 01/16/2002

Computer sleuths searching for deleted Enron e-mails
Associated Press Newswires, 01/16/200

Paper Trail: Andersen Fires Partner It Says Led Shredding Of Enron Documents --- It Claims Disposal Effort Started After SEC Asked Energy Firm for Data --- Was He Following Orders?
The Wall Street Journal, 01/16/2002

ENRON'S COLLAPSE: NEWS ANALYSIS
For Andersen and Enron, the Questions Just Keep Coming
The New York Times, 01/16/2002

Andersen Dismisses Lead Enron Auditor; Partner Said to Lead Document Shredding
The Washington Post, 01/16/2002

Scandals Put Andersen's Future at Risk; Enron Case Is Just Latest to Put Dent in Reputation of Big Five Accounting Firm
The Washington Post, 01/16/2002

Arthur Andersen May Lack Insurance To Cover Judgments
The Wall Street Journal, 01/16/2002

SEC, Accounting Firms Redrafting Audit Rules; Agency Chairman Draws Fire for Role in Effort
The Washington Post, 01/16/2002

O'Neill says US derivatives rules may need modernising in wake of Enron case
AFX News, 01/16/2002

ENRON'S COLLAPSE: THE DONATIONS
Enron's Ties to a Leader of House Republicans Went Beyond Contributions to His Campaign
The New York Times, 01/16/2002

Hooley and Blumenauer return Enron cash
Associated Press Newswires, 01/16/200

The Essentials Of a Washington Scandal; Enron Has Possibility. But Something's Still Missing.
The Washington Post, 01/16/2002

Commentary No Special Counsel on Enron
Los Angeles Times, 01/16/2002

. . . Especially From Republicans
The Washington Post, 01/15/2002

Media Split on Import of Enron
The Washington Post, 01/15/2002

THE IDEAS INDUSTRY Richard Morin and Claudia Deane
Enron Pumped Cash Into Tanks Too
The Washington Post, 01/15/2002

Enron highlights risks of employee stock plans
National Post, 01/16/2002

DEALS Allan Sloan
The Worst Thing About Enron: Checks and Balances Failed
The Washington Post, 01/15/2002

A Comedy of Assets
The Washington Post, 01/16/2002

Watchdogs and Lapdogs
The Wall Street Journal, 01/16/2002

'Genius of Capitalism' Let Out of the Bottle
Los Angeles Times, 01/16/200

Letters to the Editor
The Real Lessons of Enron's Fall
The New York Times, 01/16/200

POINT OF VIEW: Beyond Enron, A Wider Crisis Of Confidence
Dow Jones News Service, 01/16/2002

THE WORLD World Press Tries to Unknot Tale of Bush and the Pretzel Reaction: Some papers are skeptical or sarcastic. Others delve into the history of the salty snack.
Los Angeles Times, 01/16/2002

BRAZIL PRESS: Elektro Cancels BRR195M Bond Plan
Dow Jones Capital Markets Report, 01/16/2002

Houston Non-Profit Organization Targets Former Enron Employees
Business Wire, 01/16/2002

Former Enron Corp. employees hawking items from bankrupt company in Internet auction
Associated Press Newswires, 01/16/2002

_______________________________________________________________________________________

Publicized Letter to Lay Involved Struggle Over Enron's Direction
By John R. Emshwiller and Kathryn Kranhold
Staff Reporters of The Wall Street Journal

01/16/2002
The Wall Street Journal
A4
(Copyright (c) 2002, Dow Jones & Company, Inc.)

A now highly publicized August 2001 letter from an Enron Corp. executive raising serious questions about the company's business and accounting practices was actually one of the later shots fired in an internal struggle that had been going on inside the energy-trading company for a year or more. 
The letter to Enron Chairman and Chief Executive Officer Kenneth Lay from Sherron Watkins, a company vice president, detailed what she saw as the huge financial and public-relations risks facing the company. Extensive dealings with partnerships that had been set up and run by some of the company's own executives could cause Enron to "implode," she wrote. Widespread disclosure of those partnerships in the media beginning in October played a key role in a collapse in investor confidence that eventually forced Enron to seek bankruptcy-law protection.
Ms. Watkins's attorney, Philip Hilder, declined to discuss details of the letter. But he said his client likely would cooperate with some of the government investigations into the Enron collapse. "She has a compelling story and I expect she'll have an opportunity to tell that story," Mr. Hilder said. 
But the story behind Ms. Watkins's letter is much more than that. It involves a power struggle over the direction of Enron as it committed itself to the extremely unusual and tangled partnership structures that eventually contributed to its undoing. People familiar with that struggle say the issues ranged from the ethics of Enron's actions to a battle for the job of chief financial officer at the Houston-based energy-trading company. The partnerships -- called LJM Cayman LP and LJM2 Co-Investment LP -- were formed in 1999 by then Chief Financial Officer Andrew Fastow, who also ran the entities and owned part of them. From the beginning, Mr. Fastow, Mr. Lay and other top company officials said the LJM partnerships were designed to do business deals with Enron and help the energy company manage its financial risk. 
However, other Enron officials were extremely skeptical about the partnerships, say company insiders and others familiar with the matter. For one thing, they saw inherent conflicts of interest in having the company's chief financial officer standing to financially benefit from business deals done with Enron by an outside partnership that he headed. Late last year, Enron estimated that Mr. Fastow made more than $30 million from the LJM partnerships. 
One of the chief critics was Jeffrey McMahon, who in March 2000 took his concerns about LJM to then Enron President Jeffrey Skilling. Mr. Skilling didn't share those concerns and soon after the meeting Mr. McMahon left his job as corporate treasurer for another executive post within Enron. 
A spokeswoman for Mr. Skilling says Mr. McMahon merely voiced worry about whether his own compensation might be affected if he had to negotiate deals on the opposite side of the table from LJM. Mr. McMahon "never raised any broader concerns," she said. 
However, an Enron spokesman speaking on behalf of Mr. McMahon strongly challenged that interpretation of events. "There was a very clear conversation where Mr. McMahon expressed concerns about a range of conflicts" related to the LJM entities, said the spokesman. 
Mr. Fastow had been widely viewed within Enron as a close ally of Mr. Skilling, whose sudden resignation last August raised investor concerns and contributed to the company crisis. For his part, Mr. Fastow believed that Mr. McMahon wanted his job as chief financial officer and that Ms. Watkins was an ally in that effort, said a person familiar with the matter. Mr. McMahon was named chief financial officer last October when Enron replaced Mr. Fastow because of rising controversy surrounding the partnerships. 
The Enron spokesman said Mr. McMahon denies that he was seeking the chief-financial-officer job when he went to see Mr. Skilling. Mr. McMahon knew Ms. Watkins, the spokesman said. Indeed, he added, she initially had written the letter anonymously and first revealed her identity as the author to Mr. McMahon. He urged her to identify herself to Mr. Lay and personally express her concerns to the CEO. She later had a meeting with Mr. Lay. 
Ms. Watkins' attorney, Mr. Hilder, said "We categorically deny that Ms. Watkins was in cahoots with Mr. McMahon regarding trying to oust Mr. Fastow as CFO." He declined to comment on any specific dealings she might have had with Mr. McMahon. 
Also expressing concerns about LJM was former Enron Vice Chairman Cliff Baxter, who left the company last May. In her letter, Ms. Watkins said Mr. Baxter "complained mightily . . . about the inappropriateness of our transactions with LJM." Mr. Baxter couldn't be reached for comment yesterday. 
--- 
Journal Link: Read a copy of the letter from Sherron Watkins warning Kenneth Lay about Enron's accounting practices at WSJ.com/JournalLinks.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business/Financial Desk; Section C
Text of Letter to Enron's Chairman After Departure of Chief Executive

01/16/2002
The New York Times
Page 6, Column 1
c. 2002 New York Times Company

Following is the text of an unsigned letter written in August to Kenneth L. Lay, the chairman of the Enron Corporation, after Jeffrey K. Skilling resigned unexpectedly as chief executive on Aug. 14. Its author was later identified as Sherron S. Watkins, a vice president for corporate development at Enron. The House Energy and Commerce Committee released excerpts of the letter on Monday and the full letter yesterday: 
Has Enron become a risky place to work? For those of us who didn't get rich over the last few years, can we afford to stay?
Skilling's abrupt departure will raise suspicions of accounting improprieties and valuation issues. Enron has been very aggressive in its accounting -- most notably the Raptor transactions and the Condor vehicle. We do have valuation issues with our international assets and possibly some of our EES MTM positions. 
The spotlight will be on us, the market just can't accept that Skilling is leaving his dream job. I think that the valuation issues can be fixed and reported with other good will write-downs to occur in 2002. How do we fix the Raptor and Condor deals? They unwind in 2002 and 2003, we will have to pony up Enron stock and that won't go unnoticed. 
To the layman on the street, it will look like we recognized funds flow of $800 million from merchant asset sales in 1999 by selling to a vehicle (Condor) that we capitalized with a promise of Enron stock in later years. Is that really funds flow or is it cash from equity issuance? 
We have recognized over $550 million of fair value gains on stocks via our swaps with Raptor. Much of that stock has declined significantly -- Avici by 98 percent from $178 million, to $5 million; the New Power Company by 80 percent from $40 a share, to $6 a share. The value in the swaps won't be there for Raptor, so once again Enron will issue stock to offset these losses. Raptor is an LJM entity. It sure looks to the layman on the street that we are hiding losses in a related company and will compensate that company with Enron stock in the future. 
I am incredibly nervous that we will implode in a wave of accounting scandals. My eight years of Enron work history will be worth nothing on my resume, the business world will consider the past successes as nothing but an elaborate accounting hoax. Skilling is resigning now for ''personal reasons'' but I would think he wasn't having fun, looked down the road and knew this stuff was unfixable and would rather abandon ship now than resign in shame in two years. 
Is there a way our accounting guru's can unwind these deals now? I have thought and thought about a way to do this, but I keep bumping into one big problem -- we booked the Condor and Raptor deals in 1999 and 2000, we enjoyed wonderfully high stock price, many executives sold stock, we then try and reverse or fix the deals in 2001, and it's a bit like robbing the bank in one year and trying to pay it back two years later. Nice try, but investors were hurt, they bought at $70 and $80 a share looking for $120 a share and now they're at $38 or worse. We are under too much scrutiny and there are probably one or two disgruntled ''redeployed'' employees who know enough about the ''funny'' accounting to get us in trouble. 
What do we do? I know this question cannot be addressed in the all-employee meeting, but can you give some assurances that you and Causey will sit down and take a good hard objective look at what is going to happen to Condor and Raptor in 2002 and 2003? 
Summary of Alleged Issues: 
RAPTOR Entity was capitalized with LJM equity. That equity is at risk; however, the investment was completely offset by a cash fee paid to LJM. If the Raptor entities go bankrupt LJM is not affected, there is no commitment to contribute more equity. 
The majority of the capitalization of the Raptor entities is some form of Enron N/P, restricted stock and stock rights. 
Enron entered into several equity derivative transactions with the Raptor entities locking in our values for various equity investments we hold. 
As disclosed in 2000, we recognized $500 million of revenue from the equity derivatives offset by market value changes in the underlying securities. 
This year, with the value of our stock declining, the underlying capitalization of the Raptor entities is declining and credit is pushing for reserves against our MTM positions. 
To avoid such a write-down or reserve in quarter one 2001, we ''enhanced'' the capital structure of the Raptor vehicles, committing more ENE shares. 
My understanding of the third-quarter problem is that we must ''enhance'' the vehicles by $250 million. 
I realize that we have had a lot of smart people looking at this and a lot of accountants including AA & Co. have blessed the accounting treatment. None of that will protect Enron if these transactions are ever disclosed in the bright light of day. (Please review the late 90's problems of Waste Management -- where AA paid $130 million plus in litigation re questionable accounting practices.) 
The overriding basic principle of accounting is that if you explain the ''accounting treatment'' to a man in the street, would you influence his investing decisions? Would he sell or buy the stock based on a thorough understanding of the facts? If so, you best present it correctly and/or change the accounting. 
My concern is that the footnotes don't adequately explain the transactions. If adequately explained, the investor would know that the ''entities'' described in our related party footnote are thinly capitalized, the equity holders have no skin in the game, and all the value in the entities comes from the underlying value of the derivatives (unfortunately in this case, a big loss) AND Enron stock and N/P. Looking at the stock we swapped, I also don't believe any other company would have entered into the equity derivative transactions with us at the same prices or without substantial premiums from Enron. In other words, the $500 million in revenue in 2000 would have been much lower. How much lower? 
Raptor looks to be a big bet if the underlying stocks did well, then no one would be the wiser. If Enron stock did well, the stock issuance to these entities would decline and the transactions would be less noticeable. All has gone against us. The stocks, most notably Hanover, the New Power Company and Avici are underwater to great or lesser degrees. 
I firmly believe that executive management of the company must have a clear and precise knowledge of these transactions and they must have the transactions reviewed by objective experts in the fields of securities law and accounting. I believe Ken Lay deserves the right to judge for himself what he believes the probabilities of discovery to be and the estimated damages to the company from those discoveries and decide one of two courses of action: 
1. The probability of discovery is low enough and the estimated damage too great; therefore we find a way to quietly and quickly reverse, unwind, write down these positions/transactions. 
2. The probability of discovery is too great, the estimated damages to the company too great; therefore, we must quantify, develop damage containment plans and disclose. 
I firmly believe that the probability of discovery significantly increased with Skilling's shocking departure. Too many people are looking for a smoking gun. 
Summary of Raptor Oddities: 
1. The accounting treatment looks questionable. 
a. Enron booked a $500 million gain from equity derivatives from a related party. 
b. That related party is thinly capitalized with no party at risk except Enron. 
c. It appears Enron has supported an income statement gain by a contribution of its own shares. 
One basic question: The related party entity has lost $500 million in its equity derivative transactions with Enron. Who bears that loss? I can't find an equity or debt holder that bears that loss. Find out who will lose this money. Who will pay for this loss at the related party entity? 
If it's Enron, from our shares, then I think we do not have a fact pattern that would look good to the S.E.C. or investors. 
2. The equity derivative transactions do not appear to be at arms length. 
a. Enron hedged New Power, Hanover and Avici with the related party at what now appears to be the peak of the market. New Power and Avici have fallen away significantly since. The related party was unable to lay off this risk. This fact pattern is once again very negative for Enron. 
b. I don't think any other unrelated company would have entered into these transactions at these prices. What else is going on here? What was the compensation to the related party to induce it to enter into such transactions? 
3. There is a veil of secrecy around LJM and Raptor. Employees question our accounting propriety consistently and constantly. This alone is cause for concern. 
a. Jeff McMahon was highly vexed over the inherent conflicts of LJM. He complained mightily to Jeff Skilling and laid out five steps he thought should be taken if he was to remain as treasurer. Three days later, Skilling offered him the C.E.O. spot at Enron Industrial Markets and never addressed the five steps with him. 
b. Cliff Baxter complained mightily to Skilling and all who would listen about the inappropriateness of our transactions with LJM. 
c. I have heard one manager-level employee from the principal investments group say, ''I know it would be devastating to all of us, but I wish we would get caught. We're such a crooked company.'' The principal investments group hedged a large number of their investments with Raptor. These people know and see a lot. Many similar comments are made when you ask about these deals. Employees quote our C.F.O. as saying that he has a handshake deal with Skilling that LJM will never lose money. 
4. Can the general counsel of Enron audit the deal trail and the money trail between Enron and LJM/Raptor and its principals? Can he look at LJM? At Raptor? If the C.F.O. says no, isn't that a problem? 
Condor and Raptor Work: 
1. Postpone decision on filling office of the chair, if the current decision includes C.F.O. and/or C.A.O. 
2. Involve Jim Derrick and Rex Rogers to hire a law firm to investigate the Condor and Raptor transactions to give Enron attorney-client privilege on the work product. (Can't use V & E due to conflict -- they provided some true sale opinions on some of the deals). 
3. Law firm to hire one of the big 6, but not Arthur Andersen or PricewaterhouseCoopers due to their conflicts of interest: AA & Co. (Enron); PWC (LJM). 
4. Investigate the transactions, our accounting treatment and our future commitments to these vehicles in the form of stock, NP, etc., For instance: In the third quarter we have a $250 million problem with Raptor 3 (NPW) if we don't ''enhance'' the capital structure of Raptor 3 to commit more ENE shares. By the way: in Q. 1 we enhanced the Raptor 3 deal, committing more ENE shares to avoid a write-down. 
5. Develop cleanup plan: 
a. Best case: Clean up quietly if possible. 
b. Worst case: Quantify, develop P.R. and I.R. campaigns, customer assurance plans (don't want to go the way of Salomon's trading shop), legal actions, severance actions, disclosure. 
6. Personnel to quiz confidentially to determine if I'm all wet: 
a. Jeff McMahon 
b. Mark Koenig 
c. Rick Buy 
d. Greg Walley 
To put the accounting treatment in perspective I offer the following: 
1. We've contributed contingent Enron equity to the Raptor entities. Since it's contingent, we have the consideration given and received at zero. We do, as Causey points out, include the shares in our fully diluted computations of shares outstanding if the current economics of the deal imply that Enron will have to issue the shares in the future. This impacts 2002-2004 earnings-per-share projections only. 
2. We lost value in several equity investments in 2000, $500 million of lost value. These were fair-value investments; we wrote them down. However, we also booked gains from our price risk management transactions with Raptor, recording a corresponding PRM account receivable from the Raptor entities. That's a $500 million related party transaction -- it's 20 percent of 2000 IBIT, 51 percent of NI pretax, 33 percent of NI after tax. 
3. Credit reviews the underlying capitalization of Raptor, reviews the contingent shares and determines whether the Raptor entities will have enough capital to pay Enron its $500 million when the equity derivatives expire. 
4. The Raptor entities are technically bankrupt; the value of the contingent Enron shares equals or is just below the PRM account payable that Raptor owes Enron. Raptor's inception-to-date income statement is a $500 million loss. 
5. Where are the equity and debt investors that lost out? LJM is whole on a cash-on-cash basis. Where did the $500 million in value come from? It came from Enron shares. Why haven't we booked the transaction as $500 million in a promise of shares to the Raptor entity and $500 million of value in our ''economic interests'' in these entities? Then we would have a write-down of our value in the Raptor entities. We have not booked the latter, because we do not have to yet. Technically we can wait and face the music in 2002-2004. 
6. The related party footnote tries to explain these transactions. Don't you think that several interested companies, be they stock analysts, journalists, hedge fund managers, etc., are busy trying to discover the reason Skilling left? Don't you think their smartest people are poring over that footnote disclosure right now? I can just hear the discussions -- ''it looks like they booked a $500 million gain from this related party company and I think, from all the undecipherable half-page on Enron's contingent contributions to this related party entity, I think the related party entity is capitalized with Enron stock.'' . . . . ''No, no, no, you must have it all wrong, it can't be that, that's just too bad, too fraudulent, surely AA & Co. wouldn't let them get away with that?'' ''Go back to the drawing board, it's got to be something else. But find it!'' . . . . ''Hey, just in case you might be right, try and find some insiders or 'redeployed' former employees to validate your theory.''

Chart: ''Terms of the Business'' AA & CO. -- Arthur Andersen & Company, Enron's auditor. AVICI -- A maker of data networking systems. BAXTER, CLIFF -- Vice chairman of Enron before he resigned in May. BUY, RICK -- Enron's chief risk officer. CAUSEY, RICHARD -- Enron's chief accounting officer. CONDOR -- An off-balance-sheet partnership. DERRICK, JIM -- General counsel of Enron. EES MTM -- Enron Energy Services, mark to market, a way of accounting for the value of contracts. ENE -- Stock symbol of Enron. EPS -- Earnings per share. HANOVER -- Hanover Compressor, a provider of natural gas compression services. IBIT -- Income before interest and taxes. LJM -- Partnerships with Enron that were controlled by Andrew S. Fastow, the company's chief financial officer until he was ousted on Oct. 24. KOENIG, MARK -- Enron executive vice president for investor relations. McMAHON, JEFF -- Enron's chief financial officer. N/P -- Note payable. NI -- Net income NEW POWER -- An energy company. RAPTOR -- An off-balance-sheet partnership. ROGERS, REX -- Assistant secretary general counsel of Enron. SWAPS -- An exchange of one investment for another. V & E -- Vinson & Elkins, Enron's law firm. WHALLEY, GREG -- Enron's president 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Financial Desk
THE NATION THE ENRON INQUIRY Memo Warned of Enron's Setup Being Seen as 'Hoax' Probe: Full text suggests that a senior executive was not telling Kenneth Lay anything new. She ridicules accounting procedures and forecasts the company's collapse.
MICHAEL A. HILTZIK; DAVID STREITFELD
TIMES STAFF WRITERS

01/16/2002
Los Angeles Times
Home Edition
A-1
Copyright 2002 / The Times Mirror Company

HOUSTON -- A detailed road map of Enron Corp.'s aggressive accounting maneuvers and an uncannily accurate prediction of the company's collapse were laid before Enron Chairman Kenneth L. Lay in August in a lengthy memo that became public Tuesday. 
Excerpts of the memo had been released by congressional investigators Monday, but the full extent of the warnings became known only Tuesday with the release of the entire text.
The author of the memo, Sherron Watkins, 42, expressed concern that the company's vaunted business success would eventually become considered "nothing but an elaborate accounting hoax." Watkins, a vice president of corporate development at Enron, worked directly under the architect of Enron's complex and highly questionable financial dealings. 
Watkins focused particularly on what were known as the "Raptor" transactions, in which Enron transferred several marginal investments to a putatively independent partnership. The partnership had gone virtually bankrupt by last summer, but Enron still was not disclosing the loss to shareholders, Watkins said. 
The full text suggests that Watkins did not believe she was telling Lay much that he did not already know--and that many of the company's financial transactions were mere accounting shams. 
She attempted to persuade Lay either to reverse the offending transactions promptly or to disclose them fully to shareholders and "develop damage containment plans." Lay did neither. 
"Her motivation is not vindication or being proven right or bringing down the company," her husband, Richard, said Tuesday from the family home in Houston. "She's a team player." 
Watkins went to work at Enron Tuesday morning as news of her memo was splashed across the front pages. 
"It's a normal day," said her lawyer, Philip Hilder, although he acknowledged that "it's very difficult for anybody to go to work under these circumstances." 
Watkins has suffered no retaliation from anyone at the company, the lawyer said, although a source close to her said Watkins has been made to feel "an outcast." 
Sherron Watkins, the daughter of two secondary school educators, grew up in the distant Houston suburb of Tomball and graduated from the University of Texas. 
Tuesday morning, television news trucks jammed the street in front of the Watkins home. Later that day, Richard Watkins praised his wife for doing "something quite courageous. She has the strength of her convictions. But she's very vulnerable." 
A neighbor said the hint of moral indignation in Watkins' memo to Lay was genuine. 
"Clearly she thought it was her moral and professional duty to do what she did," said Carrie Wood, who also was Watkins' sorority sister at UT. "Sherron was drawn to the dynamic intellectual challenge of being an Enron vice president. I don't think she was drawn to the materialistic greed that sprang out of it." 
Word of Enron's accounting irregularities leaked out slowly during the fall, depressing the company's already-dropping stock price. Its businesses destroyed and its reputation in tatters, Enron finally filed for Chapter 11 bankruptcy protection Dec. 2. 
Watkins wrote her memo on the heels of the surprise resignation Aug. 14 of Enron Chief Executive Jeffrey K. Skilling. The corporate announcement of Skilling's departure ascribed it to "personal reasons." 
But to Watkins and others inside the company, the move hinted at his deep unease at the accounting irregularities and presaged a difficult period of public scrutiny. 
"I think he . . . looked down the road and knew this stuff was unfixable, and would rather abandon ship now than resign in shame in 2 years," she wrote to Lay. Moreover, she warned, "the probability of discovery significantly increased with Skillings's shocking departure. Too many people are looking for a smoking gun." 
Many of Enron's financial maneuvers would not bear that scrutiny, she said, even though they had been formally approved byEnron's outside auditor, Andersen, formerly known as Arthur Andersen. 
'We're Such a Crooked Company' 
This particularly applied to deals Enron had made with LJM, a partnership that had been set up to trade with Enron and was managed by Enron Chief Financial Officer Andrew S. Fastow. The goal was to move debt and other liabilities off Enron's books, where they would have a negative effect on the company's financial picture, and park them with a putatively independent company. As long as these liabilities remained secret, Enron's reputation, and its stock price, remained buoyant. 
The LJM deals inspired deep unease within Enron, Watkins related, quoting one colleague remarking: "I know it would be devastating to all of us but I wish we would get caught. We're such a crooked company." 
Lay responded to Watkins' letter by meeting with her personally and persuading the Enron board to commission an internal review by Vinson & Elkins, one of Enron's Houston law firms. 
Robert S. Bennett, Enron's Washington attorney, defended the company's response. The nine-page review of Watkins' concerns by Vinson & Elkins issued Oct. 15 shows "the good faith of Ken Lay and the company. . . . It shows that they meaningfully looked into this." 
Bennett said the law firm interviewed Watkins but that it put "a lot of faith in Arthur Andersen." 
Watkins, however, had specifically warned Lay against allowing Vinson & Elkins to conduct the investigation. 
"Can't use V&E due to conflict," she wrote in her memo. "They provided some true sale opinions on some of the deals." 
In other words, she argued that the firm would be ruling on the propriety of legal opinions it had itself issued. 
Moreover, the law firm said in its report, written by Vinson partner Max Hendrick III and addressed to Enron General Counsel James V. Derrick Jr., that it was specifically instructed by Enron not to "second guess . . . the accounting advice and treatment" provided by Andersen. The report stated that Enron and Andersen representatives acknowledged that the accounting treatment of the suspect transactions "is creative and aggressive," but it did not conclude that it was "inappropriate from a technical standpoint." 
Vinson & Elkins spokesman Joe Householder declined to discuss whether it was a conflict of interest for the firm to investigate Watkins' allegations. 
"We are not in a position to talk about our engagements with Enron or any other client," he said. 
As it happens, the firm overruled almost all of Watkins' substantive objections to the LJM transactions, although it did acknowledge some "awkwardness" arising from LJM's executives serving as Enron officers. 
"Transactions were negotiated between Enron employees acting [for] Enron and other Enron employees acting for LJM," the law firm's report stated. 
It also noted that within Enron there was widespread suspicion that the Enron employees representing LJM were enjoying special perquisites, including higher compensation. But it said the awkwardness would be eliminated in the future because LJM executives were leaving the Enron payroll and relocating their offices from its headquarters building. 
Focus on the 'Raptor' Deals 
The report did, however, provide indirect evidence of Enron's custom of minimizing the public disclosure of the nature of its financial maneuvers. Among other things, the company gave its outside lawyers little opportunity to examine closely the financial reports and other documents it was releasing for public consumption. 
"Enron's practice is to provide its financial statements and disclosure materials to V&E with a relatively short time frame within which to respond with comments," the report stated. 
In her memo, Watkins focused most heavily on several transactions between Enron and LJM known as the Raptor deals. The term referred to a special business entity that Enron had established to hold several investments that were expensive and of possibly marginal value, including ownership in a broadband communications company called Rhythms NetConnections and other technology and energy companies. 
To cover the LJM-Raptor acquisition of the investments, Enron pledged shares of its own stock and that of some of its subsidiaries. But it also engaged in a series of complicated derivatives deals aimed at hedging the possibility that the value of Rhythms and the other assets would fall. 
In 2000, Watkins noted, Enron went as far as to record more than $500 million in revenue from those derivatives deals. That, she said, presented numerous problems. 
For one thing, Enron had not received the $500 million from LJM. Rather, the payment was conditioned on the value of the underlying investments remaining high; if the investments deteriorated, there was an increasing chance that Enron would never receive the money. 
Further, it was likely that a truly independent company would not have paid anywhere near $500 million for the investments at issue--meaning that the deal was not legitimately an arm's-length sale. 
Vinson & Elkins acknowledged this, noting in its report that LJM "permitted Enron to close transactions that otherwise could not have been accomplished." 
In fact, as the value of the investments dropped, Enron was obligated to make up the difference by paying LJM more of its own stock. 
Throughout 2001 the underlying investments did fall in value--and so did the value of Enron stock. That meant the company had to contribute vastly more shares to LJM than it ever anticipated. That was a contingency that was never fully disclosed to the public or Enron's shareholders, who stood to lose value in their own shares as more were pledged to LJM. 
"It sure looks to the layman on the street that we are hiding losses in a related company and will compensate that company with Enron stock in the future," Watkins wrote. 
Not until Nov. 8 did Enron fully disclose the nature of the Raptor deals--as part of its public announcement that the improper accounting of those transactions and others resulted in its overstating its earnings by $586 million over a nearly five-year period. 
The announcement all but destroyed any chance that the company would be able to survive in its existing form. 
Addiction to Accounting Tricks 
Enron critic Mark Roberts, president of Off Wall Street Consulting Group, a Cambridge, Mass.-based stock research firm, said the Watkins memo adds to the evidence of Enron's addiction to illegitimate accounting tricks. 
The Raptor deals were derivative transactions "with recourse," meaning deals in which the counter-party would be compensated for any losses, he noted in an interview. 
"If the buyer doesn't have risk, the risk stays with Enron and has to be reflected on their balance sheet," said Roberts, whose firm sold Enron shares "short," a bet that they would fall, as early as last May. 
* 
Hiltzik reported from Los Angeles, Streitfeld from Houston. Times staff writers Richard Simon in Washington, Nancy Rivera Brooks in Los Angeles and Thomas S. Mulligan in New York contributed to this report.

PHOTO: Enron Chairman Kenneth L. Lay received a warning memo from a company vice president.; ; PHOTOGRAPHER: Agence France-Presse; PHOTO: (lead photo) House Energy and Commerce Committee investigators examine Enron documents. Investigators plan to meet today with the Andersen executive who oversaw the audit. He was fired Tuesday.; ; PHOTOGRAPHER: ALEX WONG / Getty Images; PHOTO: Senate staffers review Enron documents; Watkins memo care to light after bankruptcy filing.; ; PHOTOGRAPHER: Reuters 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

National Desk; Section A
ENRON'S COLLAPSE: THE EMPLOYEE
Author of Letter To Enron Chief Is Called Tough
By JIM YARDLEY

01/16/2002
The New York Times
Page 1, Column 5
c. 2002 New York Times Company

HOUSTON, Jan. 15 -- In the cutthroat business culture of the Enron Corporation, where toughness and a sharp tongue were often prerequisites for success, Sherron S. Watkins could be noticeably tough and sharp. 
One former colleague described her as ''a bull in the china shop'' at times. Others mistook the Texan Ms. Watkins for a brusque New Yorker. But several former colleagues agreed that her toughness was rooted in a strong sense of business ethics and that she was unafraid to deliver difficult news, even to her superiors.
''In my experience, she was not afraid to speak the truth, even when it was uncomfortable,'' said Stephen Schwarz, a former Enron employee who worked with Ms. Watkins and described her as ''the consummate professional.'' 
Ms. Watkins, a vice president for corporate development at Enron, has emerged as a central figure in the federal investigations into the company, after a Congressional subcommittee released a letter she sent in August to Kenneth L. Lay, Enron's chairman. [Text, Page C6.] 
Written months before the company laid off more than 4,000 workers and filed for Chapter 11 bankruptcy protection in December, the letter warned that improper accounting practices threatened to destroy the company even as Mr. Lay was reassuring investors and employees. 
That Ms. Watkins, who came to Enron eight years ago after working at the Arthur Andersen accounting firm, would confront her bosses with such a pointed message did not startle those who knew her. 
''Now that I've read what she wrote, I'm not in the least bit surprised that it was her,'' one former Enron colleague said. 
Another Enron employee said word that Ms. Watkins had confronted Mr. Lay began to circulate through the company at some point after she had sent the letter and had a subsequent audience with the chairman. 
''Rumors were floating that she knew some things that were going on and that she had apparently voiced some concerns,'' said a former employee of Enron Broadband Services, a division where Ms. Watkins once worked. 
Ms. Watkins, who is 42 and still works at Enron, declined to comment today, but her lawyer, Philip H. Hilder, said his client had written the letter as an act of conscience. 
''She thought it was the right thing to do, to ask some questions,'' Mr. Hilder said. ''I think that was her only motivation. She saw that there were some problems, and she was concerned.'' 
The investigations into Enron are focused at least in part on a series of off-the-books partnerships that were reportedly used to inflate the company's profits by hiding its losses, including those involving the company's former chief financial officer, Andrew S. Fastow. The partnerships involving Mr. Fastow, who was fired in October amid growing investor concern, are central to the Securities and Exchange Commission's investigation of Enron's accounting. 
Ms. Watkins's lawyer said his client reported directly to Mr. Fastow last summer after being reassigned to his office from the broadband unit. 
In her letter to Mr. Lay, Ms. Watkins did not mince words in discussing four of those partnerships. 
''Has Enron become a risky place to work?'' she asked. ''For those of us who didn't get rich over the last few years, can we afford to stay?'' 
Like many other Enron employees, Ms. Watkins first worked at Arthur Andersen, the Big Five accounting firm that has also come under federal scrutiny after it was disclosed that Andersen employees had destroyed thousands of pages of Enron documents in recent months. One former Enron colleague, whose career also began at Andersen, said Ms. Watkins, then Sherron Smith, started around 1982 as an auditor in Andersen's Houston office. 
Another employee in the same Andersen office was Jeffrey McMahon, who would later become Enron's treasurer. 
''She was very good friends with Jeff McMahon,'' a former Enron colleague said, noting that each had married later in life and started a family. 
It was Mr. McMahon who in 2000 complained to Jeffrey Skilling, then Enron's president, about the partnerships connected to Mr. Fastow, people close to Enron say. Mr. McMahon was later reassigned to another position. Mr. Skilling ascended to chief executive, only to leave abruptly last August after six months in the post. 
Ms. Watkins's career at Andersen took her to New York until she left to join Enron, where she steadily rose to the position of corporate vice president. Colleagues say she first worked on international projects. 
''She could swear up a blue streak,'' said a former colleague who worked with Ms. Watkins on international deals. ''She came down with a tough New Yorker confidence that could carry her in a predominantly men's world.'' 
While Ms. Watkins could be abrasive, that colleague added, her ethics were unassailable. 
Eventually, she was assigned to the broadband unit, where colleagues say her responsibilities included reining in costs. She earned a reputation as being outspoken at meetings. One former Enron executive said Ms. Watkins alienated some employees, who pointedly sought not to work for her. But, the executive added, ''I have never heard anyone question her judgment, her integrity and her veracity. I never heard anybody say she cut corners.'' 
Mr. Schwarz, the former broadband colleague who regarded her highly, described her as ''a New Yorker amidst Texans.'' 
In fact, Ms. Watkins grew up in a small town north of Houston and later attended the University of Texas. Her husband, Richard, declined to comment today at their home in the city's affluent Southampton neighborhood. 
A neighbor, Carrie Wood, said she and Ms. Watkins were sorority sisters in college and painted a softer picture of her friend. She described Ms. Watkins as a doting mother who dedicated all her time away from Enron to her young daughter. 
''She's bright and she's humble and she's thoughtful and deliberate and she's morally sound,'' said Ms. Wood, who described Ms. Watkins as an active Christian who participated in Bible study. ''She's a bright, confident businesswoman, too.'' 
Another neighbor, Chris Cagley, an independent accountant who did business with Enron, said he had on occasion bumped into Ms. Watkins on their street and in the Enron lobby. 
''Now that I know that she wrote this mystery memo, I would say I have a newfound respect for this person,'' Mr. Cagley. ''Because it's not easy to stand up and point out things that are wrong in corporate America. It's much easier to let it go.''

Photo: Sherron S. Watkins wrote to the chairman of Enron last August. 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Financial Desk
THE NATION A Regular Life in Unusual Times Profile: Enron insider Sherron Watkins led a quiet existence before becoming a key figure in the firm's scandal.
DAVID STREITFELD
TIMES STAFF WRITER

01/16/2002
Los Angeles Times
Home Edition
A-17
Copyright 2002 / The Times Mirror Company

HOUSTON -- She goes to Bible study class and buys cookies from every Girl Scout who comes to the door. She gave $40 to the neighborhood association for tree planting, which earned her the rank of "regular," not quite "patron" or "sustaining." 
Sherron Watkins, 42, became a national figure in the Enron Corp. affair this week after the disclosure of her August letter warning fellow company executives of questionable accounting measures. But friends say Watkins, an Enron vice president, has tried not to let the growing scandal at her company overwhelm her life.
The last time Carrie Wood, Watkins' neighbor and former sorority sister, saw her friend was Sunday. Wood asked how she was. 
"I've gotten an SEC [Securities and Exchange Commission] subpoena," Watkins said. 
"For documents? Or for you?" Wood asked. 
"Both," Watkins said. 
But she appeared normal, Wood said, noting that "she was going off to buy her daughter some shoes." 
Watkins lives in Southampton, a pleasant, tree-lined Houston neighborhood with big but not extravagant houses nestled close together. A few blocks away is Rice University, where she runs up the stadium steps to keep fit. 
Watkins and her husband, Richard, who works in oil and gas financing for a Canadian company, and their 2-year-old daughter live in a gray saltbox-style home with a large American flag out front. On Tuesday morning, television news trucks filled the street, but by afternoon they had given up their quest for an interview and left. 
Like the street, the inside of the Watkins house was quiet, domestic--golf clubs on the study floor, family photos on the walls and tables, an empty beer bottle near the door. Richard Watkins had a clipboard on which he was noting who called and what they wanted. It was a long list. 
The husband didn't want to talk much, but neighbors were glad to offer testimonials. 
"She's very professional--we keep it just neighbors," said Chris Cagley, who lives across the street. 
Cagley worked for Enron too, as a contract employee, but he said he never discussed office matters with Watkins. Her role in calling attention to the questionable practices came as a surprise to him when he picked up the Tuesday paper. He was filled with admiration. 
"You know how corporations are," he said. "No one wants to stand out, to say anything bad. But Sherron wanted to inform people, to let them know what was going on." 
Meanwhile, Watkins' attorney, Philip Hilder, was being besieged by the news media in his new downtown offices, which are still under construction. He did simultaneous TV interviews, perfecting the art of saying nothing. 
"We fully anticipate we will be subpoenaed to appear" before Congress and other regulatory hearings, he said repeatedly. 
Hilder, a former federal prosecutor who specializes in white-collar criminal defense, responded to one interviewer who asked if he had handled a case like this before: 
"Has anybody handled anything like this before?"

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Law Firm Releases Enron E-Mails Detailing Lockdown

01/16/2002
Dow Jones News Service
(Copyright (c) 2002, Dow Jones & Company, Inc.)

(This story was first published Tuesday) 

WASHINGTON -(Dow Jones)- One of the law firms representing Enron Corp.'s (ENE) employees in their 401(k) lawsuit against the company released two internal e-mails showing conflicting dates regarding the start of the lockdown period for the company's 401(k) plan.
The press release, issued by Gottesdiener Law Firm, is a possible indication of the tactics the plaintiffs will use in pursuing their claims against Enron. In the release, Gottesdiener also claims the lockdown wasn't administratively necessary at all. 
As reported, some employees of the bankrupt energy concern are suing, claiming a lockdown of the Enron plan to make administrative changes prevented all employees from selling Enron shares during that time. During the lockdown, the company's stock price collapsed. 
An Enron spokesman couldn't immediately be reached for comment on the latest press release. Enron has previously said the lockdown was for 10 days, from Oct. 29 to Nov. 12, and has defended the move as being essential to allow employee account information to be accurately and completely transferred to a new administrator. 
In the Tuesday press release, Gottesdiener said an e-mail sent on Sept. 27 was the company's initial announcement to employees about the lockdown. The e-mail, available for viewing at www.enronsuit.com, told employees that the lockdown would begin on Oct. 19 and last one month. 
"To ensure that records and individual accounts are converted accurately," the e-mail said, "a transition period of approximately one-month will begin Oct. 19." 
"During the transition period," the e-mail continued, "participants are not able to transfer funds among investment options or request a withdrawal." 
However, a second e-mail, sent on Oct. 25 and also available on the Web site, appears to provide contradictory information, stating the lockdown would begin Oct. 26. 
Gottesdiener said the e-mails show that the company issued false information, leading many workers to believe that the lockdown began a week earlier than it actually did and causing them to miss the opportunity to sell their stock when it was still trading for around $30 a share. 
Attorney Eli Gottesdiener said Enron issued another e-mail on Nov. 14 at night informing employees the lockdown had been lifted Nov. 13. 
On Dec. 14, Enron had defended criticism of the 401(k) lockdown in a statement, saying a temporary shutdown is required when companies change 401(k) administrators in order to allow employee account information to be accurately and completely transferred to the new administrator. 
Enron said then that it mailed a notice to the homes of all affected employees Oct. 4, to announce a transition to the new 401(k) administrator would begin Oct. 29. The company said it also sent several internal e-mail reminders between the two dates. 
Enron said the transition period during which employees couldn't change investments lasted "just 10 total trading days," from Monday, Oct. 29 to Monday, Nov. 12, and applied to all plan participants, including senior executives. The company said that from the first day of the temporary plan shutdown to Tuesday, Nov. 13, the first day participants could transfer funds, its closing share price fell from $13.81 to $9.98, a drop of $3.83, or 28%. 
On five days during the lockdown, Enron said, its stock closed below $9.98. On Friday, Oct. 26, the last day before the lockdown began, Enron's stock closed at $15.41. - By Stephen Lee, Dow Jones Newswires; 201.938.5400

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business/Financial Desk; Section C
ENRON'S COLLAPSE: THE INVESTIGATION
Justice Dept.'s Inquiry Into Enron Is Beginning to Take Shape, Without Big Names
By DAVID JOHNSTON

01/16/2002
The New York Times
Page 7, Column 1
c. 2002 New York Times Company

WASHINGTON, Jan. 15 -- With Attorney General John Ashcroft and virtually the entire legal staff of the United States attorney's office in Houston disqualified from the Enron criminal investigation, the Justice Department has been forced to rapidly assemble a pickup team of prosecutors and investigators to unravel Enron's collapse. 
The mammoth white-collar fraud inquiry, which focuses on an energy trading company that has been a big Republican donor and supporter of both President Bush and Mr. Ashcroft, is emerging as the most politically sensitive case yet confronted by the Bush administration. Overall, the investigation will be under the direction of Larry D. Thompson, the deputy attorney general, and his subordinates in the department's criminal division.
Mr. Thompson is proving to be a reliable second-in-command for Mr. Ashcroft and the White House. A top federal prosecutor in Atlanta during the presidency of Mr. Bush's father, Mr. Thompson won his credentials with the Bush camp in 1991 when he helped guide Clarence Thomas through a tumultuous confirmation as a Supreme Court justice. 
On Jan. 10, Mr. Ashcroft, along with David Ayres, his chief of staff, recused himself from the criminal investigation of the company's collapse. The case was then referred to a Washington-led task force. Mr. Ashcroft's associates have said he took the step to avoid any criticism of conflict of interest because he had accepted campaign donations from Enron. Mr. Ashcroft received more than $50,000 from the company and its chairman, Kenneth L. Lay, for his 2000 Senate campaign. 
Some Democratic groups argue that Mr. Thompson, too, has ties to Enron. In Atlanta he was a lawyer at the firm King & Spalding, which represented Enron, but he himself did no work for Enron, a Justice Department official said today. 
So far the department has avoided the appointment of a special counsel, a step that would force it to relinquish control to an outside prosecutor and deepen the impression that the case represents a serious conflict for the Bush administration. 
The criminal investigation itself will be centered in Houston, where Enron is based. But the Justice Department is being forced to recruit a fresh team of prosecutors because Michael T. Shelby, the United States attorney in Houston, and virtually the entire legal staff of Mr. Shelby's office were disqualified on grounds that they were acquainted with Enron employees. 
Mr. Shelby's brother-in-law is a lawyer for Enron North America and was among those Enron stockholders who lost substantial sums when the company's stock plummeted. Mr. Shelby said that several of his employees had ties to former and current Enron workers, some of whom could be witnesses in the case. 
Justice Department officials have declined to specify how many lawyers disqualified themselves and said they did not yet know how many will be reassigned to Houston. F.B.I. officials said that a large number of agents trained in forensic accounting would be temporarily moved to Houston for the case. 
The Federal Bureau of Investigation's own task force on the Enron case will be headed by Joseph L. Ford, an F.B.I. agent for 20 years who has led several of the bureau's complex health care fraud investigations and helped organize the investigation of the financial transactions behind the Sept. 11 terror attacks, government officials said. 
Law enforcement officials said that the initial focus of the criminal inquiry is on whether the company defrauded investors or federal regulators as it set up risky outside partnership deals that contributed to the company's bankruptcy. But privately, some officials said that investigators were at the fledgling stage of the inquiry and had no idea what they would find. 
For that reason, they said it was far too early to discuss what violations they might find as they scour the company looking for documents and cooperative witnesses. Among the areas of scrutiny will be the destruction of Enron-related documents by Arthur Andersen, the company's auditing firm. 
Justice Department officials said that Joshua Hochberg, head of the department's fraud section, would supervise the inquiry with the rank of a United States attorney -- making him an equal to other United States attorneys involved in the case in New York, San Francisco and the District of Columbia. Mr. Hochberg will report to Michael Chertoff, head of the criminal division. 
On a day-to-day basis the case will be managed by Leslie R. Caldwell, who was chief of the securities fraud section of the United States attorney's office in San Francisco. Ms. Caldwell had been a senior trial lawyer in Brooklyn until 1999, when Robert S. Mueller III, now the F.B.I. director, recruited her for the Northern California job while he was United States attorney in San Francisco. 
The Justice Department criminal inquiry, while potentially the most serious and far-reaching of the investigations, is only one of a number under way among executive branch agencies. The Labor Department has been examining how the company dealt with employee retirement plans in the weeks before Enron's bankruptcy filing on Dec. 2. The Securities and Exchange Commission has been investigating transactions between Enron and outside partnership deals and the company's relationship with Arthur Andersen. 
Today, Senator Paul S. Sarbanes, a Maryland Democrat and head of the Senate Banking Committee, said he had asked the Congressional investigative arm, the General Accounting Office, to examine laws regulating employee stock ownership in retirement plans and whether failures in accounting practices increased the risks of the company's failure. 
Two other Senate inquiries are being conducted by Democrats on the Governmental Affairs Committee. The investigations are emerging as the Democrats' most significant investigative effort since they took control of the Senate in June. 
Many Democrats were highly critical of Republican-led investigations into accusations of improprieties by the Clinton administration. Now the Democrats, who have benefited to a lesser extent from Enron contributions, risk being accused of staging politically motivated inquiries aimed at a company with well-known Republican connections. 
''I am very concerned that this is going to become highly politicized,'' said Robert S. Bennett, an Enron lawyer and a veteran of Washington scandals as a onetime lawyer for former President Bill Clinton. 
Mr. Bennett added: ''If it does become highly politicized, a lot of people are going to get hurt. A lot of reforms which might come about will not be enacted, and this will be just a typical major league Washington mess with blood all over the place and little accomplished.'' 
But Mr. Bennett's first problem is elsewhere on Capitol Hill. Mr. Lay is scheduled to testify early next month. His appearance could be a turning point in public perceptions about the company. He must give accurate testimony but avoid providing further ammunition for criminal investigators. 
Mr. Lay will testify before the Senate Commerce Committee, which is investigating how Enron employees who held company stock in retirement plans were barred from selling their stock as it plummeted -- leaving many retirees in serious financial straits. 
On the same day, Mr. Lay will testify before the House Financial Services Committee. It has focused its inquiry on the impact of Enron's collapse on investors and markets. 
The Senate Governmental Affairs Committee, headed by Joseph I. Lieberman, Democrat of Connecticut, is conducting an inquiry centered on whether regulators like the Commodity Futures Trading Commission and the Securities and Exchange Commission should have uncovered problems sooner. Mr. Lieberman's panel is scheduled to hold a hearing on Jan. 24. 
One of the Governmental Affairs subcommittees, an investigations panel whose chairman is Senator Carl Levin, Democrat of Michigan, is conducting its own inquiry. Mr. Levin's subcommittee has prepared 51 subpoenas for documents related to the operations of the company, its executives and its outside auditor. 
Two other House committees are also investigating the company. The House Energy and Commerce Committee has been investigating Enron's accounting practices. The House Education and Workforce Committee has been looking into employees' retirement plans.

Photo: Deputy Attorney General Larry D. Thompson, who will be directing an Enron investigation. (Susana Raab for The New York Times) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Deals & Deal Makers: NYSE Halts Trading in Enron, Moves to Delist Energy Company
By Gaston F. Ceron and Christina Cheddar
Dow Jones Newswires

01/16/2002
The Wall Street Journal
C12
(Copyright (c) 2002, Dow Jones & Company, Inc.)

NEW YORK -- The New York Stock Exchange said it is suspending trading in Enron Corp. and moved to delist the energy company's shares from the Big Board. 
The NYSE said that it "has determined that the company's securities are no longer suitable for trading on the NYSE." The exchange's action affects not only Enron stock, but also other Enron securities, such as preferred convertible stock.
Enron spokeswoman Karen Denne said the NYSE's decision wasn't a surprise to the company. "This will have no effect on our business," Ms. Denne said. 
In a separate statement late yesterday afternoon, Enron said its common stock will be now traded as an over-the-counter security under the symbol ENRNQ. Quotation services will be provided by Pink Sheets LLC. Formerly known as the National Quotation Bureau, the New York company provides pricing and financial information for over-the-counter securities. "Investors should call their brokers for daily pricing and volume information," the statement said. 
Enron's collapse last year triggered a huge drop in the company's stock -- sending it down to mere pennies a share -- and massive layoffs at the Houston-based company. Enron filed for Chapter 11 bankruptcy-court protection on Dec. 2. 
The NYSE moved to delist Enron after the company's stock traded below the critical level of $1 for 30 consecutive days, placing it in violation of the Big Board's listing standards. 
"The exchange notes that today's action is being taken due to the expected protracted nature of the company's bankruptcy process and the uncertainty at this time as to the timing and outcome of this process, as well as the ultimate effect on the company's common shareholders," the NYSE said. 
The exchange said it will apply to the Securities and Exchange Commission to delist Enron securities "upon the completion of applicable procedures, including any appeal by the company of the NYSE staff's decision." 
The most recent time that Enron shares traded at the NYSE was Thursday. Trading in the shares has been halted since then. 
--- 
Journal Link: New hires and a new office for Keefe Bruyette help life at the investment bank ease back to normal. Read the latest Comeback Diary at WSJ.com/JournalLinks.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business; Business Desk
NYSE Moves to Delist Enron Stock
E. SCOTT RECKARD
TIMES STAFF WRITER

01/16/2002
Los Angeles Times
Home Edition
C-4
Copyright 2002 / The Times Mirror Company

Enron Corp.'s fall Tuesday from the august New York Stock Exchange to the lowest tier of securities trading--the unregulated "pink sheets"--reflects deep skepticism about the energy-trading firm's past and future, experts said. 
At this point, few financial institutions will allow their names to appear in the same news report as Enron if they can help it. The NYSE, in its announcement Tuesday that it is suspending trading in Enron pending an official delisting, avoided pointed language. Instead, the exchange chose to explain the move by citing the likelihood of a "protracted" bankruptcy, and uncertainty "as to the timing and outcome of this process as well as the ultimate effect on the company's common shareholders."
The NYSE's technical basis for suspending trading--the first step toward booting the stock off the market--was that Enron's shares have failed to close above $1 for more than a month. That is one of the grounds for delisting under NYSE rules. 
But the exchange has plenty of leeway in allowing companies to trade even after a descent into penny-stock territory, if market officials see residual value for shareholders, and a benefit for the NYSE itself. 
One example is Bethlehem Steel, which has traded below $1 on the NYSE since the company filed for Chapter 11 bankruptcy protection Oct. 15. The stock ended at 51 cents Tuesday. Also, Finova Group, a finance firm that exited Chapter 11 last August, has spent the last two months below $1. 
The NYSE temporarily halted trading in Enron on Friday, and that halt lasted through Tuesday. 
Enron said its stock now will trade in the so-called pink sheet market under the symbol ENRNQ. It was quoted there Tuesday at 50 cents. 
Pink sheet stocks are traded between brokers; prices can be viewed at www.pinksheets.com. 
Shares of bankrupt companies frequently turn out to be worthless when the companies reorganize. Thus, many experts say most trading in Enron shares will be sheer speculation. "It's just hoping that you buy low and the stock shoots up for a day on some news," said Jon Schotz, head of Santa Monica investment bank Saybrook Capital. "You're gambling. Red or black." 
But Lawrence E. Harris, a professor of finance at the USC business school, said good reasons may exist for the NYSE and other markets to continue listing companies that have fallen on hard times. Flexibility in selling stock to record losses for tax purposes can be important for shareholders, he said. Also, exchanges may not want to lose listings of bankrupt companies that will emerge, reorganized, as solid operations with new common shares, he said. 
Harris also said bond holders and other creditors of bankrupt firms, whose claims take precedence, sometimes allow stockholders to retain valuable interests as an incentive to get companies out of bankruptcy more quickly. 
Enron, however, is a different matter, especially because its accounting irregularities may have been outright fraud and, at the very least, are inconsistent with NYSE requirements for accurate financial reporting, Harris said. 
"The NYSE does not want its list to be depreciated by a rogue firm," he said.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Accord for Enron Trading Operations Leaves UBS Free Not to Inject Capital
By Mitchell Pacelle
Staff Reporter of The Wall Street Journal

01/16/2002
The Wall Street Journal
(Copyright (c) 2002, Dow Jones & Company, Inc.)

NEW YORK -- Enron Corp.'s agreement to sell its North American trading operations to UBS AG doesn't require the Swiss concern to inject any minimum amount of capital into the operations, nor supply any minimum amount of credit, according to documents released yesterday. 
Furthermore, UBS has the right to terminate the agreement on short notice, according to lawyers who have studied the documents. The accord to sell the operations in exchange for a slice of the unit's future profits was detailed in bankruptcy-court filings.
As previously reported, UBS's investment-banking arm, UBS Warburg, won't pay any cash for Enron's trading operations, which were once the company's largest source of profits. Instead, UBS will pay royalties to Enron amounting to one-third of the energy-trading enterprise's pretax profit for as much as 10 years. 
The deal gives UBS a series of options to begin buying out Enron's royalty interest in year three of the agreement, the documents say. UBS's options can be exercised in three steps, each representing one-third of the royalty stream. UBS would pay Enron 5.75 times Enron's prior-year payment for each one-third share of royalty eliminated. 
UBS spokesman David Walker declined to provide details about the new venture until after a bankruptcy-court hearing on the deal scheduled for Friday. 
"This is an extremely positive deal for Enron and its creditors that confirms the substantial value of Enron's trading operation," Enron Chief Financial Officer Jeffrey McMahon said in a statement.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

SWITZERLAND: UBS says has no acquisition plans for Enron Europe.

01/16/2002
Reuters English News Service
(C) Reuters Limited 2002.

ZURICH, Jan 16 (Reuters) - UBS AG has no plans to expand Enron's business in Europe through acquisitions, Peter Wuffli, president of the executive board, said on Wednesday. 
"There are no plans ... for acquisitions in Europe," Wuffli told reporters prior to an analysts' briefing. UBS won the bidding for Enron's North American wholesale electricity and natural gas trading business earlier this month. Wuffli declined to disclose particulars of the deal, citing legal restrictions.
Regarding the banking group's overall strategy, Wuffli said: "I do feel we are in a shift in our priorities," following a decade of acquisitions at the group. "For the first time we are happy with our platform...so the focus will be quite clearly on organic growth." 
Regarding staffing levels, especially in investment banking, "we are going against the trend," Wuffli said. "We do not feel we have overcapacity." He added the group expected markets to recover in the second half of 2002.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

UBS CEO Rules Out Big Acqusitions

01/16/2002
Dow Jones International News
(Copyright (c) 2002, Dow Jones & Company, Inc.)

ZURICH -(Dow Jones)- After a decade of rapid growth and big mergers, UBS AG (Z.UBS) has the size and scale to grow organically, the Swiss banking giant's top executive said Wednesday. 
Peter Wuffli, who heads the group's executive board, said his focus is on making UBS cost-efficient and improving its client base.
"We are still looking at acquisitions and apply our standards, but we don't see any large transformation deals like PaineWebber or the merger with Swiss Bank Corp.," Wuffli said. "We don't have to do a major deal." 

Wuffli, who took the top job at UBS in late December, said he's sticking to statements he has previously made that UBS won't need to make any major layoffs. 
He said UBS learned the hard way that, "the cost of disruption, distraction, motivation of staff is high." 
"Positively, there is a premium to stability," he said. 
This is one reason why UBS won't be following rivals who have announced big cuts in staff over the past two quarters. 
The other reason, he said, is UBS is confident markets will recover in the second half of this year. 
"We don't want to miss that," Wuffli said. 
But he said UBS won't veer from its strategy even if a recovery is delayed by a quarter or two. 
The only reason to possibly reassess its personnel stance would be if there were a major unexpected political or financial crisis. 
UBS wants to increase cooperation between its wealth-management business and their investment banking activities. 
"There are more synergies to be realized if the units can work more closely together," he said. 
UBS is stressing improvement of its brand-name. Wuffli said branding hadn't been particularly consistent due largely to all of UBS's mergers with and acquisitions of other companies. 
"We want to raise the profile of our identity for our clients and staff," Wuffli said. 

Wuffli said UBS will steer away from using cheap loans as a way to attract more lucrative investment banking mandates. Many of the Swiss group's rivals have been doing that to beef up investment banking revenues since markets started trending downward. 
"The cross-subsidized corporate finance with credit just doesn't make sense," he said. "We will not buy business with our balance sheet." 
The issue is a particularly contentious one at UBS, and was believed to be a source of tension between group Chairman Marcel Ospel and Wuffli's predecessor, Luqman Arnold, who was ousted in a power struggle late last year. 
UBS Warburg's ties with EchoStar Communications Corp. last year came under strain because - unlike rivals - it wouldn't offer the U.S. satellite-TV operator a $3 billion loan to finance its acquisition of Hughes Electronics Corp. 
UBS Warburg didn't win the mandate to handle the acquisition. That was embarrassing for the investment bank, which had been advising EchoStar on its merger and acquisition options. 
Wuffli has previously denied EchoStar was a factor in the disagreements Ospel and Arnold had over business strategy. 
UBS last week won its bid to buy Enron Corp.'s energy trading activities, and Wuffli said the group is ready to absorb its activities into UBS Warburg. 
"This is an attractive addition to our trading activities. The Enron business will be completely integrated into UBS Warburg," Wuffli said. 
It will also be integrated into the investment bank's risk-management profile and existing risk limits. 
He said the acquisition makes sense and should make UBS Warburg stronger. 
"It's an addition to the product line and means a diversification of revenues," he said. 
He said it will be "quite challenging" to keep Enron's experienced energy traders and, "we will make offers to front personnel and support staff." 
But he said he couldn't say yet how many people would get offers and what the specifics of those offers would be. 
-By Anita Greil, Dow Jones Newswires; 411-211-7014; anita.greil@dowjones.com

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Financial Post: Canada
UBS Enron bid values affiliate at US$4M: Enron Canada Corp.: Unit of failed parent holds cash of at least $220-million
Claudia Cattaneo, Calgary Bureau Chief
Financial Post

01/16/2002
National Post
National
FP4
(c) National Post 2002. All Rights Reserved.

CALGARY - A bid by UBS Warburg to take over the trading operations of Enron Corp. assigns little value to its cash-rich Canadian unit, even though it claimed to be a viable business despite the bankruptcy of its parent. 
The agreement, made public yesterday, says UBS will take over at a cost of no more than US$4-million the intellectual property and technology, trading staff, office space and equipment of the Canadian affiliate, so it can conduct gas and power trading in Canada and with Canadian counterparties "in substantially the manner historically conducted by Enron and its affiliates."
Enron Canada Corp. has at least $220-million in cash from the sale last month of its interest in the Sundance B power-generating plant outside of Edmonton, and is owed more than $100-million by partners that have not honoured their obligations, its chief executive said last week. 
The unit unsuccessfully attempted last month to win court backing for a reorganization so it could re-emerge as an independent operation and distance itself from its parent's bankruptcy. 
Now, Enron Canada "is happy to go along with this" and be part of the UBS bid, said Eric Thode, a spokesman for Enron. 
Under the broader agreement, UBS, the Swiss investment bank, won't pay anything to acquire the trading business, which generated about 90% of the company's US$101-billion in revenue in 2000, nor assume any of the company's debts, but will share a third of the energy operation's profits with Enron and its creditors. 
Brian O'Leary, a lawyer representing many Canadian energy firms with ongoing contracts with Enron Canada, said it looks like the contracts will be liquidated, and any left over money used to pay creditors with the rest sent back to the U.S. parent. 
"A lot still has to be unravelled here," Mr. O'Leary said. "It's going to take a while to calculate damages and find out if [contracts] were properly terminated and determine the full amount payable. Who is going to do that from Enron's point of view? That's the big question we have." 
Jim Joyce, a principal with Risk Advisory, a risk management advisory firm in Calgary, said the deal gives Enron Canada a better balance sheet and the ability to start fresh. 
"They had a lot of cash, but people still weren't dealing with them, because they weren't sure of the long-term implications of that cash, whether it was going to be funnelled back to the States or not. So, having a big balance sheet behind it is certainly better than whatever cash Enron Canada had," Mr. Joyce said. 
It may also mean new jobs for the operation, which recently laid off 75 employees in Calgary and Toronto, because UBS doesn't have an energy trading business in Canada, Mr. Joyce said. 
Gary Gault, vice-president of the Natural Gas Exchange in Calgary, which accounts for about 10% to 15% of natural gas trading in Canada, said he would also welcome Enron's return. "Enron was a very big market maker and created deal flow in the market place," he said. 
But he said the company will find the market has changed since its collapse. 
Enron's share of natural gas and power trading has been taken over by competitors, including NGX, which saw a 15% increase in activity. 
In addition, activity is slower because of reduced commodity price volatility since last winter's energy crisis and because credit conditions are tighter across the industry, he said. 
Enron's activities may be restricted under the new regime. 
"How much will they let them win and how much will they let them lose? Our guess is that they will probably be more scrutinized, that UBS will be very judicious in their management," he said. 
Enron collapsed late last year amid revelations of complex partnerships used to keep billions of dollars in debt off its books and mask financial problems so it could continue to get cash and credit to run the trading business.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Politics & Policy
CAPITAL JOURNAL
The Enron Effect: Government's Job Being Rethought
By Gerald F. Seib

01/16/2002
The Wall Street Journal
A18
(Copyright (c) 2002, Dow Jones & Company, Inc.)

WASHINGTON'S HUNT for the great Enron scandal is on. As it unfolds, keep in mind the cardinal rule of such controversies: The real scandal usually lies not in what's illegal, but in what's legal. 
If that principle holds true, the long-term impact of the Enron affair won't be some Bush White House ethics controversy, as Democrats hope. It's more likely to lie in a realization that government failed miserably in its role as regulator of the marketplace.
In that respect, Enron's demise figures to join a list of recent events, including the tragedies of Sept. 11, that are helping to swing the political pendulum away from the deregulatory trends of the 1980s and 1990s. If Enron -- a company that was both the leading disciple and very symbol of the deregulatory mood of recent years -- collapses while regulators were clueless about what it was doing, how could the political effect be otherwise? 
For now, Washington's interest in Enron is a lot less subtle than that: The company run by the president's top political contributor has crumbled, taking the retirement nest eggs of many rank-and-file employees with it. Did the president's people do any favors for the company's executives in its dying days? Did the White House have inside knowledge of the disaster about to befall employees and stockholders that it should have acted upon? 
So far, the answers appear to be no. In many cases, that would be the beginning of the end of Washington's interest. 
But not in this instance. Washington's examination of Enron is shaping up as more than a partisan scandal monger's look for Bush-administration ethical lapses. It has the makings of a more serious, bipartisan look at what went wrong and what government's role should have -- or at least could have -- been in stopping it. 

AS ONE INDICATOR, consider the fact that the most dogged congressional investigator so far isn't a Democrat, but Republican Rep. Billy Tauzin, chairman of the House Energy and Commerce Committee. His panel has been looking into Enron's collapse for two months, and he has sought documents from Enron (twice), from its accounting firm Arthur Andersen (twice) and from the Securities and Exchange Commission. 
It was Rep. Tauzin's staff that this week unearthed the damning letter from an Enron official to Chairman Kenneth Lay, warning that the company's practice of hiding its debt in internal partnerships threatened to "implode in a wave of accounting scandals." That discovery prompted a Tauzin request for more documents. 
Rep. Tauzin seems disinclined to give a break either to Enron or to Arthur Andersen for failing to blow the whistle. When it was disclosed that Andersen had destroyed Enron documents, Rep. Tauzin advised simply: "Anyone who destroyed records simply out of stupidity should be fired; anyone who destroyed records intentionally to subvert our investigation should be prosecuted." Andersen appeared to take his advice by dismissing a group of employees yesterday. 
It seems clear that the SEC had no real idea how Enron was massaging its books, and a limited ability to find out, and that there was no real regulatory-oversight system in place to make sure Andersen was doing its job on behalf of the average shareholder. 

THE IMPACT transcends the Enron debacle, because the mess comes at a time when Americans already are rethinking the role government should play in their lives. In a small way, California's electricity crisis and in a large way the Sept. 11 terrorist attacks have prompted a re-evaluation. On Sept. 12, the notion of the government's taking charge of airport security didn't seem like such a bad idea, and Americans who once would have been offended by nosy law-enforcement officials snooping around welcomed the practice. 
Now one can almost sense some similar rethinking of government's role in the marketplace. Many liberals tend to think government should protect consumers from both risk and deceit in the marketplace. Many conservatives tend to think market forces can take care of both risk and deceit. 
A search for a middle ground is under way. Liberals will need to concede that individuals clearly have to handle their own risk, and conservatives will need to agree that government needs to look harder for deceit, and to have the tools to do the job right. A sign of the times came yesterday, when no less a conservative icon than columnist George Will, in the Washington Post, wrote of the Enron case: "It will remind everyone -- some conservatives, painfully -- that a mature capitalist economy is a government project."

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Politics & Policy
Law Firm Reassured Enron on Accounting --- Vinson & Elkins Discounted Warnings by Employee About Dubious Dealings
By Wall Street Journal staff reporters Jeanne Cummings and Tom Hamburger in Washington and Kathryn Kranhold in New York

01/16/2002
The Wall Street Journal
A18
(Copyright (c) 2002, Dow Jones & Company, Inc.)

A venerable and politically connected law firm advised Enron Corp. officials not to worry about a company employee's warnings of questionable accounting, based on an inquiry that only canvassed Enron executives and its accountants at Arthur Andersen LLP. 
The report by Vinson & Elkins partner Max Hendricks III, a copy of which was obtained by The Wall Street Journal, concluded that Enron's practice of forming special-purpose entities to keep debt off its books was "creative and aggressive," but that "no one has reason to believe that it is inappropriate from a technical standpoint."
In fact, the subsequent widespread disclosure of those partnerships last fall fueled Enron's downward spiral toward a bankruptcy filing, lawsuits and now government inquiries -- including a federal criminal investigation. The Enron executive whose complaints prompted the Vinson & Elkins review also warned, in an August letter to Enron's chairman, against using Vinson & Elkins to vet her concerns because she believed there was a conflict of interest. 
Vinson partner Ronald Astin also was involved in structuring some of the partnerships, according to an Enron source. 
The expanding Enron scandal also is putting political heat on President Bush and his inner circle. Along with Enron, Houston's Vinson & Elkins has been among the big Texas businesses that have been his biggest political patrons. Of the firm's 341 partners, 165 contributed about $204,000 to Mr. Bush's 2000 campaign, according to Thomas Marinis Jr., a firm partner and boyhood friend of the president's. 
The web of friendships and money threatens to raise additional questions about possible conflicts of interest. For instance, after Commerce Secretary Donald Evans received a call for help from Enron Chairman Kenneth Lay, among those he turned to for advice was his department counsel, Theodore Kassinger. Mr. Kassinger is a former Vinson & Elkins attorney who had done work for Enron on international trade and project-financing matters, according to his public resume. Mr. Kassinger declined a request for an interview. But a Commerce Department spokesman said Mr. Kassinger worked in Washington and knew nothing about Enron partnerships. He also said Mr. Kassinger hadn't been asked for help by any former law firm colleagues. 
White House counsel Alberto R. Gonzales also is an alumnus of Vinson & Elkins -- or V&E, as the Texas legal and political powerhouse is commonly known. Mr. Gonzales left there in 1994, when Mr. Bush, newly elected as Texas governor, picked him to serve as his attorney. 
White House spokesman Dan Bartlett says he is unaware of any contacts between Vinson & Elkins attorneys and administration officials about Enron. "One thing is clear," he adds. "This administration has taken no action to benefit or to attempt to help the Enron company." 
Vinson & Elkins's internal inquiry that ended up reassuring Enron was spurred by an August letter from Enron Global Finance executive Sherron Watkins to Mr. Lay. In it, she raised alarms about the energy firm's unorthodox partnerships and their potential danger to the company's finances and public image. 
"I am incredibly nervous that we will implode in a wave of accounting scandals," Ms. Watkins wrote, according to a copy of the letter obtained by the Journal. "My eight years of Enron work history will be worth nothing on my resume, the business world will consider the past successes as nothing but an elaborate accounting hoax," she added. 
In her letter, Ms. Watkins specifically points to Enron's creation of a partnership called Raptor to help protect it from falling share prices in companies in which it owned stock. As she described the situation, Raptor had to pay Enron if the company stock prices fell. In return, Enron had promised to make up Raptor's losses with shares of Enron stock. When Enron's stock declined throughout the year, the amount needed to make Raptor whole grew significantly. 
Ms. Watkins also raised concerns about whether Enron had properly disclosed the transactions with the partnerships to investors. And she questioned whether Enron Chief Financial Officer Andrew S. Fastow had a conflict of interest in forming them. 
She also specifically cautioned Mr. Lay against using Vinson & Elkins "due to conflict." Despite that, Mr. Lay did turn to his longtime allies at the firm. The ties between Enron and Vinson & Elkins date to the early 1980s, prior to when Enron's predecessors, Houston Natural Gas and Internorth, merged. Enron was the law firm's biggest client, though it only accounted for about 7% of its work. 
So close were the firms that, at times, Mr. Lay would pick a local charity, and Vinson & Elkins partners were expected to pony up donations along with Enron, say people familiar with the firm. And just as Mr. Lay and Enron were early givers to the Bush presidential campaign, so, too, was Vinson & Elkins. In early 1999, 140 of its lawyers wrote $1,000 checks in the span of a few days, and bundled them for delivery to Bush headquarters, according to an analysis by the Center for Responsive Politics. Both outfits' executives are among the Bush "Pioneers," supporters who raised at least $100,000 for the candidate. 
Over the years, lawyers at the firm would move in and out of jobs as Enron's in-house attorneys. Enron's general counsel, James Derrick Jr., was a partner at the firm until he joined the energy company in 1991. It was Mr. Derrick, one of the Enron contributors to Mr. Bush, who requested the internal study of Ms. Watkins's concerns. But he imposed two restraints: Don't second-guess the Andersen accountants, and don't analyze every transaction. 
Washington defense attorney Robert Bennett, who is representing Enron, says the limits were imposed because "they wanted an answer to this if they could get one soon." But in hindsight, he concedes, "They probably should have done some other things," such as seeking outside expertise on the accounting questions. 
Vinson & Elkins investigators zeroed in on four areas -- conflicts of interests, the accounting treatment of the partnerships in Enron's financial statement, public disclosures of the partnership transactions and the potential impact on Enron's financial statements because of stock-price declines. 
In each case, they dismissed Ms. Watkins's worries primarily by relying on assurances from Arthur Andersen that the accounting practices were appropriate, according to the report. "In summary, none of the individuals interviewed could identify any transaction between Enron [and the outside partnership] that was not reasonable from Enron's standpoint or that was contrary to Enron's best interests," Mr. Hendrick noted. 
The company believed the conflict of interest largely was resolved when Mr. Fastow severed his connection with the controversial partnerships, but Mr. Hendrick noted that Enron's board twice waived the company's ethics code to allow transactions to go forward. 
The one area where the investigators saw Enron as vulnerable was in its public relations: The transactions could "be portrayed very poorly if subjected to a Wall Street Journal expose or class action lawsuit," they noted in the report. 
The report is dated Oct. 15, 2001. The next day, Mr. Lay disclosed that his company had a loss of $618 million in the third quarter. Shortly later, the complex partnership arrangements were exposed, along with the fact that Enron had used them to conceal billions of dollars in losses. The revelations rocked the company, and led to its Dec. 2 bankruptcy filing. 
Mr. Bennett argues that Mr. Lay would have conducted a more thorough investigation of the partnerships if his attorneys had recommended it. "I think this shows Ken Lay's good faith in the matter," he says of the report. 
Joseph Dilg, Vinson & Elkins's new managing partner, who has worked closely with Enron since the early 1990s, declined to comment on the specifics of the firm's investigation of Enron's partnerships and auditing practices. 
"We remain very comfortable with everything we did," he says. 
But Mr. Dilg says that while the firm could offer legal opinions on certain Enron transactions, it couldn't conduct a review of its accounting practices because it doesn't have expertise. 
"We are not competent to render accounting advice," he says. 
An Andersen spokesmen yesterday declined to comment on the report, referring only to Andersen Chief Executive Joseph Berardino's recent congressional testimony. In that appearance, Mr. Berardino said Andersen made a mistake in accepting Enron's accounting for one of the partnerships, and wouldn't have approved of another if it had known all the details. 
Mr. Dilg says the Securities and Exchange Commission and congressional committees haven't yet contacted him or his partners. But, he adds, the firm has retained Washington's Williams & Connolly as its outside counsel. The firm also has hired well-known Houston lawyer Joe Jamail to handle civil litigation. The firm was named in two Enron-related lawsuits, but those have been withdrawn. 
--- 
Journal Link: Read excerpts from the Vinson & Elkins report on its investigation of Enron's accounting practices at WSJ.com/JournalLinks.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business/Financial Desk; Section C
ENRON'S COLLAPSE: THE LAW FIRM
Legal Counsel In Many Ways Mirrors Client
By JIM YARDLEY with JOHN SCHWARTZ

01/16/2002
The New York Times
Page 6, Column 1
c. 2002 New York Times Company

HOUSTON, Jan. 15 -- The law firm of Vinson & Elkins, which became publicly enmeshed this week in the Enron scandal, is often described much like its client: hugely powerful, international in scope and rich with connections from the statehouse to the White House. 
The connections that bind Vinson & Elkins to the Enron Corporation were evident long before the House Energy and Commerce Committee demanded documents from the firm on Monday as part of its investigation into Enron's filing for Chapter 11 bankruptcy protection. For at least the past five years, Enron has been one of Vinson & Elkins's biggest clients, and last year, Enron accounted for nearly 8 percent of the firm's $455 million in gross revenues.
''I think that probably made them the largest client,'' said Joseph C. Dilg, the managing partner, noting that the firm began representing Enron 15 years ago when it was known as Houston Natural Gas. 
Congressional investigators are looking at a letter sent in August to the Enron chairman, Kenneth L. Lay, in which a vice president at the company, Sherron S. Watkins, warned that accounting practices involving a series of secret financial partnerships could threaten Enron's future. At the time, Enron asked Vinson & Elkins to investigate the issues raised in the letter but limited the scope of the inquiry. 
In a nine-page response on Oct. 15, Vinson & Elkins concluded that Enron did not need a larger investigation into the issues raised in Ms. Watkins's letter but warned that the ''bad cosmetics'' of the partnerships could bring ''a serious risk of adverse publicity and litigation.'' 
Mr. Dilg said the firm was still reviewing the Congressional request for documents and other information. ''We're not trying to be evasive, but we do have professional responsibilities for the clients we work for, and Enron is one of our clients.'' 
Founded in 1917 by James A. Elkins and William A. Vinson, Vinson & Elkins helped create modern Houston. 
Today, Vinson & Elkins has 860 lawyers with nine offices worldwide, ranking as one of the 25 largest firms in the country. Partners earn an average of $655,000 a year. 
According to Texans for Public Justice, a not-for-profit research group tracking money in Texas politics, Vinson & Elkins employees and political action committees gave $133,000 in campaign contributions to George W. Bush in his 1994 and 1998 campaigns for governor. During the 2000 presidential campaign, three of the firm's partners served as ''pioneers,'' each raising more than $100,000 for Mr. Bush's race. 
''They have built their practice in part by building political connections through campaign contributions,'' said Craig McDonald, director of Texans for Public Justice. ''They are by far the largest law firm contributor in the state of Texas.'' 
There are already a plethora of lawsuits filed over Enron, as shareholders, creditors and other plaintiffs are seek redress from the company and its accounting firm, Arthur Andersen. Two shareholder groups had initially included Vinson & Elkins in their suits until the firm hired a prominent lawyer, Joe Jamail, who persuaded the plaintiffs to drop the firm as a defendant. 
Larry Doherty, a prominent legal malpractice attorney in Houston, said Texas statutes states that law firms can be sued for malpractice only by a client. Still, he predicted that any lawyers who have worked for Enron and were involved in reviewing partnerships and other questionable financial transactions could be vulnerable to lawsuits. 
Other lawyers warned against any rush to judgment. Dick DeGuerin, a prominent defense lawyer, compared the current frenzy surrounding Enron to ''the crash of the stock market or the run on a bank.'' He added, ''Everybody's piling on Enron and to some extent Vinson & Elkins.''

Photo: A reception area at Vinson & Elkins. The law firm in Houston made 8 percent of its $455 million in gross revenues last year through Enron. (Brett Coomer for The New York Times) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business/Financial Desk; Section C
ENRON'S COLLAPSE: THE BANKS
Lenders Differ in Disclosing Their Exposure to Troubles
By PATRICK McGEEHAN with RICHARD W. STEVENSON

01/16/2002
The New York Times
Page 8, Column 1
c. 2002 New York Times Company

The two biggest lenders to Enron have given distinctly different responses to questions about their ties to the failed company. While J. P. Morgan Chase rushed to detail its potential losses, Citigroup has repeatedly rebuffed inquiries. 
But the paths taken by the two investment banks should start to converge over the next two days as they report their earnings for the fourth quarter of 2001. J. P. Morgan is expected to provide new details on the cost of its exposure to Enron today, while Citigroup is expected to end its silence about just how deep its financial ties to Enron went when it discusses its earnings tomorrow.
Unlike J. P. Morgan, Citigroup has declined for several weeks to divulge details of the loans and trading exposures it has to Enron, a giant energy trading company. Analysts said they did not believe that the amounts involved were so big that they had to be disclosed to investors. 
Citigroup apparently had enough involvement with Enron, however, to prompt Robert E. Rubin, chairman of Citigroup's executive committee, to seek help from a senior Treasury Department official. 
Mr. Rubin, who was Treasury secretary before he joined Citigroup, called Peter R. Fisher, the under secretary of the Treasury for domestic finance, on Nov. 8 and broached the subject of Mr. Fisher's possibly calling bond rating agencies in hopes of averting an immediate downgrade of Enron's debt. 
Mr. Fisher rejected the idea and Mr. Rubin accepted his decision, according to the Treasury Department's account of the conversation. 
People close to Mr. Rubin said he called Mr. Fisher in part because Citigroup was a large creditor of Enron and was working for the energy company in an investment banking capacity. But they said Mr. Rubin, who remains prominent in Democratic politics and continues to take a keen interest in public policy issues, was also motivated by concern that the collapse of Enron would have ramifications for the financial markets and the economy. 
Citigroup officials declined to comment yesterday on the reasons for their public silence about the firm's dealings with Enron. Analysts said the company usually declines to discuss its lending relationships. 
Most analysts estimate the net value of Citigroup's exposure to be about $1 billion. But they speculated that because Citigroup has not issued any warnings to investors about its earnings, the company must not expect to lose much of that money. 
In contrast, J. P. Morgan has already said its earnings will be reduced by $220 million for bad loans to Enron, and its trading revenue for the quarter will be reduced by $235 million after the bank marked down the value of trading positions involving the company. 
A Citigroup spokesman declined to say whether Citigroup executives would even mention Enron when they announce earnings tomorrow. But analysts said the company would not try to evade questions about its potential losses related to Enron. 
''I think that could create an extremely contentious discussion with the investment community,'' said Henry McVey, an analyst with Morgan Stanley, who has been recommending Citigroup's shares. 
Mr. McVey said he did not know how Citigroup's exposure to Enron broke down among its units. 
J. P. Morgan, in contrast, has said its exposure includes loans and trading positions, as well as certain bonds issued by insurers -- including the property-casualty unit of Citigroup -- which were backed by some Enron oil and gas contracts. 
''For better or worse, J. P. Morgan's investor relations strategy has been relatively open over the years,'' said Judah Kraushaar, an analyst at Merrill Lynch. ''They got caught in a jam this time, but their intentions were to give the market as much information as possible.'' 
J. P. Morgan originally estimated its exposure to Enron at $900 million, in part because it had counted on recovering on the bonds. But the insurers have balked at paying, and J. P. Morgan is suing them. 
After reassessing all of its potential losses in the Enron debacle, J. P. Morgan said last month that its total exposure to Enron was actually about $2.6 billion. That amount included $965 million on the bonds and $165 million in a letter of credit, as well as loans secured by a natural-gas pipeline and unsecured loans. 
Both Citigroup and J. P. Morgan had also served as investment bankers to Enron. The two firms were advisers to Enron on the proposed sale to Dynegy that might have saved Enron from collapse. Together, they stood to collect advisory fees of about $90 million if Dynegy went through with that acquisition. 
Citigroup's Salomon Smith Barney investment banking unit also underwrote securities for Enron and the various limited partnerships the company controlled. And Salomon was one of six brokerage firms that managed the sale last May of about $150 million of units in an Enron partnership called Northern Border Partners L.P. 
Daniel Noonan, a spokesman for Salomon, declined to say how many of the partnerships the firm helped to sell or to characterize the scope of the firm's involvement with the partnerships. 
Citigroup has disclosed so little, analysts said, that anything it says about Enron will be an improvement. 
''If they say that it is immaterial, that is a piece of information,'' said Diane B. Glossman, an analyst with UBS Warburg. ''If you wait until Thursday afternoon, we will have more information about Enron than we have right now.''

Photo: Robert E. Rubin, the chairman of Citigroup's executive committee and a former Treasury secretary. (Bloomberg News) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Citigroup's Enron Financing Stirs Controversy
By Jathon Sapsford and Mitchell Pacelle
Staff Reporters of The Wall Street Journal

01/16/2002
The Wall Street Journal
C1
(Copyright (c) 2002, Dow Jones & Company, Inc.)

When Enron Corp. turned to its bankers for money in late October, the energy company needed a quick, big loan to restore investor confidence in its finances. 
Citigroup Inc. came up with the cash -- but with a catch.
Enron owed Citigroup $250 million in unsecured debt that was coming due in early December, just one portion of the overall debt Enron owes the bank. So Citigroup told Enron it would provide $600 million of a new $1 billion secured loan -- as long as $250 million was used to pay back existing Citigroup debt, according to people familiar with the transaction. 
Now, a number of bankers in the lending syndicate are crying foul. Citigroup, they say, used its influence as a new secured lender to improve the standing of unsecured loans it had already extended at the expense of other lenders. The bankers say they discovered only later that part of the loan facility was used to prop a Citigroup debt position. Thus, the bankers are likely to challenge Citigroup's arrangement as part of Enron's bankruptcy filing in a New York bankruptcy court. 
Few can blame Citigroup for trying to reduce its exposure to Enron. But some analysts say the maneuver raises questions about whether Citigroup moved unfairly to grab assets. And the deal effectively reduced the pool of collateral available to all of Enron's other creditors in the bankruptcy proceedings. "There's a bit of a conflict there," says Andy Collins, an analyst with U.S. Bancorp Piper Jaffray. 
Citigroup declined to comment. 
At a minimum, the controversy over the Citigroup financing underscores how contentious Enron's bankruptcy process could become, as numerous creditors fight to secure a piece of a shrinking asset pie. It addition, it raises still more questions about the multiple hats worn by large lenders such as Citigroup, and the conflicts that may create with Enron's other creditors. 
For Enron, the demand was a disappointment. While Enron trumpeted $1 billion in fresh financing to the investing public, it actually received only $750 million in new money, less than it had wanted, according to several people involved in the financing. 
Enron Chief Financial Officer Jeffrey McMahon has been telling other creditors that Enron needed cash so badly that Enron had no choice but to go through with the deal. Mr. McMahon was unavailable to comment, but an Enron spokeswoman says, "We got the best deal we could at the time." The arrangement was driven by the fact that the $250 million debt in question, linked to financing for a natural-gas transaction, was soon to come due, according to a banker familiar with Citigroup's strategy. 
J.P. Morgan Chase & Co., which contributed the remaining $400 million to the $1 billion credit line, also had hundreds of millions of dollars in existing unsecured exposure to Enron. Unlike Citigroup, it made no demands that its own existing loans be rolled into the new credit facility. An official at J.P. Morgan declined to comment. 
The incident sheds some light on the inner workings of Citigroup in the Enron mess. J.P. Morgan has disclosed it is owed some $2.6 billion in Enron-related exposure. 
But Citigroup has kept quiet on the subject. Analysts have said it was at least $1 billion, but warn the number could be higher. "Citigroup's disclosure has been lagging," says Mr. Collins. 
In most bankruptcy cases, unsecured creditors examine all loans extended before the filing to see whether the collateral was granted properly. If an unsecured debt was paid off, or turned into a secured debt, within 90 days of a bankruptcy, that lender is sometimes accused of receiving a "preference" over other lenders. 
Because such "preferences" clash with a basic aim of bankruptcy law -- to stop a race to the courthouse by treating all similarly situated creditors the same -- they can be challenged in court. 
A potential challenge by some creditors against Citigroup, in essence, would be that the bank improved its standing in the line of creditors by demanding new collateral on the $250 million of unsecured debt, thereby taking away from other creditors assets that might be available pro rata to other unsecured creditors. 
Such challenges are often mounted late in the bankruptcy process, when creditors are hashing out how to allocate assets that have been assigned to creditors. 
If the Citigroup financing is successfully challenged, the $250 million claim would once again become unsecured, freeing up the collateral for the potential pool of assets to be divvied up by unsecured creditors.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Enron, Argentina take down J.P. Morgan Chase earnings
By EILEEN ALT POWELL
AP Business Writer

01/16/2002
Associated Press Newswires
Copyright 2002. The Associated Press. All Rights Reserved.

NEW YORK (AP) - Hammered by loans to Argentina and the bankrupt Enron Corp. that have gone bad, J.P. Morgan Chase & Co. on Wednesday reported a steep earnings loss for the fourth quarter. The results were far below analysts' estimates. 
Bad news for the New York financial giant came in almost every division except retail, which was boosted by record mortgage originations and higher deposit volumes. Operating revenues declined in the fourth quarter in investment banking and in investment management and private banking, J.P. Morgan said. J.P. Morgan Partners, its venture capital arm, reported a loss.
William B. Harrison Jr., chairman and chief executive officer, said in a statement accompanying the earnings report, that results "were particularly affected by our exposure to private equity investments, and to Enron and Argentina." 
He said the bank had moved "aggressively to value those exposures to market and to build loan loss reserves further" to position the bank for stronger earnings when markets recover. 
The bank said it lost $332 million, or 18 cents a share, in the October-December period. A year earlier, it reported net income of $708 million, or 34 cents a share. 
Excluding merger and restructuring costs, the company earned $247 million, or 12 cents a share, for the quarter compared with $763 million, or 37 cents a share, a year earlier. 
Analysts surveyed by Thomson Financial/First Call had expected operating earnings of 34 cents a share. 
The bank said its total nonperforming assets were $3.92 billion at year's end, including $1.13 billion "related to the Enron surety receivables and letter of credit." That, it said, was the "subject of litigation." Nonperforming assets a year earlier totaled $1.92 billion, the bank said. 
For the full year, net income was $1.69 billion, or 80 cents a share, compared with $5.73 billion, or $2.86 a share, in 2000. Operating earnings were $3.41 billion, or $1.65 a share, compared with $5.93 billion, or $2.96 a share, in 2000. 
--- 
On the Net: 
www.chase.com

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

JP Morgan Chase's Shapiro says Enron exposure totalled 450 mln usd in Q4

01/16/2002
AFX News
(c) 2002 by AFP-Extel News Ltd

NEW YORK (AFX) - JP Morgan Chase & Co vice chairman Marc Shapiro said the bank's exposure to bankrupt energy giant Enron Corp totalled 450 mln usd in the fourth quarter. 
Shapiro made the comment in an interview with CNBC television, immediately after the bank reported fourth-quarter operating earnings per share of 12 cents, down from 37 cents a year ago and well below the First Call/Thomson Financial consensus of 34 cents.
JP Morgan Chase said Enron and its exposure to Argentina shaved a total of 807 mln usd off trading and other revenues. 
cl/lj

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Citigroup's Enron Deal Stirs Creditor Outcry

01/16/2002
Dow Jones Business News
(Copyright (c) 2002, Dow Jones & Company, Inc.)

When Enron Corp. turned to its bankers for money in late October, the energy company needed a quick, big loan to restore investor confidence in its finances, Wednesday's Wall Street Journal reported. 
Citigroup Inc. (C) came up with the cash -- but with a catch.
Enron (ENE) owed Citigroup $250 million in unsecured debt that was coming due in early December, just one portion of the overall debt Enron owes the bank. So Citigroup told Enron it would provide $600 million of a new $1 billion secured loan -- as long as $250 million was used to pay back existing Citigroup debt, according to people familiar with the transaction. 
Now, a number of bankers in the lending syndicate are crying foul. Citigroup, they say, used its influence as a new secured lender to improve the standing of unsecured loans it had already extended at the expense of other lenders. The bankers say they discovered only later that part of the loan facility was used to prop a Citigroup debt position. Thus, the bankers are likely to challenge Citigroup's arrangement as part of Enron's bankruptcy filing in a New York bankruptcy court. 
Few can blame Citigroup for trying to reduce its exposure to Enron. But some analysts say the maneuver raises questions about whether Citigroup moved unfairly to grab assets. And the deal effectively reduced the pool of collateral available to all of Enron's other creditors in the bankruptcy proceedings. 
Citigroup declined to comment. 
Copyright (c) 2002 Dow Jones & Company, Inc. 
All Rights Reserved.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

FOCUS Analysts, ratings agencies image hurt by Enron; legal impact unlikely

01/16/2002
AFX News
(c) 2002 by AFP-Extel News Ltd

---- by Leslie Wines ---- 
NEW YORK (AFX) - Public trust in brokerage analysts and debt rating agencies will remain seriously eroded for months by their failure to issue timely warnings prior to Enron Corp's Dec 2, 2001 bankruptcy filing, but they face few legal and financial consequences, analysts said.
About 16 brokerage analysts maintained 'Buy" orders on Enron right up until Dec 2, according to Steven Toll, a partner with Washington, DC securities law firm Cohen, Milstein, Hausfield & Toll, which has filed a shareholders' class action case against Enron. 
Standard & Poor's Corp downgraded the debt of Enron Corp in late November, triggering the collapse of merger plans with Dynegy Inc and the bankruptcy filing. The downgrade came a full three months after the company first revealed its own problems. 
Toll said that the extremely late response of analysts was highly disturbing to countless investors who depend on them in large part for investment decision advice. 
But he said he has no plans to launch a class action suit against brokerages and ratings agencies on behalf of investors because such a case would have scant chances for success as these institutions do not have a legal fiduciary duty to warn stock buyers. 
"The problem is they (analysts and ratings agencies) are not paid by shareholders," Toll said. "They are paid by their employers and owe a duty to them. It would be very hard to show that they have a duty to everyone in the marketplace." 
In addition, a recent US Supreme Court ruling largely restricts fraud litigation to those suspected of committing it directly, such as, in this case, certain Enron executives and their auditors at Arthur Andersen LLP. 
Brokerage analysts, ratings agencies and other additional parties who may have "aided and abetted fraud" in the Enron case would not be easy to sue under the current US Supreme Court's legal interpretations, Toll said. 
However, an individual investor who sues his personal broker or analyst might have a better chance of success, he said. 
George Perry, a fellow with the Brookings Institute in Washington, DC, said: "This thing is going to upset a lot of people before it's over, but in general I don't think that the analysts will be in legal trouble." 
Margaret Blair, another Brookings Institute fellow and a Georgetown University School of Law professor, said the delayed response of brokerage analysts to the Enron developments intensified a public confidence crisis that began in 2000 when they failed to warn investors of the technology sector's impending sharp deterioration. 
"The analysts' reputation was already shot after they contrived to put out glowing reports on the internet sector well after the party was over," Blair said. 
In addition, she said some shrewd investors began to express reservations about the trustworthiness of analyst research even before the Nasdaq market began its decline. 
"Any time someone appears to be minting money, it's fishy. And it's the duty of analysts to ask tough questions. If they don't, people will lose respect," she said. 
"I think analysts will have to work harder than ever to show that they understand the companies they cover," Blair said. "It may be a long time before the public falls for what they have to say." 
By contrast, she said criticism of debt ratings agencies may be less severe because their function is chiefly to analyze the financial information provided to the general public by corporations, and in the Enron case this information itself was flawed and possibly fraudulent. 
"I'm not sure you can blame the ratings agencies for not having access to what went on at Enron," she said. 
However, J. Edward Ketz, an associate professor of accouning at Penn State's Smeal School of Business, said ratings agencies' delayed response to the Enron crisis is "a serious problem." 
"The problem of ratings agencies moving too late has been there for years," he said. "Ratings agencies generally make changes only after a problem is known by everyone." 
"I don't know how many investors know this, but some ratings agencies look at companies in depth only once every two to three years. The rest of the time they just take cursory looks at the listed companies once in a while." 
Ketz said that in some cases investors with a knowledge of statistical models would be better off taking quarterly corporate financial statements and making their own assessments of profits performances. 
He also said that brokerage analysts' usefulness to investors has been gradually weakened in recent years by a shift in analysts' approach to their own roles. 
"In the past analysts looked at financial statements and other information and tried to come up with an independent objective view," he said. "But now they seem closer to marketing firms for the companies they cover," Ketz said. 
law/gc

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

`Lockdowns' of 401(k) Plans Draw Scrutiny --- Enron Employees' Losses Suddenly Put Practice in Spotlight
By Ellen E. Schultz
Staff Reporter of The Wall Street Journal

01/16/2002
The Wall Street Journal
C1
(Copyright (c) 2002, Dow Jones & Company, Inc.)

Many investors now are painfully aware that "lockdowns" don't just occur in prisons -- they can handcuff employees' retirement-savings plans, too. 
And for that disclosure, they can thank Enron Corp.
Last fall, amid the growing news of financial woes at the energy-trading company, Enron officials "locked down" the employee retirement-savings plan to make administrative changes. Although long-planned, the lockdown was poorly timed: It prevented employees from moving out of Enron stock as its price continued to plummet. 
The recent disclosures that Enron Chairman Kenneth Lay and top aides were aware of significant troubles at the company two months before the lockdown -- yet went ahead with it anyway -- have magnified the wrath of employees who have lost millions of dollars in retirement savings. 
It also has hastened the examination of lockdowns by investigators. In addition to a Labor Department investigation, Sen. Charles Grassley (R., Iowa), a ranking member of the Finance Committee, says his staff is examining lockdowns, which also are known as "blackouts" and "quiet periods." 
The latest developments also signal the possibility for "potential criminal exposure," asserts Marc Machiz, former associate solicitor at the Labor Department in the Plan Benefits Security division. He adds that the lockdown by itself isn't the main issue. "If the company deceived employees into hanging onto the stock, it could become part of a pattern of fraud that might support" a racketeering claim, contends Mr. Machiz, now a member of the Washington law firm Cohen, Milstein, Hausfeld, & Toll, who isn't involved in the Enron litigation. 
Robert F. Bennett, a lawyer for Enron, at Skadden, Arps, Slate, Meagher, & Flom, says, "We are not aware of any criminal conduct in any fashion related to the 401(k), and people should not make reckless allegations in this area." 
Lockdowns, though unpopular with employees, hadn't been controversial before now. They are the equivalent of putting a car up on the blocks when it is getting a tune-up. They occur when a plan is being transferred to a new recordkeeper, or is implementing some structural change, such as a shift to daily valuation from monthly valuation. During this time, employers forbid employees from moving their savings among funds. 
Ordinarily, such lockdowns are perfectly legal and routine. But if company officials know that a coming lockdown will coincide with grim news that could send the stock lower -- falling earnings, lawsuits, layoffs, a regulatory investigation -- then as fiduciaries they have a responsibility to protect employees in the plan. Postponing a lockdown would be a prudent move. 
Companies typically alert employees months in advance to planned lockdowns to give them time to shift their investments around if they choose. Normally, a "time out" of several weeks or even a couple of months may not make that much difference to employee savings, as long as the market isn't roiled by some disaster. 
However, the growing prominence of employer stock in retirement plans has made lockdowns riskier for workers. As more and more employees hold huge positions in their employers' stock, they face enhanced risks when they are forced to sit tight for a period of time. As Enron has shown, they can't bail out to limit their losses. (That's assuming they are allowed to sell: Most companies prevent employees from selling shares they receive from the company until a certain age. Enron employees under age 50 weren't allowed to diversify out of company-contributed stock, so even without the lockdown, they were locked into those shares). 
Conversely, during lockdowns, employees can't sell to lock in gains either. International Paper Inc. locked down its 401(k) plan, which had 43% of its assets in company stock, from Nov. 30, 1999, through Jan. 31, 2000. During that time, the company's stock fell 9% to $47.63. 
The company in prior months had notified employees of the coming "quiet period," which occurred while the company made improvements to the plan. Thomas Johnson, a manager with the company for 38 years who was planning to retire the following summer, planned to sell his shares when the stock was in the $50 range to diversify. 
Although the shares hit a high of $60 during the lockdown, Mr. Johnson couldn't make a move. In contrast, filings show that IP insiders sold millions of dollars in shares during the period when the employees were locked down. 
Unlike Enron employees, Mr. Johnson didn't see his savings evaporate. But his situation raises questions about whether employees close to retirement are more at risk in lockdowns. A spokesman for IP says that the company communicated the planned lockdown for many months ahead of time and that the changes improved employees' ability to diversify. 
If nothing else, Enron's lockdown will lead to closer scrutiny of how well companies communicate these events. Some Enron employees allege that the company sent them an e-mail on Sept. 27 erroneously stating that the lockdown would start Oct. 19, though it didn't start until Oct. 26. As a result, they missed an opportunity to sell the stock when it was selling for almost $30 a share, they say. On Oct. 26, the last day employees could trade their accounts, the stock closed at $15.40 a share; by the end of the lockdown on Nov. 13, it had fallen to $9.98. 
An Enron spokesman says that the company sent out a brochure and additional e-mails throughout October, and that this apparently got the message across, because on the last trading day before the lockdown, Oct. 26, 187 employee investment transfers were made. 
In an e-mail the company sent to employees shortly before midnight of the final day to make transfers, the company acknowledged that employees wanted to postpone the lockdown, but said it was going ahead anyway. 
"We understand that you are concerned about the timing" of the lockdown and "we understand your concerns and are committed to making this transition period as short as possible without jeopardizing the reconciliation of both the Plan in total, or your account in particular," the e-mail said. "Remember that the Enron Corp. Savings Plan is an investment vehicle for your long-term financial goals."

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Computer sleuths searching for deleted Enron e-mails

01/16/2002
Associated Press Newswires
Copyright 2002. The Associated Press. All Rights Reserved.

WASHINGTON (AP) - The job of recovering the missing Enron Corp. accounting documents is falling to computer sleuths whose work can foil the casual use of the delete button. 
They've been called on before in high-profile cases, looking for suspected spy transmissions and missing Clinton White House e-mails.
And now they'll be asked to recover documents from the computers of Arthur Andersen LLP, which acknowledges its employees destroyed thousands of e-mails and paper documents about Enron. 
Investigators want to know who knew about the problems at Enron, which shocked the financial world and its own employees with its fall from Wall Street grace to bankruptcy. 
Computer sleuths move quickly to preserve hard drives and backup tapes before the bits of deleted data are overwritten forever. 
Andersen has said its Houston auditors started deleting Enron e-mails on Oct. 23 and stopped Nov. 9. Bedser said his firm has been able to recover Lotus Notes e-mail messages that were deleted up to eight months earlier. Andersen used Lotus Notes. 
Most computer users think a simple stroke of the delete key is enough to make a message disappear forever. 
--- 
Enron faces Congress probe over its own tax returns 
WASHINGTON (AP) - Even as it neared collapse, Enron Corp. was in the forefront of a business lobbying campaign to scrap the corporate alternative minimum tax. Now, Congress is turning its attention to Enron's own tax returns. 
Repeal of the alternative minimum tax was backed by dozens of companies including Enron and was part of President Bush's economic stimulus plan. The House added a provision that would have given Enron a $254 million infusion of cash, but the package ultimately failed. 
Now, the Senate Finance Committee is "interested in whether Enron has been complying with federal tax laws" particularly those governing tax shelters, said the panel's spokesman, Mike Siegel. 
Whether Enron used any shelters viewed by the Internal Revenue Service as set up mainly to avoid paying taxes is one key point. 
Enron, the Houston-based energy conglomerate, faces investigations from a growing list of congressional committees, the Justice Department and the Securities and Exchange Commission following its collapse late last year in the nation's biggest corporate bankruptcy. The Finance Committee is one of two congressional panels with access to Enron's tax records. 
Even as its failure loomed last fall, Enron maintained a high-profile lobbying effort on a variety of tax issues. Enron led the AMT Coalition for Economic Growth, a business group dedicated to repeal of the corporate alternative minimum tax, which is intended to guarantee that companies pay at least a minimal amount of income taxes. 
Bush also pushed for repeal in his economic stimulus package, arguing that the provision hits corporations hardest in down years. 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Paper Trail: Andersen Fires Partner It Says Led Shredding Of Enron Documents --- It Claims Disposal Effort Started After SEC Asked Energy Firm for Data --- Was He Following Orders?
By Wall Street Journal staff reporters Ken Brown, Greg Hitt, Steve Liesman and Jonathan Weil

01/16/2002
The Wall Street Journal
A1
(Copyright (c) 2002, Dow Jones & Company, Inc.)

Capping a series of stunning disclosures, Arthur Andersen LLP fired a partner it charged with directing the hurried destruction of thousands of e-mails and paper documents related to its audit of troubled Enron Corp., declaring that he acted after learning that federal regulators were probing the energy giant's finances. 
In an extraordinary statement, Andersen said David Duncan -- the Houston-based lead partner on the Enron account -- led "an expedited effort to destroy documents" after he learned "that Enron had received a request for information from the SEC about its financial accounting and reporting." In addition to firing Mr. Duncan, Andersen placed three other Houston partners responsible for the Enron audit on administrative leave.
The purge marked an effort by Andersen to contain the Enron affair to its Houston office and shield itself from more serious charges, as Congress and the Justice Department intensify their scrutiny of the case. "If they can show that this was a rogue partner, acting beyond his authority, that will help them fashion a defense," said Joseph di Genova, a former U.S. attorney in Washington, D.C., who isn't involved in the case. 
Just what more senior officials at Andersen knew, and when they knew it, will become central questions, as the embattled firm struggles to salvage its tattered reputation and credibility, and to limit its possible civil and criminal liability. 
While Andersen insisted that its higher-ups didn't know until recently about the destruction of documents, a person close to Mr. Duncan and speaking on his behalf said the firm is unjustly trying to pin the blame on him. Mr. Duncan merely was following instructions in an Oct. 12 e-mail from an Andersen lawyer that advised the Enron auditors to follow company procedure that allows for the disposal of many documents, this person said. Congressional and Justice Department investigators expect to question Mr. Duncan in Washington, D.C., today. 
Separately, even as Andersen moved to contain the damage to its Houston office, there were new indications yesterday that Andersen's Chicago headquarters knew details about controversial Enron financing arrangements that contributed to the company's downfall. These arrangements included partnerships that kept huge amounts of debt off the company's balance sheet and inflated earnings. 
After investigating an Enron employee's warnings in August about improper accounting for the partnerships, the company's outside law firm, Vinson & Elkins, wrote in a report to Enron that "all material facts" about the partnerships were "disclosed and reviewed by Arthur Andersen." The Oct. 15, 2001, report, a copy of which was obtained by The Wall Street Journal, said that Andersen officials in Houston consulted with colleagues in Chicago about the accounting treatment of the partnerships. The nine-page report made clear that Enron's board of directors approved of the outside partnerships and had suspended its code of ethics to allow the partnerships to be headed by a top Enron executive who stood to benefit financially from them. 
Asked for comment on the Vinson & Elkins report, an Andersen spokesman yesterday would only refer to the recent congressional testimony of Andersen Chief Executive Joseph Berardino. Mr. Berardino told lawmakers that in one case, Andersen made an error in judgment in accepting Enron's accounting for one of its off-balance-sheet financing vehicles. In another case, he said that if Andersen had known everything about the deal it wouldn't have signed off on it. 
Deepening financial problems related to its hidden debt and overstated earnings forced Enron in December to become the biggest company ever to file for bankruptcy-court protection. Its collapse has been painful to investors, and especially Enron employees, who have seen once-valuable company stock become almost worthless. In recent weeks, attention increasingly has focused on Andersen's failure to flag the giant energy-trading company's problems in audits and on Enron's unsuccessful efforts to use its influence in Washington to keep the company from going under. 
The scandal widened last Thursday with the disclosure by Andersen, initially with few details, of the document destruction. On Monday, congressional officials revealed a letter written by an Enron employee last August, expressing worry that the company would "implode in a wave of accounting scandals." It also emerged Monday that Vinson & Elkins, in its Oct. 15 report, had concluded that nothing wrong had gone on at its client, Enron. 
In its announcement yesterday, Andersen depicted a frantic effort last October, allegedly directed by Mr. Duncan in its Houston office, to get rid of sensitive documents. The disposal took place as troubles mounted at Enron and after questions arose about accounting deficiencies that may have contributed to the company's downfall. 
Andersen said in its statement: "The effort [to destroy documents] was initiated following an urgent meeting the lead partner called on Oct. 23 to organize the expedited effort to dispose of Enron-related documents. This meeting occurred shortly after the lead partner learned that Enron had received a request for information from the [Securities and Exchange Commission] about its financial accounting and reporting. This effort was undertaken without any consultation with others in the firm and at a time when the engagement team should have had serious questions about their actions. Nothing in an Oct. 12 e-mail, almost two weeks earlier, or so far as we know, other conversations around that time, authorized this activity." 
The firm added that the document destruction "appears to have ended shortly after the lead partner's assistant sent an e-mail to other secretaries on Nov. 9 -- the day after Andersen received a subpoena from the SEC -- telling them to `stop the shredding.' " By that time, huge volumes of e-mails and written documents had been destroyed. Andersen said, "These activities were on such a scale and of such a nature as to remove any doubt that Andersen's policies and reasonable good judgment were violated." 
Andersen said that it couldn't assure that document destruction ended after the firm officially came under scrutiny in the SEC investigation. "The firm is still looking into this issue," Andersen said, noting that "if anyone is found to have acted in this way, they will be dismissed." 
The Andersen spokesman wouldn't comment yesterday on whether people in any office other than Houston knew about the document shredding as it was happening. 
Andersen's Mr. Berardino said in a brief interview that he first learned of the document destruction on Jan. 3 and that the firm notified the Justice Department and the SEC the following day. "We came out with this as soon as we had enough facts," he said. It is "too early to say" what the debacle's impact will be on Andersen's ability to attract new clients, he added. In an advertisement appearing in today's Wall Street Journal, Mr. Berardino said, "In the near future Andersen will announce comprehensive changes in our practices and policies that we believe will reaffirm confidence in the independence and quality of our work." 
A Justice Department spokesman declined to comment on the latest revelations from Andersen. But Mr. di Genova, the former federal prosecutor, predicted that the accounting firm's fast action signals it may seek to cooperate with the government's criminal investigation. 
"If prosecutors can cut a deal with Arthur Andersen, they may be able to get to the bottom of what happened at Enron pretty quickly," said Mr. di Genova, who is now a private white-collar defense lawyer. The purge and admission about document shredding amount to "a really nice piece of evidence [for prosecutors]," he said. If it can be shown that anyone at Andersen destroyed documents "in the middle of a criminal or congressional investigation," that person could be charged with obstruction of justice, a crime punishable by prison time, he said. 
On Capitol Hill, the investigation by the House Energy and Commerce Committee, led by Republican Chairman W.J. "Billy" Tauzin, is accelerating rapidly. Boxes of documents are pouring into the panel's office from Enron and Andersen. Committee aides are preparing for a series of imminent interviews with central players in the financial drama. 
Mr. Duncan is scheduled to be interviewed today by investigators from the committee, as well as by officials with the Justice Department, congressional aides said. "Now that he's been fired he may have a little more motivation to cooperate with us," said Mr. Tauzin's spokesman, Ken Johnson. "Today, we heard one side of the story. Tomorrow we'll hear the other." 
The firing and other actions by Andersen mirror classic strategy in white-collar criminal-defense cases: Hand prosecutors a few scalps and pledge cooperation in hopes of gaining lenient treatment in the future. Securities-law specialists say it's likely only the beginning of a wave of acts of contrition by Andersen in an attempt to restore its reputation and appease authorities. 
In its prepared statement, Andersen took care to cite the document destruction as the only reason that Mr. Duncan and the other partners were being fired or placed on leave. The firm didn't link Enron's audit failure to the personnel actions. In past cases of audit failures, such as those involving Waste Management Inc. and Sunbeam Corp., Andersen chose not to fire the partners responsible for those companies' audits, partly out of concern that they would turn against the firm in subsequent litigation. 
Taking action against employees doesn't necessarily shield Andersen from being criminally prosecuted itself, Ted Fiflis, a securities-law professor at the University of Colorado at Boulder, said. 
Andersen's Houston office has been one of its biggest and most successful, employing more than 1,400 people, out of Andersen's world-wide work force of 85,000. The firm said it has the largest operation of any of the Big Five accounting firms in Houston, even though it is the smallest of the Big Five overall. 
Mr. Duncan, 42 years old, has been at the firm since 1981, except for a nine-month period in 1992, and was made partner in 1995. He has been the Enron "engagement partner" since 1997, and over the past three years has taken on broader responsibility within Andersen, people close to him said. In 1999 and 2000, he was part of a firm-wide strategic advisory council and last year, Mr. Berardino asked him to be on the chairman's advisory council, a group of 21 partners who discuss firm-wide issues. He was informed of his dismissal in a phone call yesterday morning, the people close to him said. 
These people said that no Enron documents had been destroyed before Houston officials received the e-mail from an Andersen lawyer on Oct. 12. That long and detailed policy statement, while ordering auditors to save crucial documents, told them to destroy many other documents. If the firm wanted the auditors to save all the Enron-related documents, it should have sent a different memo, a person close to Mr. Duncan said. 
"When you want to preserve documents, you say it with bold-faced letters with exclamation points," this person added. "The notion that there was some kind of instruction from him that there be some form of expedited, extraordinary activity, it's just not correct," the person close to Mr. Duncan said. Mr. Duncan is cooperating fully with government investigators, according to the people close to him. 
The Houston-based Andersen partners put on administrative leave for their roles in the Enron document destruction are Thomas H. Bauer, Debra A. Cash and Roger D. Willard. Peter Anderson, an attorney for Mr. Willard, denied that his client had been involved in any wrongdoing. Andersen's "action suggests that my client has done something wrong or had acted in violation of the firm's policy, and we have no evidence . . . that has been communicated to us or that we're even aware of that would suggest that that's the case," he said. 
Mr. Anderson said he was told by attorneys for Andersen that the leaves were imposed "out of an abundance of caution." The attorney added that his client, Mr. Willard, "acted in a belief that he was acting in accordance with Andersen policy." 
Mr. Bauer and Ms. Cash didn't return phone calls to their homes and offices. 
The firm also relieved four Houston-based partners of their management responsibilities. They are D. Stephen Goddard Jr., Michael M. Lowther, Gary B. Goolsby and Michael C. Odom. None of the four returned calls to their homes and offices. 
Even as attention yesterday was focused on the document destruction, investigators continue to probe the controversial aspects of Enron's accounting. One of the central questions has been how much Andersen -- and in particular top-level partners -- knew about certain partnerships, including some run by Enron's officers. One of the partnerships, whose existence Enron didn't disclose for four years, was part of an arrangement that inflated earnings by several hundred million dollars. And Enron's debt level was much higher than it revealed, thanks to the off-balance-sheet treatment. 
Andersen partners were apparently concerned enough about the structure of these deals that they "consulted with its senior technical experts in its Chicago office," according to the report to Enron from Vinson & Elkins, the outside law firm. 
The report also suggested ongoing contact between Enron and Andersen over the partnerships. "The relationship between Enron and AA was an open one," the report said, citing Enron's chief accounting officer, Richard Causey, a former Andersen employee. "Enron consults AA early and often on accounting and audit issues as they arise." 
On more than one occasion, Mr. Causey told other company officials that Andersen's Houston office took decisions about the accounting treatment of the partnerships to the accounting firm's top levels in Chicago, an Enron insider said in an interview. "Duncan would run these things way up the chain," this person said. The company insider didn't know who specifically in Andersen's Chicago headquarters received the information. 
Asked about whether Andersen's Houston office routinely sought approval from the Chicago headquarters in this manner, an Enron spokeswoman said, "We were aware that in many cases the Houston office of Andersen consulted with the national office on the accounting treatment of various partnerships." 
While many big companies have close relationships with their outside auditors, the relationship between Enron and Andersen was particularly close. In 1993, when Andersen took over Enron's internal-audit operation, 40 people moved from the company's payroll to Andersen's. Andersen employees occupied a large space in Enron's office tower. 
Mr. Duncan, the Andersen audit partner, was a frequent golfing partner of Mr. Causey, the chief accounting officer for Enron. And Mr. Duncan also moved in some of the same philanthropic circles as Kenneth Lay, Enron's chairman and chief executive. The two men both serve on the 36-member board of directors of a nonprofit organization called the American Council for Capital Formation, according to the council's Web site. The organization says its mission is to promote "economic growth through sound tax, regulatory, and environmental policies." 
--- 
John R. Emshwiller and Tom Hamburger contributed to this article.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business/Financial Desk; Section C
ENRON'S COLLAPSE: NEWS ANALYSIS
For Andersen and Enron, the Questions Just Keep Coming
By FLOYD NORRIS

01/16/2002
The New York Times
Page 1, Column 4
c. 2002 New York Times Company

Arthur Andersen tried yesterday to salvage its reputation by firing a partner who it said had directed the destruction of Enron documents. But the actions it said the partner took have left Andersen facing the likelihood of criminal investigations even as it tries to reassure the public, and its clients, that its audits can be trusted. 
''This is very, very bad,'' said Alan M. Cohen, a former federal prosecutor in New York and now a partner at the law firm of O'Melveny & Myers. ''There is little doubt that prosecutors will view this as an act of obstruction. It is inconceivable to me that the partner and Andersen would not be subjects of a criminal investigation at a minimum.''
He noted that even though Andersen says the destruction was not authorized by the firm, the law says a business has ''vicarious liability'' for acts committed by its agents or employees. 
Paul R. Brown, the chairman of the accounting department at the Stern School of Business of New York University, said of Andersen: ''They have taken a permanent hit to their reputation.'' 
Joseph F. Berardino, Andersen's managing partner and chief executive, tried to put the best face on the situation as he announced the firing. ''Based on our actions today, it should be perfectly clear that Andersen will not tolerate unethical behavior, gross errors in judgment or willful violation of our policies,'' he said. 
Only a month ago, Mr. Berardino said the Enron case showed that reforms were needed in accounting rules, and he blamed Enron management for deceiving his auditors. But now the focus is clearly on Andersen itself. 
''The integrity of this firm is in question,'' Mr. Berardino said in a telephone interview. ''Our reputation is our most important asset.'' 
David Ruder, a former chairman of the Securities and Exchange Commission who is now a professor of law at Northwestern University, said Andersen was ''doing what they can to repair the damage by firing the person and changing the management down there.'' But he said the firm should also undertake a broad review of its entire internal enforcement procedures to make sure its auditors will walk away from a client when necessary. 
Andersen said the fired partner, David B. Duncan, ordered the destruction of documents the day after Enron said the S.E.C. was asking questions about the financial statements that Andersen had audited. 
Just what was in the destroyed documents is not known. Nor is it clear what, if anything, was wrong with the audits of Enron that Mr. Duncan had supervised since 1997. But prosecutors assume that a person with nothing to hide does not destroy documents after an investigation has been disclosed. 
''The destruction of documents would indicate some intent to deceive,'' said Franklin B. Velie, a former federal prosecutor who is now a partner at the Salans law firm in New York. ''Where there's smoke there's fire, and where there is a lot of smoke, like the destruction of documents, there is a lot of fire. This is really beginning to look like a fraud scenario.'' 
Andersen's reputation was hurt last year when the S.E.C. filed a civil fraud case against the firm concerning its audit of Waste Management. It was the first such charge in decades against a major accounting firm, and the allegations reached to the very top of the firm. 
The S.E.C. said Richard L. Measelle, when he was the firm's managing partner, had concurred in the decision not to force Waste Management to correct faulty accounting that Andersen's auditors had uncovered. Mr. Measelle was not accused of wrongdoing. 
Andersen settled the case without admitting or denying wrongdoing and paid a $7 million fine. Two partners were fined and banned by the S.E.C. from auditing public companies for three years but kept their jobs. 
Why was no one fired then? ''You need to be fair to people who are trying to do a good job,'' Mr. Berardino said yesterday. 
Formal documents accepting an S.E.C. censure in the Waste Management case were signed by Gary B. Goolsby, then Andersen's director of global risk management. Yesterday he was one of four partners relieved of management duties in Andersen's Houston office. 
A lawyer for Mr. Duncan, the Andersen partner who was fired yesterday, said his client had done nothing wrong but was just following directives on document retention and destruction that had been sent to Houston by a lawyer at Andersen's Chicago headquarters on Oct. 12. Andersen says nothing in those directives would have justified Mr. Duncan's actions. 
The directives encourage the destruction of documents that are not needed as work papers to support an audit. They say that all documents should be retained if there is a threat of litigation. But they do not say explicitly whether that would apply when the S.E.C. has started an informal investigation of a client, like Enron disclosed on Oct. 22, or even when the investigation has become a formal one, as Enron disclosed on Oct. 29. But lawyers not involved in this case say it is clear that documents should be preserved after an accounting firm learns of an official investigation. 
The case against Andersen regarding Waste Management was based almost entirely on internal Andersen documents indicating that Andersen believed that Waste Management's accounting was improper but approved it anyway. Many of those documents need not have been maintained under the current Andersen policy. 
The official listed as the author of Andersen's directives on document retention was Robert V. Kutsenda, the firm's director of global risk management when the directives were issued in February 2000, while the Waste Management investigation was under way. He retired from Andersen last year after the S.E.C. said he had ''engaged in highly unreasonable conduct'' in the Waste Management case. The S.E.C. barred him from auditing public companies for a year. 
Andersen said yesterday that Mr. Duncan had directed ''the deletion of thousands of e-mails and the rushed disposal of large numbers of paper documents.'' It said the ''activities were on such a scale as to remove any doubt that Andersen's policies and reasonable good judgment were violated.'' 
But if it was that clear that Andersen's policies were being violated, it does not appear that any of the Houston personnel involved in the activities complained to their superiors at the Chicago headquarters. Mr. Berardino said yesterday that he did not hear anything about the document destruction until Jan. 3. 
That could indicate that to some at Andersen, the lesson learned from the Waste Management case was not the lesson that the S.E.C. wanted to send -- that auditors run great risks if they sign off on accounts they know to be wrong. Instead, they may have concluded that the error was in keeping the documents around for the S.E.C. to subpoena them later. 
The services of an accounting firm are of no use to a company if investors will not trust the auditor's report. That is clearly a risk Andersen faces, even if it manages to avoid charges. 
But Andersen may be helped by the fact that there are now only five major accounting firms, a number reduced from eight by mergers in recent years. The companies that hire auditors do not want to see even less competition. 
For most companies that report on a calendar-year basis, audits for 2001 are under way, and changing an auditor would be extremely difficult. But changing after that audit is completed would be far easier. It is then that it may become clear how badly Andersen has been damaged.

Photos: The headquarters of Arthur Andersen in Chicago (above) and promotional banners on display in the lobby (left). An Andersen partner who was fired yesterday for ordering the destruction of Enron documents was following directives issued by the Chicago office, his lawyer says. (Agence France-Presse); (Tim Boyle/Getty Images) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

A Section
Andersen Dismisses Lead Enron Auditor; Partner Said to Lead Document Shredding
David S. Hilzenrath and Susan Schmidt
Washington Post Staff Writers

01/16/2002
The Washington Post
FINAL
A01
Copyright 2002, The Washington Post Co. All Rights Reserved

Accounting giant Arthur Andersen yesterday fired the partner who ran its audits of Enron Corp., saying he had directed a "rushed" destruction of documents after learning that federal regulators were beginning to look into Enron's books. 
The document destruction didn't stop, Andersen said, until the partner's assistant sent a "stop the shredding" e-mail in November, the day after Andersen received a subpoena from the Securities and Exchange Commission.
The big accounting firm also placed three other partners on administrative leave and demoted four managers in its Houston office, where Enron and its auditors are based. "The message we're delivering today -- highly unusual -- is we are not going to tolerate anything less than the highest standards," Andersen chief executive Joseph F. Berardino said in an interview. 
The dismissal of David B. Duncan came less than a week after the accounting firm disclosed that thousands of e-mails and a large number of paper documents related to the Enron audit had been destroyed. "These activities were on such a scale and of such a nature as to remove any doubt that Andersen's policies and reasonable good judgment were violated," Andersen said. 
Andersen has not described the content of the lost records. The firm said the shredding was undertaken "without any consultation with others in the firm and at a time when the [Enron] engagement team should have had serious questions about their actions." 
Enron's collapse is being investigated by the Justice Department, the SEC and several congressional committees, and the revelations of document destruction have fueled questions about Andersen's role as well. 
Enron, which filed for bankruptcy protection in December and whose stock was dropped by the New York Stock Exchange yesterday, disclosed in November that it had overstated its annual profits by nearly $600 million and had improperly kept more than $1 billion in debt off its books since 1997. Andersen had endorsed Enron's financial statements. 
Duncan, the fired partner at Andersen, met Monday with lawyers from the Justice Department and the SEC, according to sources close to the probe. Duncan, who reported to executives in Houston and at Andersen's Chicago headquarters, is scheduled to meet with House Energy and Commerce Committee investigators today. 
"Mr. Duncan is cooperating with all investigations of this matter. He properly followed the instructions of an Andersen in-house lawyer in handling documents," said a lawyer for Sullivan and Cromwell, which is representing Duncan. He declined to say what information was contained in the documents and e-mails but stressed that work papers from the audit were not destroyed. 
Work papers document the final conclusions auditors reach, among other things. They would not necessarily include many records of potential use to investigators, such as notes, early drafts of papers, client records, messages between auditors or correspondence with clients. 
Andersen policy generally calls for work papers to be kept for six years, and it prohibits the destruction of any "related information" in cases of "threatened litigation." 
Under federal law, it is a felony to "corruptly" persuade another person to destroy records with an intent to impair their "availability for use in an official proceeding." The law says the proceeding "need not be pending or about to be instituted at the time of the offense." 
As Andersen's problems multiplied, more details came to light about the allegations that an Enron insider made about the company's financial practices last summer. 
The full text of the letter Enron Chairman Kenneth L. Lay received in August from Enron Vice President Sherron Watkins, warning that the company might "implode in a wave of accounting scandals," was released yesterday by the House committee. Separately, Robert S. Bennett, a Washington attorney for Enron, released the findings of an investigation of Watkins's charges by the company's outside law firm, Vinson & Elkins. 
Her accusations are at the center of the probes of Enron, which are seeking to determine whether company officials concealed a deteriorating financial condition from investors and employees -- a charge Enron has denied. Watkins did not sign the letter but then identified herself to Lay and met with him about her concerns. 
In the letter, she alleged: 
* Lay should choose someone other than Andersen and Vinson & Elkins to investigate her allegations because both were involved in approving some of the transactions she complained about. Lay chose instead to have the company's outside law firm conduct a limited investigation without "second-guessing" the accounting practices. 
* Other senior Enron executives challenged then-chief executive Jeffrey Skilling about conflicts of interest in the operations of partnerships the energy-trading company set up with its chief financial officer, Andrew Fastow. Jeffrey McMahon, then Enron's treasurer, was "highly vexed" about the conflicts, "complained mightily" and suggested a list of remedies. 
* She knew that a lot of accountants, including Andersen, "have blessed the accounting treatment [used by the partnerships in question]. None of that will protect Enron if these transactions are ever disclosed in the bright light of day." 
* Enron had failed to describe its partnership obligations adequately in its financial statements. If the partnerships had been fully explained, investors would have seen that Enron was exposed to hundreds of millions of dollars of potential losses. 
"My 8 years of Enron work history will be worth nothing on my resume, [and] the business world will consider the past successes as nothing but an elaborate accounting hoax," Watkins wrote. 
In Vinson & Elkins's Oct. 15 report on the letter's charges, the law firm said the disputed partnerships had been established with the approval of Enron's board and its audit committee. 
In its report, Vinson & Elkins said Enron and Andersen acknowledged that the accounting treatment of the partnerships "is creative and aggressive" but said that "no one has reason to believe it is inappropriate from a technical standpoint." 
After interviewing Andersen auditors, Vinson & Elkins reported that Andersen "is comfortable" with the explanations provided to investors in Enron's financial statements. Vinson added that it was Enron's practice to give the law firm "a relatively short time" to review the key financial information that Enron was disclosing in those statements. 
Under a "Bad Potential Cosmetics" heading, Vinson & Elkins said that partnership transactions cited by Watkins "could be portrayed very poorly" in a newspaper expose{acute} or a lawsuit by shareholders. "It could be argued" the transactions were questionable because Enron had underwritten the risks of partnership investors, the law firm said. 
Vinson & Elkins concluded that the facts it found did not warrant "a further widespread investigation" by independent lawyers and auditors. 
Enron attorney Bennett said Lay was not aware of the issues Watkins raised until he received the memo. Lay had told his general counsel "to get to the bottom" of Watkins's charges, Bennett said. "The notion that this was a whitewash is not borne out. . . . It was mostly an appearance problem," he said. 
The document destruction Andersen described yesterday makes its position in civil litigation "close to indefensible," said John C. Coffee Jr., a law professor at Columbia University. It is likely the firm will face "heavy liability," he said. 
"Whether or not this is a crime, it's a colossal blunder," Coffee said. 
The accounting firm has disclosed that Nancy Temple, a senior Andersen lawyer, had sent an Oct. 12 internal memo to remind the Enron audit team of the firm's document retention and destruction policy. 
In its statement yesterday, Andersen said Duncan called an "urgent meeting" on Oct. 23 to organize the destruction of Enron-related records, soon after Duncan learned that the SEC had asked Enron for information about its accounting. 
Andersen spokesman David Tabolt couldn't say yesterday why Temple did not act to preserve documents as soon as the firm learned of the SEC's inquiry Oct. 22. In its statement, Andersen said that "nothing in [her] Oct. 12 e-mail . . . or so far as we know other conversations around that time, authorized this activity." 
"There is a lot we don't know about what people did and didn't do," Tabolt said in an interview. 
As Andersen described the timing, the destruction of records continued after Enron disclosed on Oct. 31 that the SEC's preliminary inquiry had become a formal investigation. 
In the interview, Berardino said he was not aware of any records being destroyed after Andersen received an SEC subpoena on Nov. 8. But he added that he could not rule out the possibility. 
Duncan joined the company in 1981, became a partner in 1995 and was put in charge of the Enron account in 1997. 
Andersen said it placed on administrative leave partners Thomas H. Bauer, Debra A. Cash and Roger D. Willard and it relieved four others of management responsibilities: D. Stephen Goddard Jr., Michael M. Lowther, Gary B. Goolsby and Michael C. Odom. 
Odom declined to comment yesterday. Calls to the others were not returned. 
Staff writer Peter Behr contributed to this report.


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Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Financial
Scandals Put Andersen's Future at Risk; Enron Case Is Just Latest to Put Dent in Reputation of Big Five Accounting Firm
Kirstin Downey Grimsley
Washington Post Staff Writer

01/16/2002
The Washington Post
FINAL
E01
Copyright 2002, The Washington Post Co. All Rights Reserved

On Vault.com, graduating college seniors who have been offered jobs at accounting giant Arthur Andersen ask plaintively into the ether whether they should still go. 
Some e-mail responders tout the company's history and tradition of excellence. Others volunteer that they're Andersen employees -- and say they're looking to get out.
Several large Andersen clients, such as Marriott International Inc., say they remain committed to Andersen. But many others won't say, and the cities of Seattle and Chicago are reconsidering their longtime links to the firm, according to the Chicago Tribune. 
The firm's admission that it destroyed subpoenaed documents from its audit of failed energy trader Enron Corp. is just the latest serious blow for the 89-year-old firm, founded by Arthur Andersen in 1913, which has prided itself for decades on its stolid, Midwestern sense of propriety and diligent, rigid accounting standards. 
University of Chicago accounting professor Roman L. Weil puts the company's odds of survival at only "50-50." He said the company could end up being harshly disciplined by the Securities and Exchange Commission; could be merged into another firm, perhaps one of the other Big Five accounting firms; or could go bankrupt if scandal-averse clients turn tail and sever their ties to the firm. 
"Their future is at risk, and there are many factors for that," said Arthur Bowman, editor of Atlanta-based Bowman's Accounting Reports. "The most obvious is financial. Defending the company will be expensive, even if they don't pay out a dime. There will be many, many lawsuits." 
"Arthur is rolling in his grave as we speak," Bowman said. "This company, with its great history, its great legacy. People would have said it was the most arrogant firm in the business, but they wouldn't say that today." 
Andersen is one of the the Washington region's largest corporate contributors to charities. Last year, it gave more than $1 million to local charities, and it permitted its employees to spend many hours engaged in volunteer work for nonprofit organizations. 
Andersen employees here, in Texas and around the country have been devastated by the company's internal problems, Bowman said. The firm's partners, who have been earning on average about $500,000 a year, are expected to soon be asked to help foot the bill for the company's defense. They are facing difficult choices about whether to stay or leave. 
Andersen announced yesterday that it would dismiss the lead partner on the Enron account and place three others on administrative leave. It also said it is putting new management in charge of the Houston office, where the auditing and accounting work for the now-bankrupt energy firm was headquartered. 
Andersen said it would also take action against anyone found to have purposefully deleted Enron-related e-mails or letters, as congressional investigators have alleged occurred. The firm said it is continuing to investigate the matter, and other employees found to have been involved will also be fired. 
"Based on our actions today, it should be perfectly clear that Andersen will not tolerate unethical behavior, gross errors in judgment or willful violation of our policies," said Joseph F. Berardino, Andersen's managing partner and chief executive. 
Arthur Andersen had prospered through the 1990s, enjoying double-digit income growth annually through the 1990s. Its revenue rose from $3 billion in 1992 to $9.3 billion in 2001, fueled by the firm's entry into new lines of business outside of its auditing. It now has 85,000 employees worldwide. 
One source of income growth came from outsourcing. The firm took over the internal accounting functions within many companies, including Enron, allowing those firms to focus on their businesses and reduce their payrolls and expenses. It was an especially easy transition if Andersen was also already handling the firms' auditing work. 
Also, about a decade ago, the firm's accounting arm began offering consulting services, including management advice and information technology assistance, to some longtime clients -- a practice that later had dire consequences on the management level as the firm's consulting wing vehemently protested the incursion into its home turf. 
With that, the baby boomers who headed the firm's consulting and accounting divisions, Jim Wadia and George Shaheen, began a divisive ground war among themselves, in a dispute so extended that some observers at the time likened it to Vietnam. The consulting arm took the matter to an international arbitrator to decide how best to split the two groups apart, resulting in a prolonged bout of negative publicity about the leadership turmoil -- an unattractive prospect for organizations that sold themselves on the basis of their management expertise. 
"It was pretty ugly," Bowman recalled. "They hated each other. It affected their every breathing moment they were consumed by it." 
The arbitrator partitioned the two firms into separate entities in July 2000. The accounting arm, which had hoped to receive a multibillion-dollar windfall from the consulting arm for the value of the brand name, was disappointed to receive far less. Andersen Consulting dubbed itself Accenture, and Arthur Andersen, the accounting arm, now often drops the "Arthur." 
Wadia resigned and then went to an international law firm called Linklaters in October 2001; Shaheen went to Webvan, an online grocery that has since failed. Other prominent executives left soon afterward. 
Last year, Andersen was forced to pay $110 million to settle a lawsuit brought by shareholders in the Sunbeam Corp. appliance company alleging that the accounting firm signed off on a company audit that included fictitious profits. On Monday, former Sunbeam chief executive Albert J. Dunlap, nicknamed "Chainsaw Al" for his job-cutting enthusiasm, agreed to pay $15 million to settle a similar lawsuit by shareholders. 
Andersen similarly agreed to pay part of a $220 million class-action settlement and a $7 million SEC fine in a case in which another of its clients, Waste Management Inc., overstated its income by more than $1 billion. 
Andersen now finds itself in the position that it often warned its clients against risking. In a 1999 report, Andersen executives Andrew Flaig and Gloria Chang told the firm's hospitality industry clients that they needed to be wary of financial reporting fraud, or what Flaig and Chang called "cooking the books." 
The executives warned that "widespread publicity involving disclosure of financial statement fraud is clear evidence of how damaging this is to a company." 
They said that the resulting costs could include "precipitous drops in market value, . . . multiple shareholder lawsuits and damages material to the entities' financial statements, damaged employee morale and retention and extensive amounts of time diverted." 
In the report, they urged their clients to be wary of these warning signs: "Inadequate leadership at the top, weak internal controls, autocratic senior management, collusion among accounting employees and aggressive accounting policies."


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Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Politics & Policy
Arthur Andersen May Lack Insurance To Cover Judgments
By Christopher Oster
Staff Reporter of The Wall Street Journal

01/16/2002
The Wall Street Journal
A18
(Copyright (c) 2002, Dow Jones & Company, Inc.)

In dealing with lawsuits stemming from its actions as Enron Corp.'s outside auditor, Arthur Andersen LLP likely won't be able to pass the bulk of any potential judgments against the big accounting firm on to insurance companies because Andersen, in large part, serves as its own insurer. 
Andersen already has been hit with shareholder lawsuits seeking class-action status in connection with its audits of the energy-trading firm, which filed for bankruptcy-court protection late last year. Securities-law specialists said Andersen's ability to successfully fight the lawsuits took a hit yesterday with its announcement that it was firing its lead auditor on the Enron engagement, on the heels of its announcement last week of document destruction by certain employees.
The coverage available for litigation in cases like that of Enron would fall under Andersen's errors-and-omissions liability coverage. It is unclear how much coverage Andersen purchased from insurance carriers. And like the other Big Five accounting firms, Andersen carries a large deductible, which means it is on the hook for smaller claims, said Leo Beus of Beus Gilbert PLLC, a Phoenix law firm, that has won several suits against the big accounting firms and in the process has become familiar with their insurance coverage. 
For payments that exceed the coverage limits on its outside insurance, Andersen would tap into an insurance pool that it jointly funds with other big accounting firms, including some outside the U.S., according to Mr. Beus. This pool, based in Bermuda, operates as an insurance company would, investing its assets and paying claims as needed. 
An Andersen spokesman declined to comment about the firm's insurance coverage. 
Mark Cheffers, chief executive of AccountingMalpractice.com, which advises accounting firms on how to reduce liability risk, said the Big Five are secretive about their insurance coverage because they don't want plaintiffs' attorneys to know how large a pool of money they maintain to pay judgments. 
In a 1994 speech before a House subcommittee, J. Michael Cook, then-chairman of Deloitte & Touche, said the big accounting firms "have virtually no outside insurance." He said the firms, due to tremendous growth of litigation against them, "pooled our own risks." 
Mr. Cheffers said it was unlikely that Andersen's insurance coverage -- including the deductible and pooled portion -- for any single year would be greater than $300 million. "At the end of the day it's designed so it's largely self insurance," Mr. Cheffers said. 
Mr. Cheffers said plaintiffs' attorneys generally are hesitant to push any one firm into dire financial straits. "The one thing Andersen has going for it is that the class-action attorneys recognize that they don't want to kill the goose, and that they can get more money out of Andersen in 10 years than in one." 
For its part, Enron is expected to tap into $300 million in directors-and-officers liability coverage provided by several big insurance companies, as previously reported.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

A Section
SEC, Accounting Firms Redrafting Audit Rules; Agency Chairman Draws Fire for Role in Effort
Kathleen Day and Albert B. Crenshaw
Washington Post Staff Writers

01/16/2002
The Washington Post
FINAL
A01
Copyright 2002, The Washington Post Co. All Rights Reserved

Securities and Exchange Commission Chairman Harvey L. Pitt and the accounting industry are scrambling to craft a new system for policing auditors in an effort to shore up confidence in the financial reports of publicly traded companies. 
The new plan, which could be unveiled within days, is designed to head off criticism in the wake of the Enron Corp. fiasco that the current system of self-regulation does not work. The effort is being driven by Pitt, who faces complaints from some lawmakers that he should distance himself from the SEC's investigation.
Pitt represented the five major accounting firms as a private lawyer before he was appointed by President Bush to take over the SEC on Aug. 4. 
Sens. Jon S. Corzine (D-N.J.) and Byron L. Dorgan (D-N.D.) have said Pitt's previous ties to the industry should require him to declare a hands-off policy. "I think Harvey Pitt has a high degree of integrity," said Corzine, a former partner with Goldman Sachs Group Inc. "But I do believe for appearance' sake . . . Pitt ought to do what Attorney General John Ashcroft has done and clearly step aside from the process." 
But Pitt disagreed. "To talk about recusals at this point misperceives how this agency operates," he said in an interview. 
Pitt said he has done and will continue to do his job in accordance with ethics rules, which forbid -- but with some exceptions -- the SEC chairman from taking any action concerning a former client for a year after taking office. 
The SEC, which regulates financial markets, is also responsible for the oversight of accounting firms, which are supposed to certify that financial records give a fair portrait of a company's finances. 
With the Enron collapse focusing criticism on accounting firms, the SEC is facing conflict-of-interest questions, not only because of Pitt's former ties to the industry, but also because Bush's two nominations for vacant seats on the five-member SEC come from big accounting firms. 
Pitt yesterday would not comment on how he voted last fall, when the commission agreed to launch an investigation into the Enron affair. That investigation is examining the role played by Enron officials and the company's outside auditor, Arthur Andersen. 
Pitt also would not specify what he would do if the SEC staff were to come before the commission again, at the conclusion of its investigation, with recommendations that actions be taken against companies or accounting firms. 
"Enforcement inquiries are conducted by our staff and the SEC commissioners do not have any involvement in the myriad decisions that our enforcement staff will be called upon to make," Pitt said. 
"It is not the function of the chairman of the SEC or any commissioner to manage any investigations. If and when I am asked to do anything on this matter, I will follow both the letter and the spirit of the ethical requirements of this office. Any suggestion that I would do otherwise is an attempt to politicize the workings of an independent agency." 
Pitt also would not comment on the negotiations he is having with the top five accounting firms and the industry trade group, the American Institute of Certified Public Accountants -- all of them former clients -- on how to revamp oversight of the profession. An SEC spokesman said those discussions are permitted by ethics rules and are appropriate. 
Industry sources said that talk about a regulatory overhaul, a topic that has been kicked around for years, was given new impetus after Enron's failure. Enron filed for bankruptcy Dec. 2 after being forced to restate earnings. The industry wants to unveil its proposal before Congress reconvenes next Wednesday and begins hearings into what caused the energy company's problems, sources said. 
The new framework would create a private-sector regulatory organization, similar to those that the SEC now permits the securities markets to use to discipline members and establish guidelines for what is accepted and unacceptable behavior, industry sources said. 
But the organization would not be controlled by accounting firms, the sources said, because it would be governed by boards whose members would come largely from outside the accounting industry. Accounting industry officials acknowledge that the reforms may not go far enough to quell criticism from consumer groups and some lawmakers, who say self-regulation is at the root of the accounting profession's problems. 
The five major accounting firms declined to comment on the proposal. 
The major accounting firms, in the past, have fought such a proposal, insisting that the current system, which includes industry self-regulating groups and state licensing boards, are sufficient. But in missing seemingly egregious misstatements and incorrect reports at Enron, the Arthur Andersen team raised anew questions about how well the nation's system of private accountants, paid by their audit clients, serves the nation's investors. 
The federal government gave the accounting industry the valuable franchise to audit companies that sell shares to the public after the stock market crash of 1929. In return, auditors are supposed to serve the public interest, and maintain independence from their clients. 
"The true client is society in an audit -- yet the client that is paying your fee is the corporation," said Stephen Loeb, professor of accounting and business ethics at the University of Maryland. With this system, "you have a conflict of interest. It's always going to be there," he said. 
In addition, many accounting firms earn large sums by selling consulting services to their clients. For instance, Andersen was paid $52 million last year by Enron -- $25 million for auditing and $27 million for consulting services. 
Accountants argue that they are professionals who can and do stand up to their clients when that is necessary. And, they add, ultimately their livelihood depends on retaining the public's trust. Otherwise, they say, audits would lose their value. 
That, though, is exactly what is happening, some critics charge. 
Arthur Levitt Jr., chairman of the SEC during the Clinton administration, proposed prohibiting accounting firms from selling certain consulting services to corporations whose books they audit in 2000. But that proposal was beaten back by the accounting industry and was opposed by several members of Congress. 
In addition, generally accepted accounting principles, the rules that accountants must follow in auditing public companies, allow considerable flexibility in evaluating what a business has done. Some lawmakers question whether those rules give accounting firms too much latitude. 
"Does the Enron debacle (and cases like it) rest on activity that is allowable under generally accepted accounting principles and standards, or that constitutes clear violations of those principles and standards, or some combination thereof?" Rep. John D. Dingell (D-Mich.), ranking minority member of the House Commerce Committee, asked the SEC last month. 
Auditing problems are not new. The late 1990s saw a wave of "restatements," in which many major companies, including Rite-Aid Corp., Sunbeam Corp., Waste Management Inc. and Cendant Corp., were forced to admit that profits reported earlier had been vastly overstated. 
Some cases involved fraud, which auditors said they are ill-prepared to detect. Critics have said that auditors should do more extensive checks of contracts, deliveries and other aspects of a company's operation. But accountants warn that would make routine audits far more expensive. They say that in fierce competition for clients, the lowest cost auditor often wins.


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O'Neill says US derivatives rules may need modernising in wake of Enron case

01/16/2002
AFX News
(c) 2002 by AFP-Extel News Ltd

WASHINGTON (AFX) - Treasury Secretary Paul O'Neill said US derivatives regulations may need modernising, in the wake of the bankruptcy of Enron Corp. 
"In this case, I think it's fair to say it may be that our rules and regulations have gotten behind practices," O'Neill said in an interview on the PBS Charlie Rose program.
At heart of the Enron bankruptcy was the firm's dealing with derivatives trading, he explained, which "got away from them." 
Derivatives that are four to five levels deep from the original product they are based on are extremely complex, he said, and the laws and regulations addressing information disclosure need to be modernised. 
A second factor is that some of Enron's actions possibly "didn't pass muster when they're held up against what the law required" under existing rules, he added. To the extent that anybody broke the law, "they should go to jail." 
O'Neill also said he would not have made the call former Treasury Secretary Robert Rubin made to a senior current Treasury official concerning intervention with credit rating agencies and Enron's banks. 
According to the Treasury, Rubin called Treasury Undersecretary Peter Fisher and brought up the possibility of Fisher calling the ratings agencies and encouraging them to work with Enron's banks to avoid a credit downgrade. 
O'Neill said it was up to Rubin to decide whether the call was appropriate, but that he would not have made such a call. 
Separately, O'Neill said he believes he has 100 pct backing in his position from President George Bush, in face of criticism from politicians and the media on his job performance. 
Regarding the US economy, O'Neill said the US has now "put in place the conditions that in a reasonably quick period of time will restore growth" to 3.0-3.5 pct. 
Europe and Japan need to do the same, he said, to ensure the world's three major economies are driving global development. 
Asked about Argentina's crisis, the Treasury Secretary said Bush told him "the concept here is friendly amigo," with the US offering technical and policy advice to the new government, to help it establish a program that can restore growth. 
However, he drew a distinction between Argentina and Mexico, which in 1995 received a multi-billion dollar bailout from the previous Clinton administration. 
In the Mexican situation, US aid was collateralised with Mexican oil revenues. 
In Argentina's case, however, "they don't have anything left to collateralise," he said. 
O'Neill also said the US only "reluctantly went along with the notion at the IMF that they should be given one more chance," last August, when the IMF boosted its loan program for Argentina by 8.0 bln usd. 
cxa/tr For more information and to contact AFX: www.afxnews.com and www.afxpress.com

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Business/Financial Desk; Section C
ENRON'S COLLAPSE: THE DONATIONS
Enron's Ties to a Leader of House Republicans Went Beyond Contributions to His Campaign
By ALISON MITCHELL

01/16/2002
The New York Times
Page 1, Column 2
c. 2002 New York Times Company

WASHINGTON, Jan. 15 -- It is well known that the Enron Corporation lavished money and attention on political figures all over the nation's capital. But for an insight into how carefully the company cultivated members of Congress, look no further than its efforts to please its home state powerhouse, Representative Tom DeLay. 
Like other members of the Texas delegation, Mr. DeLay, a Republican whose district is in the Houston suburbs near Enron's headquarters, received sizable personal campaign donations from Enron -- $28,900 since 1989, according to the Center for Responsive Politics.
Yet Mr. DeLay, the House majority whip, is not just another lawmaker. The donations were only a starting point. 
Enron used as lobbyists two influential members of Mr. DeLay's informal kitchen cabinet, Ed Buckham and Karl Gallant. 
Mr. Buckham, a former chief of staff for Mr. DeLay, has worked closely on strategy with Mr. DeLay's political action committee, Americans for a Republican Majority. And Mr. Gallant, who once served as that committee's director, went on to run the Republican Majority Issues Committee, a group widely considered close to Mr. DeLay, whose allies once hoped that the issues committee would serve as a counterweight to unions by financing get-out-the-vote efforts for conservative candidates. 
Records also show that Enron and its executives made sizable donations to each of the groups. The 2000 disclosure statement for Mr. Gallant's committee includes a $50,000 contribution from Enron's chairman, Kenneth L. Lay, and a $25,000 contribution from Joseph W. Sutton, a vice chairman of Enron who left the company in November. Before that year, disclosure was not required for gifts to issues groups. 
Americans for a Republican Majority received a $10,000 corporate contribution from Enron in 2000 for its unregulated ''soft money'' account. And according to the Center for Responsive Politics, the group also received $47,250 in regulated contributions in 1995 through 2000 from Enron, its political action committee or individuals tied to the company. 
Mr. DeLay's spokesman, Stuart Roy, said there was nothing unusual about Mr. DeLay's relationship with Enron. He described the company as ''an equal-opportunity political donor and an equal-opportunity employer, as well, hiring lobbyists who were both Republicans and Democrats and giving money to both sides, including a third of House Democrats and half of the Senate Democrats.'' 
Mr. Gallant said he would not discuss his dealings with Enron, citing a confidentiality clause in his contract. Mr. Buckham did not return a phone call, and an aide said he would be unavailable until later this month. 
Mr. DeLay has been unabashed about demanding that business support Republicans, whom he considers commerce's natural ally. Aides said he froze Enron out of his office for some of the past year because it had hired Linda Robinson, a Democrat who was a senior Treasury official in the Clinton administration, to run its Washington office. 
Mr. DeLay has previously urged lobbying firms and trade associations to install more Republicans in executive positions. Indeed, the House Ethics Committee wrote a warning, but took no official action, after he tried to persuade a lobbying group not to hire a Democrat as its president in 1998. 
Still, whatever the tensions last year, Mr. Delay and Enron had a natural alliance. In his days in the Texas Capitol, Mr. DeLay was called Dereg by some because of his support of business. And in Congress he has been a longtime proponent of energy deregulation, an issue dear to Enron. 
Moreover, last year he was the chief Republican strategist who pushed through the House energy legislation that was favored by Enron and many other energy companies. Three years ago, when Enron lost out to a Japanese company in bidding to build a power plant in the Commonwealth of Northern Mariana Islands, a United States territory in the Pacific, Mr. DeLay asked for the bidding to be reopened. 
In some ways, Mr. DeLay's support for Enron was a matter of constituent service. Mr. Roy said that Enron's success had always been important to Mr. DeLay because of the hundreds of people the company employed in his Congressional district and the thousands of others in nearby Houston. 
''Obviously, DeLay would not be doing his job if he were not trying to help job creation by a major company in Houston,'' Mr. Roy said. 
He said Mr. DeLay had never asked that the company hire his former aides as lobbyists. 
It is also the case that Enron cultivated the other side of the aisle. For example, Michael Lewan, a former chief of staff to Senator Joseph I. Lieberman, the Connecticut Democrat who is running one investigation into the company's collapse, worked for Enron for a time, a spokesman for Mr. Lieberman confirmed. The spokesman, Dan Gerstein, said Mr. Lewan, who remains a political adviser to Mr. Lieberman, had severed his ties to the company. 
Enron officials in Washington referred questions to a company official in Houston who did not return a call. 
Having a lobbyist who is close to a lawmaker can help a company get attention. In 1999 Mr. Buckham told Mr. DeLay that the Japanese company had successfully bid to build the power plant in the Northern Marianas. Mr. DeLay wrote his letter asking that the bidding be reopened. 
Mr. Roy said there had been rumors at the time that some bidders had been locked out of the competition. He said Mr. DeLay's letter did not advocate on behalf of Enron, but for ''a fair and open bidding system.'' Mr. Roy said he did not know who won the final contract. 
A former aide to Mr. DeLay who did not want to be identified said of Enron, ''They certainly through Ed Buckham got more attention than people who didn't have Ed Buckham.'' 
After Enron hired Ms. Robertson for its Washington office in late 2000, relations with Mr. DeLay became more distant. ''Relations were chilly all last year,'' Mr. Roy said. 
But as the member of the House Republican leadership shepherding Mr. Bush's program through the House, Mr. DeLay pulled off a stunning upset and built a coalition of Republicans and Democrats to pass energy legislation sought by many companies, including Enron. 
Mr. Roy said Mr. DeLay had received no warnings that Enron was in deep financial trouble. With many of the hard-pressed Enron employees in his district, Mr. DeLay called the situation ''heartbreaking'' in an interview with a Houston television station this week and said his goal now was to find out whether there had been criminal wrongdoing by the company.

Photo: The Enron Corporation contributed to groups aligned with Tom DeLay, the House majority whip, and used two former employees of his as lobbyists. (Associated Press) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Hooley and Blumenauer return Enron cash

01/16/2002
Associated Press Newswires
Copyright 2002. The Associated Press. All Rights Reserved.

SALEM, Ore. (AP) - Reps. Darlene Hooley and Earl Blumenauer, both Oregon Democrats, became the latest politicians to return campaign contributions from Enron, the failed energy giant. 
Enron went bankrupt Dec. 2 after disclosing that its faulty accounting practices concealed huge losses. Top executives sold millions of dollars of stock before the collapse, but many employees were barred from selling shares held in their company 401(k) plans.
"The news over the past several weeks of the financial collapse of Enron has been devastating for individuals and families throughout the United States," Hooley wrote to Enron CEO Kenneth Lay on Dec. 21, enclosing a check for the $1,000 the company's political action committee had sent her. 
"They, like most Americans, are not analysts and experts in the field of financial investment," Hooley continued. "They believed in your company's financial projections. They believed you and your board of directors." 
Enron was widely noted for its political influence. Since its demise, several politicians from around the country, including Sen. Gordon Smith, R-Ore, have returned or donated contributions. 
Upon hearing of the company's bankruptcy filing and realizing she had gotten money from its PAC, Hooley initially tried to send the money to employees who have sued the company, said her chief of staff, Joan Mooney. 
But taxes would have eaten up more than half of the donation, and the payoff to individual employees or investors would have been negligible. 
Blumenauer announced Wednesday that he is donating $2,200 in campaign donations made by Enron's PAC to a private nonprofit group that is retraining laid-off Enron employees. 
"I am pleased to give the money from Enron's corporate PAC to a good cause, especially when so many Oregonians have been hurt by the company's collapse," Blumenauer said in a statement. 
Blumenauer also got contributions from people employed by companies bought out by Enron, including Portland General Electric. 
The congressman said he is not returning those donations because they were made by longtime supporters and personal friends.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Style
The Essentials Of a Washington Scandal; Enron Has Possibility. But Something's Still Missing.
Paul Farhi
Washington Post Staff Writer

01/16/2002
The Washington Post
FINAL
C01
Copyright 2002, The Washington Post Co. All Rights Reserved

It's still early, but, yes, it's possible. If everything goes to form, and everyone executes according to the playbook, this one could go all the way: The collapse of Enron Corp. could turn out to be another Incomprehensible Washington Scandal. 
An IWS is one of those events that, like Halley's comet, periodically lights up the sky. It fascinates some and disappoints others -- but it mostly baffles everyone else.
In the beginning, you understand the basic plot of an IWS. Somebody in high office allegedly did something he wasn't supposed to do. But soon the leaked memos start colliding with the press conferences, which pile into the transcripts and the congressional hearings. Lawyers and spokesmen materialize. 
Soon, you've lost it. The simple story becomes so barnacled with facts and accusations, so encumbered with major and minor players, that the core is no longer recognizable. You struggle to keep pace, but it's not long before you're being lapped by the field. 
By definition, an IWS is so convoluted that it is understood only by participants, partisans, lawyers and a few very nerdy journalists -- all of whom are paid to pay attention anyway. An IWS involves allegations about things that might have been said, on dates that are in dispute, by people who may or may not have had the legal authority to do what they (allegedly) did. All IWSes inspire congressional hearings, although early in the process the hearings take place before panels with names like the House Subcommittee on Intra-government Affairs, Federal Rules and Oversight Operations Management. 
A new IWS erupts about once every 18 months, give or take, which means Enron's timing could be just about perfect. IWSes rarely overlap, the media and political classes' endurance being what it is. The Asian Fundraising Scandal followed Filegate, which followed Travel Officegate, which followed Whitewater, which followed the House Post Office Scandal, which followed the HUD Debacle, which followed the Savings & Loan Scandals, which followed Iran-contra. And so on back to Teapot Dome. 
What with its destroyed documents, suspect accounting reports and eye-glazing concepts like "off-balance sheet partnerships," Enron is halfway to classic IWS status. Almost every IWS involves money, but not money alone. It also needs some Byzantine connection (or plausibly imputed connection) to some kind of official influence-peddling. This distinguishes an IWS from a Simple Washington Scandal (SWS), which is usually about sex, and therefore not especially perplexing (everyone understands sex, or thinks they do). 
So: Wilbur Mills's fling with stripper Fanne Fox was an SWS, as was Gary Hart's friendship with Donna Rice, as were Bill Clinton's problems with Paula Jones and Monica Lewinsky. Bob Packwood's personnel-management techniques were an SWS, as were Clarence Thomas's movie preferences. Gary Condit's relationship with Chandra Levy was an SWS, but with an asterisk: It involved sex and the suspicion of violence. 
Perhaps the easiest way to tell a bona fide IWS from an SWS is by the media that cover it. CNN, the New York Times and The Washington Post take on both kinds (although they are much later to an SWS than an IWS). The National Enquirer and the Star were all over Lewinsky et al., but don't expect to read much about "off-balance sheet partnerships" in them. 
Further, there are few, if any, telegenic props associated with an IWS. There is never a stained dress or a yacht called Monkey Business. There are, mostly, memos. 
We'll know for sure when Enron has become a full-blown IWS when it achieves the following milestones of every true IWS: 
* A catchy name. All IWSes require a spiffy nickname. So far, Enron hasn't gotten there, but there have been some rudimentary attempts. 
The media continues to shorthand Enron as "the biggest corporate bankruptcy in U.S. history," which is accurate, but hardly headline-ready. 
New York Times columnist William Safire, pointing to the failings of accounting firm Arthur Andersen, dubbed this aspect of the story "Andersen-gate," "-gate" being the predictable suffix for every IWS and SWS since Water-. 
The Democratic National Committee last week was floating "Enron-omics" as a way to disparage the Bush Administration's tax and budget initiatives. Alas, this falls short, too, if you're trying to gin up an IWS. The "-omics" suffix ("Reaganomics") merely suggests a style of policy, not corruption. If it turns out someone illegally cut corners, maybe this one will become known as "End-ron." 
* Buzzwords. No IWS is fully realized until certain legal and quasi-legal phrases start flying: "subpoena," "grand jury," "special counsel," "nolo contendre." We're not there yet. All we've been able to muster so far are the hoary soporifics of every two-bit D.C. dispute: "conflict of interest," "appearance of a conflict of interest," and the unlovely "suggestion of the appearance of a conflict of interest." 
* Regrettable catchphrases. One of the great subsidiary values of an IWS is that it sometimes throws off a preposterous or startling catchphrase. Again, Enron is not fully developed enough to generate entries into the rhetorical pantheon that includes "I'm not a potted plant," "No controlling legal authority," and the ultimate: "I am not a crook." 
* The Lawyer as Character. Count on the media to elevate some unglamorous, balding guy in a baggy gray suit to the status of Righteous Crusader for Justice, or at least Colorful Rogue during a long-running IWS. Brendan Sullivan got there during Iran-Contra. David Boies made it during the Microsoft antitrust trial (technically, not an IWS, but very close). No sightings on Enron yet. 
* The Dragon Lady. Even the dreariest IWS eventually coughs up one or two semi-glamorous women to enliven the proceedings. The woman in question may be a key player, or she may hold a minor role. Doesn't matter. Either way, she's bound to look good next to all the balding lawyers in baggy gray suits. Remember Fawn Hall, Deborah Gore Dean, Susan McDougal and Mo Dean? 
* The Non-Denouement. Quick: What was the result of every IWS of the past 15 years? Surely, after all those special prosecutors, all that media coverage, all that distracting government focus, there was some outcome. Wasn't there?


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Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

California; Editorial Pages Desk
Commentary No Special Counsel on Enron
SAMUEL DASH
Samuel Dash, a professor of law at Georgetown University Law Center, was chief counsel to the Senate Watergate Committee and ethics counsel to the independent counsel investigation on Whitewater.

01/16/2002
Los Angeles Times
Home Edition
B-13
Copyright 2002 / The Times Mirror Company

The fast developing Enron story has now reached Washington scandal status. 
Adding to the frenzy, some Democratic leaders sound as though they regret the demise of the independent counsel legislation, something most of them applauded when it happened in 1999. If that legislation had not expired, these critics would have been able to demand that the Bush administration request an independent counsel and then make political hay when the administration refused. This would have been reminiscent of the Republican onslaught against Atty. Gen. Janet Reno for refusing to request an independent counsel to investigate charges of campaign financing misdeeds in the 1996 Clinton campaign.
Instead, the critics can only call for the Justice Department to appoint a special counsel. Yet on the basis of the facts known so far, this would be wrongheaded and inconsistent, nothing more than a return to the familiar partisan political game of "gotcha!" 
Enron's collapse may indeed justify investigations by Congress, the Securities and Exchange Commission and the Justice Department, all of which are underway. 
The attorney general and his chief of staff have properly recused themselves because of political contributions made by Enron, and a special Justice task force has been created to conduct the investigation. 
There appears to be no reason that the professional prosecutors on this task force cannot be trusted to be objective and thorough. 
Then what was the necessity for past independent counsels, which Congress legislated after the Watergate scandal? 
That legislation never was intended to replace the Justice Department as the official law enforcement arm of the federal government; Congress could not constitutionally do this. Rather, the independent counsel legislation was aimed at the rare circumstance in which an attorney general would be faced with a serious conflict of interest in having to investigate substantial and credible criminal charges against the president or a high Cabinet official. 
In Watergate, exactly such a conflict existed for Atty. Gen. Elliot L. Richardson when criminal charges were pending against President Nixon's top staff and former Cabinet members, charges that implicated the president. At the time, Richardson appointed a regulatory special prosecutor, Harvard law professor Archibald Cox. Only after Nixon fired Cox did the Senate Watergate Committee conclude that new legislation was needed. 
I believe this legislation worked well from 1978 to the mid-1980s. It was used sparingly and had the confidence of the public. But beginning with the Iran-Contra investigation and through the numerous investigations involving the Clinton administration, it was overused. It became publicly and politically unpopular and so was not reenacted by Congress. 
So far, nothing made public about Enron would have justified the appointment of an independent counsel. There are no charges that President Bush, Vice President Dick Cheney or any member of the Cabinet had complicity in Enron's financial failure. Yes, Enron Chairman Kenneth L. Lay was a major financial supporter of Bush and thus had access to the president and Cabinet members. But such access has always been an inherent feature of the American political system. With no evidence of improper favors, it is at most an impropriety. The remedy is campaign financing reform. 
The administration has disclosed that in October, just as Enron was going under, Lay contacted Treasury Secretary Paul H. O'Neill and Commerce Secretary Don Evans and may have asked for help in protecting Enron's credit rating. But it seems that no such help was given. Apparently, the administration did nothing to prevent the company's financial failure and the resulting losses to shareholders and employees. It is not clear what the administration could have done, even in October. But if anyone in the administration had intervened to save Enron, the critics would now be making even more serious allegations. The investigations should go forward without a supplemental independent investigator. With regard to possible criminal charges, the Justice task force should conduct an aggressive investigation. The accounting practices used to falsely report huge profits, misleading investors and employees, need to be exposed and those responsible made accountable. 
The congressional and SEC investigations must thoroughly examine the role of corporate directors, auditors and large accounting firms to determine whether outside audits are truly independent. 
Tragic as it is to so many investors and employees, Enron's failure could serve as a wake-up call for American politics and business.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Editorial
. . . Especially From Republicans
George F. Will

01/15/2002
The Washington Post
FINAL
A19
Copyright 2002, The Washington Post Co. All Rights Reserved

Washington -- narcissistic and even solipsistic, as usual -- thinks Enron's collapse is primarily a Washington, meaning a political, story. Actually, the debacle is, so far, primarily a tale of two other cities. Houston is Enron's hometown. New York is the center of the financial system that Arthur Andersen is supposed to serve. Andersen is the document-destroying accounting firm that failed -- assuming, generously, that it tried -- to report accurately Enron's activities. 
However, Washington will star in subsequent acts of this drama that may live on, in litigation, longer than anyone reading this column. Events since Sept. 11 have confirmed Randolph Bourne's 1918 axiom that "war is the health of the state." Enron's collapse is a reminder that economic scandal, too, causes the state to wax.
It will remind everyone -- some conservatives, painfully -- that a mature capitalist economy is a government project. A properly functioning free market system does not spring spontaneously from society's soil as dandelions spring from suburban lawns. Rather, it is a complex creation of laws and mores that guarantee, among much else, transparency, meaning a sufficient stream -- torrent, really -- of reliable information about the condition and conduct of corporations. 
Always necessary to economic health, transparency has increasingly become crucial to civic health because of the changed demographics of stock ownership. A nation in which a majority of households own equities is neurologically wired to the stock market. Hence corporate corruption quickly begets political demoralization and cynicism. 
Off and on over the years, a few capitalists have done more to delegitimize capitalism than America's impotent socialist critics ever did or today's moribund left could hope to. It is the Republicans' special responsibility to punish such capitalists. 
Democrats are properly put on the defensive by corruption in organized labor and the ditziness of the cultural left. Similarly, Republicans, beginning with their post-Civil War entanglement with corporate America (tariffs and all that), have had a special responsibility to police business outlaws. 
Fortunately, those in the Bush administration who were approached on Enron's behalf evidently did exactly what government should do for fools and clever knaves who are ruining a corporation: nothing. But now there are things to be done. 
Indignation is a precondition for whatever new laws and regulations are required to prevent behavior such as Enron's. It has been said that the absence of honest emotion is the shared characteristic of American politics and professional wrestling. One would like to hear from President Bush, regarding Enron's executives, the sort of anger he expressed over the possibility that the crybaby Secret Service agent whose behavior caused an American Airlines pilot to bar him from a flight might have been a victim of illegitimate profiling. 
Instead, we have heard Bush's slippery -- Clintonian, actually -- assertion that Enron's CEO, Ken Lay, "was a supporter of Ann Richards in my run in 1994" for governor. Well, yes, but no. Lay contributed to Richards. And he contributed much more to Bush. 
When the president finds his proper voice, he should say: 
Arthur Andersen was both accountant and consultant for Enron. The resulting relationship reeked of conflict of interest, and surely helped produce Enron account books that should be filed under "fiction." Enron never reported even a bad quarter before collapsing. Consulting by accounting firms should be proscribed. And what is the point of "peer reviews" by the big accounting firms of one another's work if they do not discern an approaching train wreck such as Enron's? 
A few senior Enron executives sold their Enron stock when they realized they were steering their ship onto the rocks. In some crucial final days, employees, locked in steerage like the lower orders on the Titanic, were blocked from selling the Enron stock that comprised, on average, 62 percent of employees' 401(k) holdings. (At 120 large corporations, employees' 401(k) plans have at least one-third of their value in their employers' stocks.) If insider trading and other laws do not proscribe such things, they should. 
Amid the debris of Enron, the functions and liabilities of boards of directors need fresh scrutiny. Many boards have proved themselves unwilling (there are myriad forms of coziness between corporations and their directors) or unable to stop the most scandalous practices regarding senior executives' compensation, practices not easily distinguishable from the looting of shareholders' wealth. Let us have, at a minimum, congressional hearings that embarrass the looters, if they are capable of embarrassment. 
Now Washington takes center stage. By casting a cool eye on Enron's debris and those who made it, government can strengthen an economic system that depends on it.


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Style
Media Split on Import of Enron
Howard Kurtz
Washington Post Staff Writer

01/15/2002
The Washington Post
FINAL
C01
Copyright 2002, The Washington Post Co. All Rights Reserved

Judging by the sudden media explosion, the Enron saga is a high-octane political scandal of the first order. 
Or, some journalists say, it's a badly hyped bit of Beltway intrigue that will run out of gas because the Bush White House did nothing wrong.
A senior administration official blames the coverage on "a bunch of scandal-thirsty reporters who are dying to hit the bottle, even though it's not alcoholic." 
In the days since the White House revealed that Enron CEO Kenneth Lay called two Cabinet officers shortly before his energy-trading company collapsed in the largest bankruptcy in American history, the press has jumped on the story with Whitewater-like intensity. But since the administration refused to help Lay, a long time friend and financial backer of President Bush, the coverage has an almost schizophrenic quality. 
Jonah Goldberg, editor of National Review Online, sees journalists firing at their favorite targets. 
"Bush has gotten a really good ride out of the press during the war for a long time, and rightly so," he says. "All of a sudden there's this huge story that Democrats, for reasons good and ill, are trying to make hay out of. You can see the press saying we have to go back to our muckraker roots and get to the bottom of it. It's natural for the press to want to show that business is evil." 
But Robert Scheer, a Los Angeles Times columnist who has called Enron a "cancer on the presidency," maintains the press has gone soft. "Journalists should be asking the question 'What did you know and when did you know it?' " he says. Scheer argues that "the media backed off" on White House coverage after Sept. 11 and have been "cheerleading" for Bush. 
This philosophical split is reflected in the news reports. "The rapidly exploding Enron inquiry presents all the elements of earlier Washington scandals," the New York Times said Friday, "including carefully phrased denials and accusations of improper influence." 
The Washington Post took a similar tack: "It's too soon to say whether Enron Corp.'s spectacular collapse will become a bona fide Washington scandal, but the classic elements suddenly burst into view yesterday -- disclosures of destroyed documents, White House phone calls from a big political contributor, an attorney general's recusal and damage control efforts by the president." 
But the Washington Times cast Bush as a reformer, relegating the White House calls to the eighth paragraph: "President Bush yesterday decried the 'awful bankruptcy' of Enron Corp. and ordered a review of pension disclosure laws to help protect the life savings of workers at other troubled firms." And USA Today went with the headline: "Bush Seeks Review of 401(k) Law." 
"I couldn't find anything improper or illegal in Enron officials calling Cabinet secretaries," says Washington Times correspondent Bill Sammon. "I'm not going to join people who are throwing around a lot of innuendo and insinuation. . . . Of course the White House was defensive, in response to accusatory questions from the press." 
White House spokesman Ari Fleischer faults The Post for including "disclosures of destroyed documents" in the article's first sentence before explaining that the papers were shredded by auditor Arthur Andersen & Co. "The velocity with which this story has taken off in the minds of the Washington press corps is way ahead of the pace of the facts," Fleischer says. 
Conservatives, noting that Enron also gave sizable sums to Democrats, ridicule the notion that the White House/Enron story should be covered like Bill Clinton's scandals. White House adviser Mary Matalin told radio host Don Imus that Bush's critics "act like there's some billing records or some cattle scam or some fired travel aides or some blue dress." 
"The comparison to Whitewater really doesn't hold," says Goldberg. "No one is alleging that Bush gained personally from this." (As it turned out, the Clintons lost money on their Whitewater land deal.) 
There is little dispute that the Enron meltdown is a major-league financial scandal in which company insiders dumped their stock before employees started losing their life savings. But despite the Houston firm's Dec. 2 bankruptcy filing, the story was largely relegated to the business pages and rarely mentioned on television. Exceptions included the New York Times and Wall Street Journal -- as well as the Los Angeles Times and San Francisco Chronicle, where local interest was fueled by Enron's role in California's energy crisis. 
As late as Aug. 28, after the former CEO abruptly resigned, the Houston Chronicle was cautious in a front-page report: "Even though nothing major appears to be wrong at Enron Corp., investor confidence in the world's largest energy trader remains shaky." 
Jim Cramer, a former money manager and co-host of CNBC's "America Now," says an Enron executive complained to his bosses months ago when he charged that the company was "unraveling" and that its stock was going to zero. 
"My producer and I have been saying for weeks, 'Are we the only guys who think this is a big story?' " Cramer says. "Everyone just kept quoting the same analysts, saying it's all much ado about nothing. The Wall Street analysts worked at firms that were doing massive amounts of investment banking business with Enron." 
Paul Begala, a former Clinton aide who now teaches at Georgetown University, says Enron deserves far more coverage than the Monica Lewinsky melodrama. "Clinton having an affair is pretty much between him, his wife and his girlfriend," Begala says. "It didn't hurt America. Nobody lost their savings. This is a very big deal." 
Begala says Bush hurt himself by claiming last week that Lay supported Ann Richards over him for Texas governor in 1994 -- a claim that was prominently debunked by Texas newspapers but only briefly mentioned elsewhere. 
"The lesson I learned from the Lewinsky thing is a president must never lie," Begala says. Bush "got off very, very easy," he says, because the press is "a bunch of cream puffs."


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Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

A Section
THE IDEAS INDUSTRY Richard Morin and Claudia Deane
Enron Pumped Cash Into Tanks Too
Richard Morin and Claudia Deane

01/15/2002
The Washington Post
FINAL
A17
Copyright 2002, The Washington Post Co. All Rights Reserved

Politicians weren't the only ones getting gobs of cash from Kenneth L. Lay, the embattled chairman of Enron Corp., the Houston-based energy trading company that collapsed last month amid allegations of accounting hanky-panky and management misdeeds. 
In recent years, Lay or Enron contributed thousands of dollars to Resources for the Future and the American Enterprise Institute. Lay also serves on the board of directors of the two high-profile Washington-based think tanks.
"Enron has contributed periodically to RFF since 1990, with gifts ranging from $10,000 to $45,000" to the general fund, said Jonathan Halperin, director of communications planning and strategy at RFF. The $45,000 contribution was made last fall to honor the 50th anniversary of the think tank, which researches issues related to natural resources and the environment. 
And yes, "the check did clear," reported Ted Hand, RFF's vice president for finance and administration. 
In addition, the Linda and Ken Lay Foundation pledged in 2000 to endow a research chair at RFF. In 2000, the foundation contributed a total of $15,000, Halperin said. 
The Enron chairman briefly served on the RFF board of directors in the mid-1980s. He rejoined the board in April 2000. 
Lay has served on AEI's board of trustees since 1994. AEI officials declined to say how much Lay or Enron has contributed to the tank. 
"We have a firm rule about not discussing the amount of contributions or where they come from," said Executive Vice President David Gerson, though he noted wryly that AEI got less than RFF did last year. 
AEI is the intellectual home of Lynne V. Cheney, wife of Vice President Cheney and an AEI senior fellow. The vice president and Lay were on a panel together at AEI's World Forum on June 24, the White House said in a letter to Congress released last week. 
GETTING TOGETHER: Here's another unexpected consequence of the Sept. 11 terrorist attacks: "Whites trust blacks more, Asians trust Latinos more, and so on, than these very same people did a year ago," reports Harvard political scientist Robert Putnam. 
Putnam, the intellectual guru of the civic engagement movement, based his surprising claim on a new analysis of surveys conducted by the Saguaro Seminar at Harvard. The first poll was conducted in 2000. Last October, researchers returned to the same people and posed the questions again to see if their attitudes had changed following the attacks on the World Trade Center and the Pentagon. 
They had. "Evidence of enhanced trust across ethnic and other social divisions is especially striking and gratifying," Putnam writes in the American Prospect due out this week. For example, the proportion of whites and Asians who said they trusted blacks "a lot" increased from 22 percent to 29 percent, Putnam reported. 
VOUCHING FOR SCHOOL CHOICE: School vouchers didn't make the final cut in the recent education bill, but they're still a smoking hot topic in Washington with the Supreme Court set to hear oral arguments in the Cleveland voucher case next month. 
With this timing in mind, the Cato Institute announced the launch of the Center for Education Freedom, to be run by new hire David Salisbury. The center will run on an annual budget of $450,000 and start with a staff of four. 
"We'll be looking at proposals in the 50 states, including tuition tax credits, scholarship tax credits like they have in Arizona, and how to decrease the role of the federal government in special education," Salisbury said. "We're also looking at for-profit and nonprofit educational entrepreneurs who are providing options for managing schools and educating kids outside the government." 
Salisbury, a former education professor at Florida State University, comes to the libertarian tank from Utah, where he spent five years running the Sutherland Institute, a small, free-market think tank. 
(Perhaps there's some sort of East-West libertarian exchange going on. Cato's previous education expert, Darcy Olsen, left the District last fall to become the executive director of the Phoenix-based Goldwater Institute.) 
On a related subject, the Center for Education Reform, a pro school-choice advocacy group, just released the seventh edition of its National Charter School Directory, which includes a list of 2,431 charter schools as well as analyses of enrollment and growth, and a ranking of state laws. 
PEOPLE: Everett Ehrlich has been named senior vice president and director of research at the Committee for Economic Development. Ehrlich, a former undersecretary of commerce for economic affairs, has also served as assistant director at the Congressional Budget Office, and is a former vice president for Unisys Corp. In his spare time, he pens novels. 
The Carnegie Endowment for International Peace has hired George Perkovich, a specialist in South Asian security issues, as a senior associate. Perkovich, author of a well-received book on Indian nuclear policy, has spent the last decade grant-making at the W. Alton Jones Foundation. Council on Foreign Relations scholar and former State Department policy planning head Morton Halperin has taken over the directorship of the Washington office of George Soros's Open Society Institute. 
Ross Eisenbrey has joined the Economic Policy Institute as policy director. He comes from the Occupational Safety and Health Review Commission, where he was a commissioner, and has worked on labor issues in both the House and Senate.


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Financial Post: Editorial
Enron highlights risks of employee stock plans
Amity Shlaes
National Post

01/16/2002
National Post
National
FP15
(c) National Post 2002. All Rights Reserved.

Back in the late 1950s, a lawyer called Louis Kelso co-authored a book called The Capitalist Manifesto. In it, he posited that democracy suffered when money was confined to the hands of the wealthy. Workers should have a chance to participate in capital, not just in some nominal fashion but as true shareholders. 
With the Enron collapse on the front pages, and much media attention paid to the many employees who lost the bulk of their life savings because their retirement funds contained little other than Enron stock, Mr. Kelso's lessons for us bear revisiting.
The essence of property, as Mr. Kelso wrote, "is the right to receive its product." Workers needed equity assets and, crucially, the freedom to manage them. After this radical change, the United States would stabilize and would no longer suffer periods like that of Mr. Kelso's own youth, the Great Depression. 
Mr. Kelso created a device to mount his revolution: the employee stock ownership plan, Esop. A Kelsonian spirit also infused the subsequent development of the now widespread employee pension plan, the 401(k), an RSP-like vehicle. 
The 401(k) gives companies the option -- it is important to note this is voluntary -- to deposit company shares or cash into accounts of individual employees. Tax incentives then encourage workers to match the company contribution made in their name with their own cash savings. There are also confiscatory penalties for those who do not wait until retirement to claim the proceeds. 
All this comes to mind when we consider the fate of Enron employees who lost their 401(k) shirts when the Enron stock they held evaporated. One could argue -- from the left -- that the Enron case shows worker stock ownership is inherently dangerous. But the truth is that Enron's pension crisis occurred because 401(k)s are not Kelsonian enough. 
Consider the nature of 401(k)s. While workers have nominal title to their pensions while they are employed, both the government and company sponsors place all sorts of constraints on their ownership. In 401(k) plans, worker investments are routinely limited to an array of mutual funds, chosen by the company, and to company shares. They may not invest their 401(k) money in assets that are not on the prescribed menu, such as individual properties. They are, as mentioned, subject to rules that punish any withdrawals before retirement. What is more, pension law encourages employers to play the murky role of principal investment "educator" to employees. Many of these rules were written in the name of protecting the workers. But the net result is that, during the working years, the rights of ownership of 401(k) plans do not reside with the worker alone. Instead, they are shared between him and his employer. Worker ownership has generated enormous good, just as Mr. Kelso foresaw. 
The existence of Esops and 401(k)s in the 1980s and 1990s meant that workers could participate in great economic expansions. The fact that companies could offer their own stock to workers meant that they shared out far more than they might otherwise have done. 
The second benefit of employee stock ownership was that it did indeed give workers a personal stake in their companies. Companies figured out that worker-owners would be less likely to shirk. This is one reason why U.S. productivity growth stands out internationally. But Enron illustrates the disadvantages of the half-ownership arrangement. 
First is the problematic rule that drives employers to play the role of investment educator. This creates a form of pension paternalism that in turn generates a false sense of security. If Enron employees had been talking to an independent financial planner instead of their go-go bosses, that planner would have told them that it was crazy to have 98% of their pension in Enron stock. The advisor would also have told them that their Enron pension plans were insufficient. He or she would have said it was unwise for middle-aged workers to be taking the same risks as 20-year-olds at Internet start-ups. 
The second problem was a rule that gave Enron -- and other such firms -- the discretion to enforce a "black-out" period when workers are not allowed to alter their investments. Just such a black-out was in effect when Enron stock price was plummeting. This denied workers the right of the true owners to, receive their capital's product, as Mr. Kelso put it. If they had been able to do so, they could have sold the shares in a timely manner. 
The third problem rule is one that gave Enron the discretion to block sales by workers until they reached a certain age. Had workers truly controlled their capital, they would have been free to act more quickly. The logical next step therefore is to unmuddy the pension law and make clear what ownership is and what it is not. 
If employees are to have 401(k) investments -- and they should -- their ownership should be something closer to outright. The law should encourage them to seek independent advisers and to cast a skeptical eye on their employers' enthusiasms. The worst thing would be to heap on new constraints and "protections," as legislation proposed by senators Barbara Boxer and Jon Corzine would do. This would stop companies from contributing to these voluntary plans altogether. 
Most important to recall, at this dire moment, is that the profit-sharing ideal did achieve its lofty aim. For the tens of thousands of Enron workers in trouble, there are millions more who have seen benefits. It would do more damage than a dozen Enrons to disturb the progress of Louis Kelso's revolution.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Financial
DEALS Allan Sloan
The Worst Thing About Enron: Checks and Balances Failed
Allan Sloan

01/15/2002
The Washington Post
FINAL
E01
Copyright 2002, The Washington Post Co. All Rights Reserved

Enron was supposed to be the next new thing, a new-economy company with substance to it. 
Unlike flaky Internet start-ups that substituted ethereal yardsticks such as "eyeballs" and "stickiness" for revenue and profits, Enron had real businesses, real assets, real revenue and what seemed to be real profits. It owned natural gas pipelines and electric generating plants and water companies.
Not only would it do well, it would improve the planet by substituting the efficient hand of the market for the clumsy hand of government regulation. And it seemed to work. From humble beginnings as a natural gas company, Enron rose in a mere 15 years to No. 7 on the Fortune 500 list, doing $100 billion of business in 2000. Along the way, Enron became one of America's most admired companies and a perennial favorite on best-places-to-work lists. 
But Enron turned out to be another bubble. Unlike a Pets.com or a Webvan, whose implosions did little damage outside of costing dice-rolling speculators some money and techies some jobs, the Enron bubble exploded like a grenade. Today, Enron is a smoking ruin, the biggest corporate bankruptcy filing in American history. 
A year ago, the stock market valued Enron at more than $60 billion. Its stock has since lost 99 percent of its value -- and still seems overpriced. Stockholders and lenders are out tens of billions of dollars. Many of Enron's 20,000 employees lost their retirement savings when the company collapsed. About 5,000 of them, from computer jocks in Houston to newsprint recyclers in New Jersey, lost their jobs, too. 
By contrast, Chairman Ken Lay made $205 million in stock-option profits in the past four years alone, and other big hitters and board members made out, too. What's especially galling is that a handful of executives and outsiders made millions by investing in off-balance-sheet deals with Enron that played a large role in destroying the company. 
The collateral damage keeps spreading. Prominent among the wounded is Arthur Andersen, Enron's outside auditing firm, which disclosed last week that some employees destroyed documents. Andersen's reputation has been tarnished to the point that the Big Five accounting firms might shrink to the Big Four. Wall Street's credibility has been shattered. Utilities deregulation, for which Enron was the model, is now on the back burner. 
The spectacle of impoverished, unemployed Enron workers has thrown a harsh spotlight on the risks of 401(k) accounts stuffed with company stock. Confidence in financial markets has been shaken -- and rightly so. With the action in Afghanistan slowing down, Enron shock waves have finally reached Washington, raising the specter of another 'Gate. 
Life would be simple if we could blame the whole thing on Enron Chairman Lay. Or on George W. Bush, who goes way back with Lay, the biggest individual contributor to Bush's presidential and Texas gubernatorial campaigns. But Enron isn't that simple. It's something far more scary: a wholesale systemic failure. 
The multi-layered system of checks and balances that is supposed to keep a company from running amok completely broke down. Executives of public companies have legal and moral responsibilities to produce honest books and records -- but at Enron, they didn't do that. Outside auditors are supposed to make sure that a company's financial reports not only meet the letter of accounting rules but also give investors and lenders a fair and accurate picture of what's going on -- but Arthur Andersen failed that test. To protect themselves, lenders are supposed to make sure borrowers are creditworthy -- but Enron's lenders were as clueless as everyone else. Wall Street analysts are supposed to dig through company numbers to divine what's really happening -- but almost none of them managed to do that. Regulators didn't regulate. Enron's board of directors didn't direct. 
Why did all these people look the other way for so long? Money talks. Or, with Enron, shouts. The company put lots of money in the pockets of people and institutions who were supposed to police it. Enron's incessant dealmaking generated huge fees for Wall Street investment-banking houses. And guess what: Wall Street loved Enron, with most analysts rating its stock and bonds as the greatest thing since money was invented, at least until they finally heard Enron's death rattle. 
Enron paid huge fees -- $52 million in 2000 -- to Arthur Andersen for auditing and consulting services. Andersen allowed it to get away with accounting that was at best aggressive and at worst criminal. If Andersen had stood on principle, Enron would doubtless have changed accountants. 
Enron famously made heavy political contributions. Pols got peanuts compared with what Wall Street and Andersen got, but it was enough to help Enron run over regulators at both the national and state levels. 
The Enron fallout promises to be severe and far-reaching. With a criminal investigation underway, some of the Enron players face the possibility of spending time in the Big House. The only questions about Arthur Andersen is how much the partners will have to pay to settle this mess and whether the company can survive as an independent entity. The accounting profession is wishing it were again faceless and colorless, instead of being in the harsh spotlight. Financial conglomerates such as J.P. Morgan Chase and Citigroup are going to be scrutinized over their multiple and often conflicting roles at Enron: lenders, trading partners, investors, advisers, investment bankers. 
The bottom line: Enron wanted to change the world. It did. But not quite the way that it had in mind. 
Keith Naughton, Kevin Peraino, Temma Ehrenfeld and Donna Foote in Los Angeles and Jamie Reno in San Diego contributed to this report for Newsweek. 
Sloan is Newsweek's Wall Street correspondent. His e-mail address is sloan@panix.com.


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Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Editorial
A Comedy of Assets
Michael Kelly

01/16/2002
The Washington Post
FINAL
A19
Copyright 2002, The Washington Post Co. All Rights Reserved

"I am incredibly nervous that we will implode in a wave of accounting scandals." 
-- Enron employee Sherron S. Watkins to Kenneth L. Lay, chairman of the now-bankrupt energy company that inflated its profits by nearly $600 million under the approving eye of the industry-leading accounting firm of Arthur Andersen.
Scene: The executive conference room of Megaglom-Inflato Inc. 
Cast: The chairman of Megaglom-Inflato and a senior partner of the accounting firm Alfred Arthursen. 
Megaglom Chairman (seated at conference table, head in hands, weeping): "Woe is me! For I am undone; because I am a man of unclean lips, and I dwell in the midst of people of unclean lips!" 
Alfred Arthursen Senior Partner: "Nonsense, nonsense, now, now, come, come, chin up, stiff lip, all is not lost, no fear." 
Megaglom Chair (rending clothes, tearing hair, covering self in ashes): "Doom, doom, perdition and doom. Bankruptcy. Fraud. Court TV trial. Texas jail time. Doom." 
Arthursen Senior Partner (dancing gaily around table, strewing flowers, singing): 
"Gray skies are gonna clear up 
Put on a happy face. 
Brush off the clouds and cheer up. 
Put on a happy face." 
Megaglom Chair (curled up on floor, fetal position, moaning): . . . 
Arthursen Senior Partner (opening briefcase, arranging Megaglom ledgers, green eyeshade, eraser): "Pull yourself together, man. It's audit time! First thing, let's assess liabilities." 
Megaglom Chair (whispering): "Seven hundred and ninety-seven million dollars and fourteen cents." 
Arthursen Senior Partner (examining ledgers): "And this appears on the books, as -- ah, here it is -- fourteen cents. Now, that's what I call accounting." 
Megaglom Chair (staring into space): "Whoops. Whoops. Whoops." 
Arthursen Senior Partner: "Whoops-a-daisy, you mean -- son, this isn't nothing but a little ol' hill of beans -- nothing that a good auditor can't fix. What about assets?" 
Megaglom Chair: "Zip, nada, goose egg." 
Arthursen Senior Partner: "Which appears on the books as $145,000,000.14. Okey-dokey, let's get there. We'll start with corporate assets of the person. Always more there than you think. Lemme see. Shirt, Turnbull & Asher; three-piece bespoke suit, Saville Row; shoes, Church's; socks, very nice black cotton ones; belt, Mark Cross; watch, Rolex Oyster; wedding ring, Tiffany; underwear, no doubt finest kind. Lemme see, that ads up to $42,357.25." 
Megaglom Chair (perking up): "Really?" 
Arthursen Senior Partner: "More assets of the person: Age, 55 -- years of productive leadership service remaining -- let's say 15 at an annual compensation, adjusted, gross, net, with bells on, averaging $22 million: total $330 million. Value of spousal consortium -- figure one conjugal occasion per week, 52 weeks per year, four weeks off makes 48, multiplied by 25 years makes 1,200 at an assessed value of $5,000 per occasion equals $6 million, not bad. 
"Parental value to children -- two kids, right? -- mentoring, guiding, consoling, hectoring, teaching right from wrong. Let's call it $100 million per precious wee nipper, for $200 million. 
"Finally, the body itself: procreative value to corporation, figuring, say, five future Megaglom executive officers at a lifetime worth per officer of, oh, $65 million; value of precious bodily fluids adds up to $325 million. Then there are your ruby lips, sapphire eyes, pearly teeth -- gemstones valued $2 million. So, let's see, I make your corporate assets of the person out at $863,042,357.25." 
Megaglom Chair (a startled smile lighting up his face): "Hey!" 
Arthursen Senior Partner: "Kid, you ain't seen nothing yet. You ever contribute to any elected officials?" 
Megaglom Chair: "Have I ever! Lifetime support of current president, $2.5 million; lifetime support of current members of Congress, average $45,000 a head in the Senate for a total of $4.5 million, $20,000 per each of 435 House members for $8.7 million; state, county and local officials adds up to about $5 million, give or take a hundred thou." 
Arthursen Senior Partner: "Okay, that's $20.7 mil, call it $21, and figuring in a conservative multiplier effect of about six -- for as ye sow so shall ye reap -- we get $120 million more in assets. Grand total of assets of Megaglom-Inflato: $983,042,357.25. Against liabilities of $797,000,000.14, we arrive at a net market value of $186,042,357.11." 
Megaglom Chair: "Wow!" 
Arthursen Senior Partner: "Minus our usual consulting fee, which this time comes out to $41.1 million, that leaves you with assets of -- well, what do you know -- $144.9 million, round it up to $145,000,000.14 for accounting purposes." 
Megaglom Chair (stands up, a new man, puts his arm around Arthursen Senior Partner): "Gosh, I love an audit." 
Both (arm in arm, leaving, singing): 
"Pick out a pleasant outlook. 
Stick out that noble chin. 
Wipe off that full-of-doubt look. 
Slap on a happy grin!"


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Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Watchdogs and Lapdogs
By Burton Malkiel

01/16/2002
The Wall Street Journal
A16
(Copyright (c) 2002, Dow Jones & Company, Inc.)

The bankruptcy of Enron -- at one time the seventh-largest company in the U.S. -- has underscored the need to reassess not only the adequacy of our financial reporting systems but also the public watchdog mission of the accounting industry, Wall Street security analysts, and corporate boards of directors. While the full story of what caused Enron to collapse has yet to be revealed, what is clear is that its accounting statements failed to give investors a complete picture of the firm's operations as well as a fair assessment of the risks involved in Enron's business model and financing structure. 
Enron is not unique. Incidents of accounting irregularities at large companies such as Sunbeam and Cendant have proliferated. As Joe Berardino, CEO of Arthur Andersen, said on these pages, "Our financial reporting model is broken. It is out of date and unresponsive to today's new business models, complex financial structures, and associated business risks."
It is important to recognize that losses suffered by Enron's shareholders took place in the context of an enormous bubble in the "new economy" part of the stock market during 1999 and early 2000. Stocks of Internet-related companies were doubling, then doubling again. Past standards of valuation like "buy stocks priced at reasonable multiples of earnings" had given way to blind faith that any company associated with the Internet was bound to go up. Enron was seen as the perfect "new economy" stock that could dominate the market for energy, communications, and electronic trading and commerce. 
I have sympathy for the Enron workers who came before Congress to tell of how their retirement savings were wiped out as Enron's stock collapsed and how they were constrained from selling. I have long argued for broad diversification in retirement portfolios. But many of those who suffered were more than happy to concentrate their portfolios in Enron stock when it appeared that the sky was the ceiling. 
Moreover, for all their problems, our financial reporting systems are still the world's gold standard, and our financial markets are the fairest and most transparent. But the dramatic collapse of Enron and the rapid destruction of $60 billion of market value has shaken public trust in the safeguards that exist to protect the interests of individual investors. Restoring that confidence, which our capital markets rely on, is an urgent priority. 
In my view, the root systemic problem is a series of conflicts of interest that have spread through our financial system. If there is one reliable principle of economics, it is that individual behavior is strongly influenced by incentives. Unfortunately, often the incentives facing accounting firms, security analysts, and even in some circumstances boards of directors militate against their functioning as effective guardians of shareholders' interests. 
While I will concentrate on the conflicts facing the accounting profession, perverse incentives also compromise the integrity of much of the research product of Wall Street security analysts. Many of the most successful research analysts are compensated largely on their ability to attract investment banking clients. In turn, corporations select underwriters partly on their ability to present positive analyst coverage of their businesses. Security analysts can get fired if they write unambiguously negative reports that might damage an existing investment banking relationship or discourage a prospective one. 
Small wonder that only about 1% of all stocks covered by street analysts have "sell" recommendations. Even in October 2001, 16 out of 17 securities analysts covering Enron had "buy" or "strong buy" ratings on the stock. As long as the incentives of analysts are misaligned with the needs of investors, Wall Street cannot perform an effective watchdog function. 
In some cases, boards of directors have their own conflicts. Too often, board members have personal, business, or consulting relationships with the corporations on whose boards they sit. For some "professional directors," large fees and other perks may militate against performing their proper function as a sometime thorn in management's side. Our watchdogs often behave like lapdogs. 
But it is on the independent accounting profession that we most rely for assurance that a corporation's financial statements accurately reflect the firm's condition. While we cannot expect independent auditors to detect all fraud, we should expect we can rely on them for integrity of financial reporting. While public accounting firms do have reputations to maintain and legal liability to avoid, the incentives of these firms and general auditing practices can sometimes combine to cloud the transparency of financial statements. 
In my own experience on several audit committees of public companies, the audit fee was only part of the total compensation paid to the public accounting firm hired to examine the financial statements. Even after the divestiture of their consulting units, revenues from tax and management advisory services comprise a large share of the revenues of the "Big Five" accounting firms. In some cases auditing services may be priced as a "loss leader" to allow the accounting firm to gain access to more lucrative non-audit business. 
In such a situation, the audit partner may be loath to make too much of a fuss about some gray area of accounting if the intransigence is likely to jeopardize a profitable relationship for the accounting firm. Indeed, audit partners are often compensated by how much non-audit business they can capture. They may be incentivized, then, to overlook some particularly aggressive accounting treatment suggested by their clients. 
Outside auditors also frequently perform and review the inside audit function within the corporation, as was the case with Andersen and Enron. Such a situation may weaken the safeguards that exist when two independent organizations examine complicated transactions. It's as if a professor let students grade their own papers and then had the responsibility to hear any appeals. Auditors may also be influenced by the prospect of future employment with their clients. 
Unfortunately, our existing self-regulatory and standard-setting organizations fall short. The American Institute of Certified Public Accountants has neither the resources nor the power to be fully effective. The institute may even have contributed to the problem by encouraging auditors to "leverage the audit" into advising and consulting services. 
The Financial Accounting Standards Board has often emphasized the correct form by which individual transactions should be reported rather than the substantive way in which the true risk of the firm may be obscured. Take "Special Purpose Entities," for example, the financing vehicles that permit companies such as Enron to access capital and increase leverage without adding debt to the balance sheet. Even if all of Enron's SPEs had met the narrow test for balance sheet exclusion (which, in fact, they did not), our accounting standard would not have illuminated the effective leverage Enron had undertaken and the true risks of the enterprise. 
Given the complexity of modern business and the way it is financed, we need to develop a new set of accounting standards that can give an accurate picture of the business as a whole. FASB may have helped us measure the individual trees but it has not developed a way to give us a clear picture of the forest. The continued integrity of the financial reporting system and our capital markets must be insured. We need to modernize our accounting system so financial statements give a clearer picture of what assets and liabilities on the balance sheet are at risk. And we must find ways to lessen the conflicts facing auditors, security analysts, and even boards of directors that undermine checks and balances our capital markets rely on. 
One possibility is to require that auditing firms be changed periodically the way audit partners within each firm are rotated. This would incentivize auditors to be particularly careful in approving accounting transactions for fear that leniency would be exposed by later auditors. 
And, in the end, we need to create a powerful and effective self-regulatory organization with credible disciplinary authority to enforce accounting rules and standards. It would be far better for the industry to respond itself to the current crises than to await the likelihood that the political process will do so for them. 
--- 
Mr. Malkiel, professor of economics at Princeton, is author of "A Random Walk Down Wall Street," 7th ed. (W.W. Norton, 2000).

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

California; Editorial Pages Desk
'Genius of Capitalism' Let Out of the Bottle

01/16/2002
Los Angeles Times
Home Edition
B-12
Copyright 2002 / The Times Mirror Company

Re "Officials Defend Not Sounding Alarm on Enron," Jan. 14: Treasury Secretary Paul O'Neill and Commerce Secretary Don Evans should be allowed to state under oath that they did not tell the president of Enron's pending bankruptcy. This was Dubya's moneybag--past, present and future--and they didn't think it important enough to inform him? 
That is not credible. The last presidential election was ugly. The next one should be worse.
Glenn Yokum 
Barstow 
* 
If O'Neill and Evans had come out and warned the public about the trouble of Enron, who would still buy Enron stock? Wouldn't O'Neill and Evans be accused of driving down Enron's stock? 
Ringo Li 
South Pasadena 
* 
O'Neill's contention that "I don't go across the street and tell the president every time somebody calls me" is about the weakest defense I've heard in my life. One of the largest corporations in the world is saying it is in trouble and needs help from the U.S. government and O'Neill doesn't even call President Bush? 
[Enron Corp. Chairman] Kenneth Lay is a close friend of the Bush family and O'Neill doesn't call Bush? Is it possible Bush might have been watching "Fox News Sunday" on Sunday and not a football game when he choked on that pretzel? 
Dave Gunall 
Ventura 
* 
O'Neill describes the theft of thousands of hard-working, loyal workers' jobs and retirement funds by a small handful of far-wealthier men as "part of the genius of capitalism." If despicable corporate behavior such as Enron-gate continues to be ignored and condoned (only after being exposed, of course) by our highest government officials, aren't we being told that crime does indeed pay? If you're running a corporation, that is. 
Why do we have thousands upon thousands of petty, two-bit criminals behind bars, many for doing drugs that only harmed themselves, while people like Lay and his higher rungs get awarded "genius" status when they've just ruined thousands of lives and made off with their loot? O'Neill's callous remark, further evidence of the true pro-business/anti-worker nature of our suddenly beloved president who appointed him, offers us another shining, some would say genius, example of "compassionate conservatism." 
Victor H. Knowles 
Los Angeles 
* 
The Bush administration attempted to distance itself from the Enron disaster by turning a deaf ear to requests for help from high Enron officials. The fear was that any government involvement would appear to be integral to the cozy relationship between Enron and Bush administration officials. Had this relationship not existed, prompt government action (as was done in the cases of Chrysler, Lockheed and Long-Term Capital Management) might have staved off an Enron bankruptcy and thereby mitigated the consequences to Enron employees and investors. 
Michael Horstein 
Los Angeles 
* 
Try though they may, the Democrat alchemists will have a tough time turning energy into political hay. 
Gerald Wright 
Los Angeles 
* 
Re "Enron Way: Anything but 'Simple, Straightforward,' " Commentary, Jan. 13: I think there's a perfectly straightforward and simple answer to this mess. Freeze every bank account belonging to the Enron executives who sold all their stock at tremendous profit. Then pay back the employees who weren't allowed to cash their stocks and who lost their pensions and 401(k)s from this money. 
Then, give the Enron executives and the Andersen auditors ("Auditor Says It Destroyed Enron Records," Jan. 11) what they deserve--nice long prison sentences. Simple. 
Ann Johnston 
Thousand Oaks

PHOTO: Paul H. O'Neill; ; PHOTOGRAPHER: Associated Press 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Editorial Desk; Section A
Letters to the Editor
The Real Lessons of Enron's Fall

01/16/2002
The New York Times
Page 18, Column 5
c. 2002 New York Times Company

To the Editor: 
Quite apart from any question of political corruption, the Enron story stands as a symbol of the kind of society that I thought we had left behind many years ago (''Minimizing the Enron Taint,'' editorial, Jan. 12). Entrepreneurs assure profits for themselves while investors are cheated and workers are left with next to nothing.
This debacle should remind us that government has a role in restraining individuals who abuse the market for their own interests and in protecting those subject to economic forces beyond their control. 
JOHN H. WILSON 
New York, Jan. 12, 2002

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Editorial Desk; Section A
Letters to the Editor
The Real Lessons of Enron's Fall

01/16/2002
The New York Times
Page 18, Column 5
c. 2002 New York Times Company

To the Editor: 
In ''Minimizing the Enron Taint'' (editorial, Jan. 12), you imply that ''any action by the government'' on behalf of Enron would have been inappropriate given the perception that it was a favor for campaign contributions.
But it may be that such action to stem the economic calamity caused by Enron's bankruptcy was called for. The ability of government to act without fear of ethical impropriety is another reason for campaign finance reform banning soft money from corporations. 
PAUL M. WORTMAN 
Stony Brook, N.Y., Jan. 12, 2002

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Editorial Desk; Section A
Letters to the Editor
The Real Lessons of Enron's Fall

01/16/2002
The New York Times
Page 18, Column 5
c. 2002 New York Times Company

To the Editor: 
I am concerned that the Democrats, in their desire to impute scandal to the Bush administration in the Enron matter, may overlook the real political message of this debacle (''Parties Weigh Political Price of Enron's Fall,'' front page, Jan. 12). 
Enron was the administration's model corporation. It operated aggressively in a lightly regulated environment, and its financial practices were secretive and obfuscatory.
The Bush tax cuts replicate this model. If the cuts are not repealed, the country will experience an Enron-like disaster on a vast scale. 
JAMES FLEMING 
Potomac, Md., Jan. 12, 2002

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Editorial Desk; Section A
Letters to the Editor
The Real Lessons of Enron's Fall

01/16/2002
The New York Times
Page 18, Column 4
c. 2002 New York Times Company

To the Editor: 
Equating the Enron affair with Washington scandals past (news analysis, front page, Jan. 11) misses a fundamental point: this one really matters.
Unlike the Whitewater land deal or sex with an intern, which consumed the press and Congress for years but had zero bearing on the public policy of this country, Enron exposes the all-too-legal influence-peddling, favor-seeking and corporate greed at the heart of our political system. 
JEREMY WEINBERG 
New York, Jan. 12, 2002

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Editorial Desk; Section A
Letters to the Editor
The Real Lessons of Enron's Fall

01/16/2002
The New York Times
Page 18, Column 4
c. 2002 New York Times Company

To the Editor: 
Re ''Bush and Democrats Disputing Ties to Enron'' (Business Day, Jan. 12):
Anyone who received campaign contributions from Enron should return every dime to the employees who had their pensions wiped out. 
FRANK HANSEN 
Martin, Tenn., Jan. 12, 2002

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Editorial Desk; Section A
Letters to the Editor
The Real Lessons of Enron's Fall

01/16/2002
The New York Times
Page 18, Column 4
c. 2002 New York Times Company

To the Editor: 
Enron spread its financial largess to the candidates of both major political parties to promote policies to get government off the backs of the energy sector. How ironic that the same erstwhile champion of deregulation repeatedly called high government officials and sought their help for some kind of financial bailout (front page, Jan. 12).
VEDULA N. MURTI 
Middletown, Pa., Jan. 12, 2002

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Editorial Desk; Section A
Letters to the Editor
The Real Lessons of Enron's Fall

01/16/2002
The New York Times
Page 18, Column 4
c. 2002 New York Times Company

To the Editor: 
Despite the tone-deaf remark by Paul H. O'Neill, the treasury secretary, that the collapse of Enron reflects ''the genius of capitalism,'' the Bush administration does not appear to have done anything illegal. As Bob Herbert suggests (column, Jan. 14), the laws themselves are scandalous. 
The real travesty of the Enron collapse is not the failure of administration officials to notify small-time investors of what Enron's fat cats knew: it is in corporate control over employee 401(k) investments and laws governing the corrupt campaign finance system.
Rather than wasting energy trying to pin a scandal on President Bush now, why not seize this opportunity to change the laws that let companies buy access to top officials and allow companies to force employees to keep their savings in a tanking stock while executives cash in? 
If Congress refuses to act, we should all be scandalized. 
CHRISTINE EVANS 
Washington, Jan. 14, 2002

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

POINT OF VIEW: Beyond Enron, A Wider Crisis Of Confidence
By Michael Rapoport

01/16/2002
Dow Jones News Service
(Copyright (c) 2002, Dow Jones & Company, Inc.)

A Dow Jones Newswires Column 
(This report was originally published Tuesday.) 

NEW YORK -(Dow Jones)- Enron Corp. (ENE) has a lot to answer for. And it may be even more than you might realize at first.
Already the rippling scandal has claimed a long list of victims - from the thousands of Enron employees who've seen their retirement savings wiped out to the reputation of Arthur Andersen LLP, Enron's beleaguered auditor. 
But what may turn out to be the most far-reaching effect of the Enron scandal is more amorphous and less obvious. Simply put, the problem is this: After Enron, and after conflicts of interest and earnings tricks at other companies that have shaken the confidence of investors over the past couple of years, who can investors trust? 
Because of these happenings, investors are going through "a crisis in confidence like I've never seen before," said Pat McConnell, an accounting analyst for Bear Stearns & Co. Their faith in something as basic as the accuracy of financial statements has been eroded, she said - and "that's not a good and healthy thing." 
Enron, after all, amounts to a poster child for a lot of what's been wrong with the market in recent years. Manipulation of financial statements to make the company look like it's in better shape than it really is? Check. Aiding and abetting in its misdeeds, apparently, by an auditor who may have been more concerned about its fees than in the accuracy of the figures it was auditing? Check. Fawning praise from stock analysts too lazy or too conflicted to raise the questions about the company's business that should have been raised? Check. 
As a result, investors feel a little like the rug has been pulled out from under them. They've had enough, said McConnell, who spoke Thursday in New York at a Directors' Roundtable seminar on how companies should report their earnings. With their confidence damaged, she said, there's "a lot of skepticism" among investors about the information they're being given. 
This lack of confidence has all kinds of effects, none of them favorable. For one thing, McConnell noted, it increases the cost of capital for companies: If investors don't feel they can trust in the accuracy of the information they use to make investment decisions, they're going to demand a bigger return on their investments to compensate. 
And look at what's happened to Tyco International Inc. (TYC). The SEC closed an accounting probe of Tyco in 2000 without taking any action, and the company insists that everything is on the up-and-up - and yet persistent investor skepticism about Tyco's accounting has weighed on the stock in recent days. Investors no longer know who to believe. 
This slippage in investor confidence in the most basic of the market's underpinnings is worrisome, and it should be a wake-up call. It should concern every company out there that's tried to game the figures to paste a smiley face on its financial condition, and every auditor and analyst who's helped them do it. 
Because if investors' confidence slips too far, the market is going to suffer some damage that it's going to be hard to recover from. A free market is built on the free and equitable distribution of information in whose accuracy investors can trust when using it to make financial decisions. Without that accuracy and that trust, we might as well be Argentina. 

-By Michael Rapoport, Dow Jones Newswires; 201-938-5976; michael.rapoport@dowjones.com

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Foreign Desk
THE WORLD World Press Tries to Unknot Tale of Bush and the Pretzel Reaction: Some papers are skeptical or sarcastic. Others delve into the history of the salty snack.
MARJORIE MILLER
TIMES STAFF WRITER

01/16/2002
Los Angeles Times
Home Edition
A-1
Copyright 2002 / The Times Mirror Company

LONDON -- Was it an Al Qaeda plot? An Enron end run? Or was it, as President Bush said, just a wayward pretzel that briefly felled the leader of the free world? 
With the only witnesses to the presidential fainting spell two canines, the international press has been left to speculate about what happened and whether Bush can watch TV and chew pretzels at the same time.
"George Bush attempted to taste the biscuit with his attention focused on a football game--a combination of actions that, it appears, proved difficult," said the Greek daily To Vima. 
The media responded to the pretzel pratfall with jokes, queries about Bush's mental and physical health and detailed explanations of the knotted American-style pretzel. 
"Though not to everyone's taste, they are not considered a health hazard," London's Independent newspaper informed readers dryly. 
True to form, the Germans consulted pretzel experts, the French contemplated Americans' "complicated relationship with food," and the Italians looked to the religious roots of the pretzel. The Saudis worried that the scare will prevent Bush from focusing attention on Israel's oppression of the Palestinians, while Britons offered Bush a few backhanded compliments. 
The incident proved Bush is "a man of the people," London's Daily Telegraph said in an editorial. "This is exactly the sort of accident that befalls Homer Simpson, night after night." 
The conservative paper noted in its news pages that the president "was not eating something foreign or in any way fancy when he passed out." The paper was cheered by the fact that the leader of the international war on terrorism still has time for Sunday football. "He has shown himself, once again, to be completely in tune with the tastes and instincts of the people he leads," its editorial said. 
Of course, most Americans didn't end up prone with facial bruises at the end of the game--at least not from pretzels. The Independent labeled the official story "Hard to Swallow." 
"Was he poisoned perhaps? Has the stress of fighting the war on terrorism while fending off inquiries about the collapse of his friend Ken Lay's Enron overwhelmed him? Was there maybe some family tiff?" the paper asked in an editorial. It concluded that "the vanquisher of Al Qaeda may have met his match." 
Germany's mass-circulation Bild, the daily of choice for blue-collar Germans, also asked if there wasn't more to the story: "Has the president's alcohol problem been taken up again?" 
Expressing concern for the president's health, Saudi Arabia's English-language Arab News said that while no one believes there is anything seriously wrong with Bush, his pretzel mishap has led to speculation about the impact of an ailing president on the world. 
"These are particularly dangerous times internationally. The United States has assumed considerable responsibilities and powers in its campaign against global terrorism. In order to bring together a coalition of support within the Arab world, the White House had to focus its attention more constructively on Israel's oppression of the Palestinians," the paper said in an editorial. 
"If, however, Bush's unusual collapse is a symptom of more serious medical problems, we can be absolutely sure that, lacking any clear direction from a troubled White House, Washington's foreign policy will click back on its traditional Zionist track. Palestinians will continue to choke on Israeli aggression while the U.S. president may again choke on a typical Yiddish pretzel," it said. 
No, no, said the Italian press. The American-style pretzel was invented by a 16th century German monk as a reward for children who memorized their prayers, La Repubblica newspaper said. The word derives from the Latin prex, or prize, it said. 
Leave it to the British tabloids to challenge the Italians on Latin. London's Daily Mail declared that the word "pretzel" comes from pretiola--Latin for "little reward." The dough is folded to look like a child's arms in prayer, and the three holes represent Christianity's holy Trinity. And it was German and Dutch immigrants who took the pretzel across the Atlantic when they settled in Pennsylvania in 1710, the paper said. 
Pretzel is brezel in Germany, where the Berliner Morgenpost sought out the opinion of a master baker on the safety of the U.S. snack food--and the likelihood that it could have caused the president's swoon. 
"I have no reason to doubt the quality of the American pretzel," opined Eberhard Groebel, speculating that Bush's spell was due to his ignoring "the 50-gram rule." That is a German etiquette adage that holds that one should not try to talk with more than 1.75 ounces of food in one's mouth. 
"Even in his wildest dreams, Osama bin Laden couldn't have managed what one tiny pretzel did this weekend," began a story in the Berliner Zeitung daily. "According to reports from the White House, it not only brought the mightiest man in the world to his knees but flat out on the floor." 
Spain's national daily, ABC, reported that after an exhaustive investigation, the FBI, CIA and Secret Service had "rejected [the possibility] that the biscuit in question came from Afghanistan and have certified that it is a genuine American salted pretzel." 
Russian newspapers, perhaps reflecting the more somber tone of the Vladimir V. Putin era, restrained themselves. The daily Komsomolskaya Pravda ran a detailed diagram of Bush's anatomy, with the location of the pretzel blockage marked with a star. 
"Bush's organism, although weakened and unconscious, managed to cope with the indisposition," wrote the daily Gazeta. "The organism first rejected the pretzel but later swallowed it and digested without mercy." 
Ah, but Bush shouldn't be overconfident, the French and British press warned. 
"This shows that the most powerful man on Earth is, above all, a man," wrote the Lyons newspaper Le Progres. "And as a man, he is in danger of digging his grave with his teeth. . . . Especially when he comes from a society that obviously has a complicated relationship with food." 
Added London's Mirror tabloid: "Attila the Hun survived bloody battles only to die of a nosebleed on his wedding night. Sir Francis Bacon wanted to prove frozen food lasted longer and went outside to stuff a chicken with snow. The experiment was a success, but he died of pneumonia." 
* 
Contributing to this report were Times staff writers Richard Boudreaux in Rome, Maura Reynolds in Moscow, Michael Slackman in Riyadh, Saudi Arabia, and Carol J. Williams in Berlin and special correspondents Maria Petrakis in Athens, Achrene Sicakyuz in Paris and Cristina Mateo Yanguas in Madrid.

PHOTO: Artist Jo Kinsey paints a bruise on the face of a model of President Bush at Madame Tussaud's wax museum in London.; ; PHOTOGRAPHER: Agence France-Presse 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

BRAZIL PRESS: Elektro Cancels BRR195M Bond Plan

01/16/2002
Dow Jones Capital Markets Report
(Copyright (c) 2002, Dow Jones & Company, Inc.)

SAO PAULO -(Dow Jones)- Elektro Eletricidade e Servicos SA (E.EKO), an electricity distributor controlled by Enron Corp. (ENE), decided to cancel plans to issue 195 million reals ($1=BRR2.38) in debt, business daily Valor Economico said Wednesday. According to the paper, lead manager Sudameris advised Elektro to cancel the bond plan following Enron's bankruptcy and after the local market regulator demanded that Elektro republish its 2000 earnings statement. 
Newspaper Web site: http://www.valor.com.br
-Sao Paulo Bureau, Dow Jones Newswires; 55-11-3145-1481 -adriana.arai@dowjones.com

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Houston Non-Profit Organization Targets Former Enron Employees

01/16/2002
Business Wire
(Copyright (c) 2002, Business Wire)

HOUSTON--(BUSINESS WIRE)--Jan. 16, 2002-- 

The Resource Alliance Group of Houston Launches to Accelerate and
Incubate Emerging Businesses Founded by Former Enron Employees 

The Resource Alliance Group of Houston, a non-profit newly formed organization, today announced its launch to provide former Enron employees with the necessary resources to accelerate the growth of new businesses in Houston. 
The Resource Alliance Group (RAGroup) is comprised of local, experienced business people and companies interested in providing office space, infrastructure, computers, mentoring, professional services and access to funding sources to former Enron employees launching new businesses. 
"This group was founded as a means to keep people, jobs and funding in Houston," said John Elder, a Houston entrepreneur serving as executive director for RAGroup. "We can't change the facts surrounding this incredibly devastating event but we can do our part to promote the growth of new business that will affect the tremendous financial impact on the local economy and loss of jobs resulting from the collapse of Enron." 
Former Enron employees can submit ideas, executive summaries and business plans via the RAGroup Web site at www.RAGroup.org, via email to info@RAGroup.org or by calling 713/861-0230. The business will be evaluated and then assigned for need assessment by a steering committee member, who will act as the company's mentor. In addition, a method for measurement of success will allow for the group to monitor a company's growth and designate parameters for "graduating" from the organization. 
The RAGroup Web site also allows corporations interested in supporting the initiative to submit resource allocations online, and allows former Enron employees interested in working with an emerging business to submit their resumes online. Former Enron employees can also join the mailing list and refer associates and friends to the site automatically online. 
The volunteer-driven organization's operations are funded entirely through donations from sponsoring companies and individuals. 
The organization is driven by a steering committee of impressive local, multi-industry experienced business leaders. John Elder, a Houston entrepreneur, serves as the executive director and co-founder. Additional co-founders and steering committee members include: 

a.. Mark Slaughter, a private investor and former president and 
CEO of Reliant Energy Communications. 

b.. Dan Sudduth, CFO for Teligistics, Road-Show.com and several 
emerging companies. 

c.. Randy Stilley, a private investor and former president of 
Weatherford International's Completion and Oilfield Services 
Division. 

d.. Barry Smotherman, managing partner of Tatum CFO. 

RAGroup is open to all former Enron employees with an interest in developing new business initiatives. The non-profit resources are not limited to technology-driven businesses, industry-specific or proprietary technology, but is open to any business idea generated by former employees of Enron. 
For more information, please call 713/668-8091 or visit RAGroup's Web site at www.RAGroup.org.


CONTACT: The Padgett Group, Houston Kim Padgett, 713/668-8091 Fax: 713/668-8872 Kim@ThePadgettGroup.com 
09:00 EST JANUARY 16, 2002 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Former Enron Corp. employees hawking items from bankrupt company in Internet auction
By KRISTEN HAYS
Associated Press Writer

01/16/2002
Associated Press Newswires
Copyright 2002. The Associated Press. All Rights Reserved.

HOUSTON (AP) - Former Enron Corp. employees are hawking dozens of company items on Internet auctions, including the embattled company's 64-page code of ethics and a commemorative stock certificate. 
Former Enron employee Matt Mitchell is selling one of his two copies of a broadband risk management manual used by the former energy giant, which contains tips on increasing creditworthiness and timing of reported earnings. It is among the priciest of more than 100 Enron-related items for sale in eBay auctions.
"It's not entirely deceptive, but it isn't showing what's actually happening," Mitchell said Tuesday of risk management techniques employees learned from the manual, which he hopes to sell for at least $150. The auction ends Friday. 
Other items for sale on the site range from freebies that Enron gave employees, such as golf balls, baseball hats and paperweights with the company logo. 
Enron spokeswoman Karen Denne said former employees can sell Enron artifacts with the company's blessing. 
"The whole situation is unfortunate, and we've always had resourceful, innovative employees. This is just the latest demonstration," she said. 
Mitchell, 29, was among hundreds of employees laid off from Enron's money-losing broadband services unit in July last year, six months before 4,500 lost their jobs in December after Enron filed the largest bankruptcy in history. He worked as a sales engineer for Enron for 14 months, consulting with traders who made telecommunications-related trades. 
Mitchell found another job for less pay with a small software company in Houston in September and watched his former employer implode in a whirlwind of questionable accounting practices, deflated shares and erosion of investor and trader confidence. Stock that traded near $80 a year ago was delisted from the New York Stock Exchange on Tuesday, having stagnated at less than $1 for weeks. 
Mitchell said he thought the risk management manual might generate a snicker or two and pique interest from some bidders. He said risk management techniques used for energy and electricity trading were tweaked to apply to broadband in the manuals. 
"This was just old information rewritten," Mitchell said. "It does not go into specific laws about what you can do with taxes and ownership, but there are cases of where it focuses on what you can do and accepted accounting practices that are allowed." 
For example, the manual said companies can re-categorize expenses "in such a manner as to improve the perceived financial performance." 
Mitchell said layoffs were common for broadband employees working for an unprofitable venture, but they benefited from the company's severance plan. 
Those laid off after the bankruptcy filing received $4,500 each, as approved by a U.S. bankruptcy judge in New York. Mitchell received nearly $40,000 as entitled under company policy, as did others laid off before Enron's demise. 
"I was one of the lucky ones," Mitchell said. "I was lucky enough to get another job, with a substantial pay cut, in September. I feel worse for all my co-workers, who had no notice whatsoever and no idea it was coming." 
--- 
On the Net: 
http://www.ebay.com

AP Photo HT105 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	





Sarah Palmer
Internal Communications Manager
Enron Public Relations
(713) 853-9843