THE NATION THE ENRON INQUIRY Now, the $51-Million Severance Question Pay: Enron's Chapter 11 status may jeopardize compensation for ex-CEO Kenneth Lay.
Los Angeles Times, 01/25/2002

Accounting for Enron: Enron's Top Choice For Acting CEO Is Stephen Cooper
The Wall Street Journal, 01/25/2002

ENRON'S COLLAPSE: THE COMPANY'S FUTURE
Trying to Salvage What Can Be Salvaged While the Creditors Line Up
The New York Times, 01/25/2002

Andersen Knew of `Fraud' Risk at Enron --- October E-Mail Shows Firm Anticipated Problems Before Company's Fall
The Wall Street Journal, 01/25/2002

October memo warned of 'heightened risk' of fraud 
Houston Chronicle, 01/25/2002

Enron Hid Losses, Ex-Worker Says Energy: Manager warned executives $500-million deficit was attributed to another unit to create illusion of profit.
Los Angeles Times, 01/25/2002

ENRON'S COLLAPSE: SELLING ENERGY
Ex-Workers Say Unit's Earnings Were 'Illusory'
The New York Times, 01/25/2002

Andersen Officials Grilled on Shredding; Fired Enron Auditor Declines to Testify
The Washington Post, 01/25/2002

Judge OKs depositions on shredding 
Houston Chronicle, 01/25/2002

ENRON'S COLLAPSE: THE CHAIRMAN
An Optimist Sees the Chaos Become Surreal Spectacle
The New York Times, 01/25/2002

ENRON'S COLLAPSE: THE OVERVIEW
Enron Hearings Open, Focusing on Destroyed Papers
The New York Times, 01/25/2002

ENRON'S COLLAPSE: THE IMPACT
Bipartisan Outrage but Few Mea Culpas in Capital
The New York Times, 01/25/2002

ENRON'S COLLAPSE: THE PARTNERSHIPS
Investors Lured To Enron Deals By Inside Data
The New York Times, 01/25/2002

ENRON'S COLLAPSE
How LJM2 Tripped Up Enron
The New York Times, 01/25/2002

ENRON'S COLLAPSE: MUTUAL FUNDS
Many May Be Surprised To Be Enron Investors
The New York Times, 01/25/2002

ENRON'S COLLAPSE
Ruling Accelerates Key Depositions
The New York Times, 01/25/2002

Why Bush Stiffed Enron
The Wall Street Journal, 01/25/2002

Trading Charges: Lawsuit Spotlights J.P. Morgan's Ties To the Enron Debacle --- Insurers Balk at Paying Bank Up to $1 Billion in Claims On Complex Transactions --- Update in a Glass Room
The Wall Street Journal, 01/25/2002

Accounting for Enron: Former SEC Chief Levitt Reverses Stand, Calls for New Laws on Accounting Rules
The Wall Street Journal, 01/25/2002

A Renewed Call to Redo Accounting Reform: Two years after initially urging changes in industry, a former SEC chairman has Senate panel listening closely.
Los Angeles Times, 01/25/2002

Accounting for Enron: Grand Jury to Investigate Plaintiffs' Firm Involved in Shareholder Suit Against Enron
The Wall Street Journal, 01/25/2002

After Enron, a Push to Limit Accountants to...Accounting
The Wall Street Journal, 01/25/2002

NSC Aided Enron's Efforts; Agency Sought Lay Meeting With Indians on Plant
The Washington Post, 01/25/2002

ENRON'S COLLAPSE: THE SECRETARY
Army Chief Being Challenged on Ties to Company
The New York Times, 01/25/2002

THE NATION With the Theater or PACs, Texans Saw Kenneth Lay as 'On Top of the World' Influence: The former Enron chief 'was a guy with swagger and loot who bought his way into whatever needed buying.'
Los Angeles Times, 01/25/2002

Spreading It Around
The New York Times, 01/25/2002

Enron Fraud: Appoint a Special Prosecutor
Los Angeles Times, 01/25/2002

Business Spin; It's just like political spin, only not quite as dishonest.
The Washington Post, 01/25/2002

ENRON'S COLLAPSE
Excerpts From a House Hearing on Destruction of Enron Documents
The New York Times, 01/25/2002

________________________________________________________________________________

Financial Desk
THE NATION THE ENRON INQUIRY Now, the $51-Million Severance Question Pay: Enron's Chapter 11 status may jeopardize compensation for ex-CEO Kenneth Lay.
NANCY RIVERA BROOKS; JAMES F. PELTZ
TIMES STAFF WRITERS

01/25/2002
Los Angeles Times
Home Edition
A-1
Copyright 2002 / The Times Mirror Company

Ousted Enron Chief Executive Kenneth L. Lay could get a severance package worth at least $25 million--and perhaps exceeding $51 million--although his ability to collect that payday is clouded by the company's Chapter 11 bankruptcy filing. 
Lay, who resigned Wednesday under fire, also could get parting gifts that include a lifetime annual pension of nearly $475,000, a $12-million life insurance policy and payment of taxes on any severance pay.
But Lay may never see a dime because, with most of Enron Corp.'s operations tangled in U.S. Bankruptcy Court, he slipped overnight from corporate commander to yet another among the thousands of Enron creditors. 
"I would be incredulous if he got any money, and if he did take any money he'd be spending the entire amount on bodyguards," compensation expert Graef Crystal said. 
Lay, who received more than $200 million in compensation from Enron since 1999, has been accused of misleading shareholders about Enron's finances as it plunged toward ruin last year. 
In his 15 years building Enron from a small pipeline company to the world's largest energy trader, Lay was paid handsomely, and his severance agreement and other benefits reflect that, according to documents on file with the Securities and Exchange Commission. 
Exactly how much Lay might receive in severance is only vaguely spelled out in Enron's most recent proxy statement, filed with the SEC in March. Enron representatives declined to clarify the matter and hinted that the payout might not be a sure thing. 
"The terms of Mr. Lay's separation are still being determined," Enron spokesman Vance Meyer said. 
Three Times His Salary and Bonus, Plus 
Lay's severance is based on payments he received in 2000, multiplied by the three full calendar years left on his contract. That means Lay would be entitled to a lump sum of about $25 million, or three times his 2000 salary of $1.3 million and bonus of $7 million. 
That $25-million tab would be further swelled by an unspecified "long-term grant value" received in 2000, according to the proxy statement. Compensation experts said that could include the $7.5 million of restricted stock and a $1.2-million cash payment that Lay also received in 2000, which Enron called "long-term compensation." 
If that assessment is correct, the total payout would be $51 million. 
The SEC filing also said that Lay is entitled to a lifetime pension that would have been valued at $475,042 if Lay, 59, had stayed until 65. In addition, the company said it would pay all taxes on Lay's severance if the IRS rules that the severance package is an "excess parachute payment." 
What is more, Lay, as of the end of 2001, owns a $12-million life insurance policy that Enron helped him buy, according to Lay's 1996 employment agreement, also filed with the SEC. 
Lay also remains as an Enron director, and they are paid at least $50,000 a year. 
Compensation experts said it is unlikely Lay will get his severance package and most of his pension because all preexisting contracts are invalidated by the bankruptcy filing and the fact that Lay technically resigned, rather than being terminated. But the refusal of the company to rule out a severance is "troublesome," Crystal said. 
In any event, even as Enron was hiding losses in a murky series of off-the-books partnerships and using questionable accounting on its way to the nation's largest bankruptcy filing, the company served another purpose that nearly was hidden from public view: It effectively was a personal bank for Ken Lay. 
The company last year provided Lay with an unusual line of credit of as much as $7.5 million that he used repeatedly, often to help cover soured investments he made elsewhere, his lawyer has said. This despite the fact that Lay has received more than $200 million in compensation from Enron since 1999. 
And the collateral securing the line of credit apparently was Lay's own Enron stock, shares of which were showered on him by the thousands either directly or through stock options that were part of his compensation package during Enron's explosive growth in the late 1990s. 
Lay typically repaid the credit line with his Enron shares, then would draw down the loan again and repeat the process, Earl Silbert, Lay's lawyer, said. Lay did this on 15 occasions between February and October, just as Enron's collapse was accelerating. 
Lay Expected to Face Huge Legal Bills 
Lay's apparent financial problems, signaled by his repeated tapping of the credit line, are compounded by the specter of huge personal legal bills facing him. Lay is the subject of more than 50 lawsuits resulting from Enron's financial meltdown, as well as numerous federal investigations. 
His credit line is a perk that has surprised several experts in executive compensation, a field already chock-full of various stock options, bonuses and other benefits paid to Corporate America's leaders. 
To have a standing credit line for an executive who can pay back the loan with stock the company has awarded him is "very unusual," said Alan Johnson, managing director of Johnson Associates, a compensation consultant in New York. The arrangement, approved by Enron's board, allowed Lay "to treat the company as a personal piggy bank," he said. 
Bill Coleman, senior vice president of compensation at Salary.com, an Internet compensation site, said that "there is something fundamentally odd about a company loaning money to an executive and collateralizing it with the company's own stock." 
"Why is Enron in the business of loaning money?" he asked. 
Company Loans to Top Management 
It is common for a company to make one-time loans to senior managers--say to help them relocate or to buy the company's shares. Sometimes corporations will even waive the interest, or total repayment, as part of the executive's future compensation. Indeed, Enron in 1997 made a $4-million loan to Jeffrey K. Skilling, its chief executive who abruptly quit in August. 
Also, the dollar amount of Lay's credit line isn't sizable relative to the billions of dollars of debt that sank Enron. After a series of financial setbacks that sent its stock plunging and eroded investors' confidence, Enron filed for Bankruptcy Court protection Dec. 2, citing more than $31 billion in debt and $50 billion in assets. 
The stock, which traded around $80 a share a year ago, now trades for just pennies, and the options that Lay and others still have are virtually worthless. 
Silbert did not return calls requesting elaboration on Lay's arrangement, and Enron spokesman Meyer said he could provide no further details. 
No one has suggested that Lay's arrangement involved any wrongdoing, and Enron's proxy statement last year disclosed--in two sentences--that the credit line existed. About the same time that the proxy appeared, in March, was when Lay was starting to use the credit line repeatedly. 
He typically repaid it by returning shares of his Enron stock to the company, said Silbert, who said he made the public disclosure to offset speculation that Lay was aggressively dumping shares because the executive knew the company was headed toward disaster. 
But that disclosure--coming on top of so many other revelations, including that some top Enron executives had financial interests in partnerships that helped finance Enron's operations--adds to the appearance that "there is an awful lot of self-dealing going on in this case, and this is symptomatic of that," said Rajesh Aggarwal, an assistant business professor at Dartmouth College. 
In September, at the same time Lay was using his Enron stock to support his line of credit, he urged company employees to buy more shares only weeks before Enron disclosed the worst financial results in its history. 
The stock then was selling for about $25 a share, and two months later for $4 a share. The stock's collapse wiped out billions of dollars of investor holdings and the retirement savings of Enron employees who owned the stock. 
In general, Lay's credit-line arrangement "is not one that's shareholder friendly," said Salary.com's Coleman. The whole point of executive compensation is to give top managers incentives to build the company and boost its stock price for all shareholders, he said, yet Lay's credit line gave him protection from having to reach into his own wallet even when Enron's stock nose-dived. 
"He doesn't get hurt," Coleman said. 
The credit line served another purpose not afforded the average Enron stockholder, said Kevin Murphy, a finance professor at USC. Letting Lay repay his credit line with Enron stock "allowed him to get liquidity out of his stock that was easier than going to the open market," he said. In other words, Lay didn't have to first sell $4 million or so of Enron shares on the stock exchange--an event that likely would have depressed Enron's price on the market--each time to pay back his Enron loans. 
"That gives him an advantage that most stockholders don't have," Murphy said. 
The credit line also raises questions about the amount of risk Lay was personally accepting at the same time he was leading Enron's fight for survival. 
It's unclear why, in light of his enormous compensation at Enron, he was having to repeatedly tap his credit line. 
Besides his salary and bonuses, Lay realized $43.8 million from stock options that he cashed in during 1999, and $123.4 million from exercising options in 2000, according to Enron's government filings. 
Lay sometimes borrowed from his Enron line of credit last year when he expected to face margin calls from other lenders, Silbert has said. That meant he had bought other investments partly with borrowed funds--or on "margin"--and now had to repay some or all of those amounts because their underlying investments had tumbled in value. 
Lay recently put several properties up for sale, including vacation homes in Aspen, Colo. 
Now that Lay is gone, Enron is searching for a restructuring specialist to run the company. Sources close to the company said an interim chief executive will be announced in the next few days. 
Enron reportedly has narrowed the candidates for its interim chief executive, and the front-runners are three New York companies that specialize in corporate turnarounds, according to Bloomberg News. Those companies--Alvarez & Marsal, Glass & Associates and Zolfo Cooper--all declined to comment. 
* 
Times staff writer Mark Fineman in Washington contributed to this report, and Times wire services were used in compiling it.

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

Accounting for Enron: Enron's Top Choice For Acting CEO Is Stephen Cooper
By Rebecca Smith and Joann S. Lublin
Staff Reporters of The Wall Street Journal

01/25/2002
The Wall Street Journal
A4
(Copyright (c) 2002, Dow Jones & Company, Inc.)

Reorganization specialist Stephen F. Cooper is the front-runner to be named acting chief executive of Enron Corp., following the resignation earlier this week of Kenneth Lay as chairman and CEO, people close to the matter said. 
Mr. Cooper, a managing principal of Zolfo Cooper, a 20-year-old consulting firm that specializes in bankruptcy reorganization, is set to fly to Houston from New York today along with Tom Roberts, Enron's counsel at Weil Gotschal & Manges, these people said.
Mr. Cooper, who couldn't be reached, is scheduled to meet with senior management during the next few days. Enron's board could confirm his appointment as soon as today, but more likely will act during the weekend. Mr. Cooper, who has worked with Federated Department Stores Inc., Morrison Knudsen Corp. and a host of other companies, "is one of those guys who's done bankruptcies his whole life," said one person familiar with the situation. "You don't want somebody learning on the job with a bankruptcy this big." 
If Mr. Cooper is named, the board next will turn its attention to finding a chairman. 
While Enron wants a chief executive who will manage its complicated day-to-day operations and shepherd the firm through bankruptcy, which it entered on Dec. 2, the board is seeking a chairman who can play a different role. One person said the chairman's post -- for which there is no clear front-runner yet -- will be offered to someone who can act as the company's ambassador to Washington, where Enron is being investigated by nine congressional committees, the Justice Department and the Securities and Exchange Commission. 
Mr. Lay stepped down at the request of Enron's bankruptcy creditors' committee after it said it had lost faith in the energy company's management. Whoever is named as CEO is expected to work closely with Chief Financial Officer Jeffrey McMahon, who has been the firm's public face in recent weeks after the departure of Enron's former finance chief, Andrew Fastow.

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

Business/Financial Desk; Section C
ENRON'S COLLAPSE: THE COMPANY'S FUTURE
Trying to Salvage What Can Be Salvaged While the Creditors Line Up
By NEELA BANERJEE

01/25/2002
The New York Times
Page 7, Column 1
c. 2002 New York Times Company

When he resigned as chairman and chief executive of Enron on Wednesday under pressure from outside creditors, Kenneth L. Lay said he was stepping aside to ensure the survival of the company. But as Enron tries to sort through creditors' claims and to tally the billions of dollars in debt parked off its balance sheet, its chances of surviving, even in a greatly diminished form, remain far from certain. 
The creditors' committee, which represents the big banks and other companies Enron owes, wants to extract the greatest value from the assets remaining. So do the company's own lawyers. But to do so probably will require selling off most, if not all, of what the company still owns, industry analysts and energy executives said.
''There's a high likelihood that it just gets liquidated and never gets out of Chapter 11,'' said Andre Meade, a senior energy analyst with Commerzbank. ''Enron doesn't have a business with a critical mass that it could be reorganized around.'' 
The company is moving quickly to hire an outside executive who specializes in restructuring bankrupt companies, said Martin J. Bienenstock of Weil Gotshal & Manges, the law firm that is representing Enron in the bankruptcy proceedings. Mr. Bienenstock declined to identify the candidates for the job. But he said the list had been narrowed to three executives, at most, and that Enron would probably announce its decision in less than a week. 
Right now, Enron is being run day to day by Jeffrey McMahon, who was elevated to chief financial officer to replace Andrew S. Fastow, who was forced out last fall after his role in managing the off-the-books partnerships that contributed to Enron's fall came to light. 
Mr. McMahon is working alongside Raymond M. Bowen Jr., the treasurer, and Stan Horton, who is in charge of gas pipeline operations. 
''The creditors' committee thinks this is a step in the right direction to maximize value for all creditors,'' said Luc Despins of Milbank Tweed Hadley & McCloy, which represents the committee. 
Exactly how Enron's value will be maximized at the hands of its lawyers and creditors will determine the future shape of the company. When it filed for bankruptcy protection on Dec. 2, Enron reported that it had $50 billion in assets and $31 billion in debt. But many industry experts are skeptical of the claims that its assets are fairly valued, given how misleading Enron's accounting has turned out to be. 
Moreover, the reported debt does not include transactions that were kept off the books by the company to inflate its profits, Mr. Bienenstock said. The $50 billion in assets includes contracts in its trading and power marketing businesses, industry analysts said. But with its trading operation paralyzed ever since the bankruptcy, no one knows what those deals are really worth. 
The sell-off at Enron has already begun. The company recently turned over its energy trading business to UBS Warburg. In return for assuming the contracts of about 600 employees and acquiring things like computers and proprietary software, UBS Warburg will give Enron a third of its profits over the next 10 years, although it has an option to buy out Enron's claim early. It made no upfront payments. 
Enron still owns the network of natural gas pipelines that it began with in the mid-1980's. But that business, while profitable, is far smaller than the other units at the company. It also has a utility in Portland, Ore., that is being sold. Enron's overseas holdings, widely considered money-losers, include a troubled power plant in Dabhol, India, and a utility in Argentina. 
''The main business, the one anyone would really care about -- their trading business -- they sold to UBS,'' said Gordon Howald, an energy analyst with Credit Lyonnais. ''Their international portfolio is horrible. Their broadband business has been disbanded. There is very, very little of value left.'' 
But Mr. Bienenstock contended that through a mix of asset sales and consolidation of remaining business, some version of Enron can still survive. Enron's lawyers are discussing with the creditors' committee the best way to sell those businesses that they think are worth the most intact while trying to rebuild others that might bring profits and revenue in the future. Those remaining businesses would form the core of a new company in which creditors would receive equity positions. 
At the same time, Enron faces a sea of shareholder and employee losses. Mr. Bienenstock said those suing for mismanagement of 401(k) retirement accounts would have the same rights as creditors with unsecured debt. But those charging stock fraud would be at the back of the creditors' line, along with Enron shareholders. Still, such plaintiffs retain the right to pursue lawsuits against Arthur Andersen and individual officers and board members of Enron. 
''The creditors' committee is economically rational,'' Mr. Bienenstock said, explaining why he does not think that Enron will melt away in a fire sale. ''If the shares in a reorganized company are more valuable than selling the assets immediately, the creditors will take the shares.''

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

Andersen Knew of `Fraud' Risk at Enron --- October E-Mail Shows Firm Anticipated Problems Before Company's Fall
By Tom Hamburger and Jonathan Weil
Staff Reporters of The Wall Street Journal

01/25/2002
The Wall Street Journal
A3
(Copyright (c) 2002, Dow Jones & Company, Inc.)

Arthur Andersen LLP analysts determined during the fall that there was significantly "heightened risk of financial-statement fraud" at Enron Corp., a newly released document shows. 
That determination came from a test on the Houston energy company's financial statements described in an Oct. 9 e-mail sent by Mark Zajac, a risk-management employee in Chicago, to Andersen auditors on the Enron account. Michigan Rep. John Dingell, the senior Democrat on the House Energy and Commerce Committee, released the e-mail as the panel's investigations subcommittee opened hearings on Enron's collapse.
At the hearing, which focused on document destruction at Andersen, firm executives acknowledged that they retained a law firm in early October in part because they feared being sued over Enron -- but waited another month before telling the Houston office to preserve Enron-related documents. 
Andersen's lead Enron auditor, David Duncan, was fired this month for allegedly overseeing a massive document-destruction effort after the Securities and Exchange Commission opened an inquiry into Enron's accounting practices in late October. Yesterday, Andersen acknowledged that personnel outside Houston also destroyed documents. 
The Zajac e-mail provides another indication that Mr. Duncan and other Andersen auditors were increasingly uncomfortable with Enron's practices as it spiraled toward collapse. The e-mail also offers a clue to Mr. Duncan's state of mind as he and his subordinates were shredding documents. The e-mail was dated a week before a previously disclosed Oct. 15 memo that recounted Mr. Duncan warning Enron that its upcoming third-quarter earnings announcement might be misleading. The Oct. 16 earnings news release characterized $1.01 billion of losses as "nonrecurring charges," a characterization Mr. Duncan opposed. 
Mr. Zajac's analysis was based on a "financial statement fraud risk identification" test. Such tests are routine in auditing, but the Enron results weren't. Mr. Zajac wrote that a complete test was impossible because sufficient data about administrative expenses were lacking. But a test of the rest of Enron's financial statements triggered a "red alert: a heightened risk of financial fraud." Mr. Zajac's e-mail explained that such red alerts sometimes are false alarms, but must be taken seriously because the risk of fraud is "significantly heightened." 
The results were relayed to Mr. Duncan a month before Enron announced on Nov. 19 that it would restate its financial statements going back to 1997, cumulatively reducing earnings by nearly $600 million. "In the context of the Enron debacle, this is tantamount to yelling that the barn door is open long after the horses have fled the scene and shown up in the next county," Rep. Dingell wrote in a letter to Andersen Chief Executive Joseph Berardino inquiring about the matter. 
Andersen spokesman Charlie Leonard said he didn't know what actions its auditors took to address the "red alert." But he emphasized that Andersen had been conducting the particular test referred to in the e-mail only "on an experimental basis" since 2000 and that past runs "have shown that it needs further refinement," especially when applied to companies such as Enron. 
At the hearing, Andersen officials continued to pin responsibility for the shredding on Mr. Duncan and his Houston team, but committee members peppered them with questions and evidence aimed at shifting the blame toward Chicago headquarters. 
Andersen's internal "investigation indicated that [Mr. Duncan] directed the purposeful destruction of a very substantial volume of documents," said C.E. Andrews, Andersen's global managing partner. "This is the kind of conduct that Andersen cannot tolerate." 
Subcommittee Chairman James Greenwood, a Pennsylvania Republican, remained skeptical as the hearing closed: "What I got after four hours here is a larger question of whether Mr. Duncan is a fall guy for others at Arthur Andersen." 
The hearing provided the most detailed chronology yet of the circumstances surrounding the document destruction. 
Members focused much of their questioning on the decision to hire the New York law firm of Davis Polk & Wardwell, which was retained Oct. 9 -- the same day as Mr. Zajac's e-mail about financial fraud -- and now represents Andersen in Enron litigation. Mr. Andrews said the firm was retained to help deal with Enron financial-reporting issues as well as "possible litigation." By then, headquarters officials already were aware of a whistleblower's allegations of possible fraud at Enron. 
On Oct. 12, Andersen attorney Nancy Temple sent an e-mail from Chicago to remind the Houston office of the firm's document-retention policy, which calls for preserving final audit papers but destroying nearly all other records unless litigation is "threatened." By about that time, Ms. Temple testified she had learned of the whistleblower's allegations, too, but she rejected suggestions that the reminder amounted to a document-destruction order. She insisted she was merely responding to questions in prior conference calls "about how to appropriately document several different matters." 
Three days after sending that e-mail, Ms. Temple had her first discussions with lawyers from Davis Polk about the Enron matter, which included document-retention issues. That same day, Ms. Temple asked the Houston office in an e-mail to remove her name from a draft memo, in part because she didn't want to be called as a "witness." Ms. Temple explained that she was afraid that, because the memo discussed advice she offered, the inclusion of a reference to her might breach attorney-client privilege. 
On Oct. 22, the SEC announced an informal inquiry into Enron. The next day, Ms. Temple testified, she and Mr. Duncan talked by telephone. Ms. Temple said her notes indicate that Mr. Duncan said Andersen personnel were "trying to gather all docs re transactions from around the world." 
"Do your notes indicate that the documents were gathered and preserved or simply gathered?" Colorado Democratic Rep. Diane DeGette asked, prompting laughter. Ms. Temple responded that she understood Mr. Duncan to mean gathered "in one place to have it available." 
In fact, that was the day that, according to Andersen's account, Mr. Duncan called an urgent meeting of the Enron team that led to widespread destruction of documents. Before declining to testify, he told committee investigators that he provided his team with copies of Andersen's document policy but didn't directly order document destruction, according to an account released by the panel. A follow-up memo from another Houston manager the next day advised "everyone to do what is necessary to adhere to the guidelines" and to work overtime if necessary to do so. 
Buried in the Andersen officials' written testimony -- but not read aloud at the hearing -- was an acknowledgment that "Enron-related documents were destroyed by others" outside Mr. Duncan's team. Mr. Leonard, the Andersen spokesman, confirmed that personnel outside Houston also disposed of Enron-related items -- mostly e-mails that the firm expect to recover -- but he declined to say which other offices were involved or if Chicago was one of them. 
It was only after Andersen received an SEC subpoena Nov. 8 that Ms. Temple sent Houston a memo advising all employees to preserve all Enron-related documents. 
Asked why she waited so long, Ms. Temple said it was company policy to send out such advisories whenever a subpoena was received. Otherwise, Ms. Temple and Mr. Andrews testified, account executives -- in this case, Mr. Duncan -- are expected to make reasonable judgments. "The responsibility for that rests with the engagement partner," Mr. Andrews said. 
"I never counseled any destruction or shredding of documents," Ms. Temple testified. "And I only wish that someone had raised the question so that we could have consulted and addressed the situation." 
Rep. Billy Tauzin, chairman of the full committee, urged Andersen to reconsider its policy of leaving such matters to auditors. "If all your policies are to let accountants decide when it is legal to destroy documents in a pending investigation, an awful lot of people are going to be in trouble down the road," he said. "If you don't change it, I promise you, we will."

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

October memo warned of 'heightened risk' of fraud 
Firm draws fire for delay before halt of shredding 
Compiled from staff and wire reports 
Jan. 25, 2002, 9:10AM
WASHINGTON (Houston Chronicle) -- Some officials at Arthur Andersen were worried about a "heightened risk" of fraud in Enron's books a week before the energy company shocked stockholders with huge losses, an auditor's memo from last October shows. 
The e-mail by Andersen auditor Mark Zajac warned that a computer analysis of Enron's financial activities in the third quarter of last year indicated "a red alert: a heightened risk of financial statement fraud," according to investigators. 
The document, released by Rep. John Dingell, D-Mich., added to mounting evidence that Enron's outside accounting firm had strong misgivings about Enron business practices. 
"We have considerable rascality," Dingell, ranking Democrat on the House Commerce Committee, summed up today on CBS's The Early Show. "We have to find out who is at fault for what." 
But a House hearing Thursday into the Enron Corp. collapse left lawmakers still certain of only one thing: Thousands of documents were destroyed by Enron's blue-ribbon accounting firm. 
Questions about who ordered the shredding, and whether it was intended to stifle government investigations, were left unresolved after a Commerce subcommittee concluded its first public hearing into the largest and perhaps most devastating bankruptcy in history. 
A week after the "red alert" memo, Enron reported a $638 million third-quarter loss and disclosed a $1.2 billion reduction in shareholder equity, partly because of hidden debt built up by a complex web of partnerships. 
On the same day that Zajac wrote his memo to the head of the Enron auditing team, Andersen also hired a law firm in anticipation of possible lawsuits involving Enron, the Houston-based energy giant that spiraled into bankruptcy Dec. 2. 
Andersen played down the significance of the computer analysis. And Zajac in the memo acknowledged the system produces "false alarms." 
Lawmakers on Thursday ferociously criticized Arthur Andersen for waiting weeks after a federal investigation was under way before halting in-house destruction of Enron documents. Andersen executives in turn tried to blame fired auditor David Duncan for sole responsibility in the shredding -- a claim met with skepticism by House inquisitors. 
Duncan, denied immunity by the House Energy and Commerce Committee, appeared briefly before the subcommittee on oversight and investigations, where he twice invoked his Fifth Amendment right against self-incrimination. 
"Mr. Duncan, Enron robbed the bank, Arthur Andersen provided the getaway car, and they say you were at the wheel," said Rep. Jim Greenwood, R-Pa., after Duncan took his seat at the witness table. 
A tense-looking Duncan, flanked by his lawyers, informed the committee he wouldn't be answering any questions. 
"I would like to answer the committee's questions, but on the advice of my counsel I respectfully decline to answer the question based on the protection afforded me under the Constitution of the United States," Duncan said. 
The exchange kicked off a new round of congressional hearings into the collapse of Enron and the involvement of its former auditors at Andersen. 
On the other side of Capitol Hill, the Senate Governmental Affairs Committee was hearing from former SEC officials and academic experts on whether Enron's troubles should have been spotted earlier and how to strengthen current safeguards. 
The two panels are among at least nine looking into various aspects of what lawmakers are calling the Enron debacle. 
The Securities and Exchange Commission and the Labor Department also are investigating, and the Justice Department has opened a criminal probe. 
At the House subcommittee hearing, lawmakers repeatedly grilled Andersen attorney Nancy Temple about why she waited until Nov. 10 to instruct employees to start saving Enron documents. 
As early as Oct. 9, Andersen had hired an outside law firm in anticipation of possible litigation in the Enron matter, lawmakers said. 
Enron's highly public financial free fall began Oct. 15, when the company reported more than $600 million in quarterly losses and a $1.2 billion reduction in shareholder equity. 
Enron also had disclosed as early as Oct. 22 that the SEC was probing its books. 
Gesturing dramatically and thumping his desk in the hearing room, Rep. W. J. "Billy" Tauzin, R-La., chair of the committee, asked Temple why she was silent for so long about the need to preserve documents. 
"I never counseled any shredding or destruction of documents. I only wish someone had raised the question," Temple said. 
Tauzin fired back, "Does anybody have to raise it, or is it somebody's responsibility in the company to raise it themselves? Whose responsibility is it but yours?" 
Andersen fired Duncan last week, saying he had organized a massive destruction of Enron documents beginning Oct. 23. 
C.E. Andrews, an Andersen global managing partner who also appeared before the committee, said it was Duncan's responsibility to protect the documents. 
"I cannot say it more strongly, Mr. Duncan was not following company policy. Mr. Duncan was violating company policy," Andrews said. 
The claim, echoed by other Andersen witnesses, drew fresh scorn from Tauzin, who questioned why such a sensitive legal issue was left to an accountant. 
"I hope you're all OK, I don't know," Tauzin warned, referring to the legal ramifications the testimony raised. "I don't know what's going to come out of all this." 
Several lawmakers said they suspect Andersen is making a scapegoat of Duncan, when it appears many employees may have been involved in destroying Enron documents. 
In an internal, Oct. 24 Andersen document the committee released Thursday, a manager instructs staff to use overtime if necessary in complying with the company's policy, which at the time called for destruction of all but the final auditing documents. 
Noting that retaining documents is largely a passive act, Greenwood asked why complying with the Andersen policy would require staff to use overtime. 
"If the emphasis is on retaining documents, it doesn't seem to us that a whole lot of overtime is required," Greenwood said. 
Tauzin added that investigators believe documents may have been destroyed by Andersen in both the Houston and Chicago offices. 
Andersen, which is rewriting its policy on document retention, called a halt to the destruction of Enron materials on Nov. 10, the day after the SEC subpoenaed the auditing firm. 
"My mother would say your policy was dumb like a fox," Greenwood told the Andersen executives. 
Dorsey Baskin, managing director for Andersen, said the firm took decisive steps to remedy the issues surrounding the document shredding. 
"We certainly are not proud of the document destruction, but we are proud of our decision to step forward and accept responsibility," Baskin told the committee. 
Although the committee had originally subpoenaed Andersen CEO Joseph Berardino, they accepted Baskin as a substitute to answer questions about companywide policy and the firm's response to the Enron crisis. 
Subpoenas also were issued to Temple and Andersen manager Michael Odom, which investigators said would give them legal cover in the event of future litigation involving Enron. 
Odom, an Andersen employee since 1969, was moved out of management duties in Houston the day Duncan was fired. Odom told lawmakers Andersen officials didn't specify why he, Odom, was being disciplined. 
"I asked what the reason was and I was told the firm felt it had to make some bold moves to restore confidence in the Houston community," Odom said. 
Rep. Gene Green, D-Houston, a member of the committee, told lawmakers that Enron's collapse had devastated the city. 
Hearing the stories of former employees, "literally, the tears would come to your eyes," Green said. "Clearly the insiders knew what was going on." 
Lawmakers in the coming weeks will be expanding the probe of document destruction, and also looking at the financial and other problems that brought about Enron's historic collapse. 
Several said that changes in the law or federal regulations may result from various issues illuminated through testimony. 
It was unclear whether any of the four who testified Thursday would return for more questioning when hearings resume in the House committee next month. 
Duncan's request for immunity from prosecution is not likely to be granted by the committee, since it could later impair the Justice Department's ongoing criminal probe. 
Duncan, who also was subpoenaed by the committee, began cooperating with House investigators the day after he was fired from Andersen. Since then, his immunity request has cast a chill on his relationship with investigators. 
Greenwood complained that Duncan's ongoing silence could impede the committee's work -- including unraveling the mysteries surrounding the fired auditor. 
"I still haven't made up my mind on whether Mr. Duncan was a rogue employee or whether Mr. Duncan was set up as a scapegoat," Greenwood said. 


Business; Business Desk
Enron Hid Losses, Ex-Worker Says Energy: Manager warned executives $500-million deficit was attributed to another unit to create illusion of profit.
LEE ROMNEY and WALTER HAMILTON
TIMES STAFF WRITERS

01/25/2002
Los Angeles Times
Home Edition
C-1
Copyright 2002 / The Times Mirror Company

A former Enron Corp. manager warned top company brass in August that more than $500 million in losses from the firm's energy services unit were being hidden in another division so the unit could misleadingly report profit to Wall Street, a copy of her e-mail reveals. 
The allegations by former employee Margaret Ceconi were made in an Aug. 29 e-mail to Chairman Kenneth L. Lay, who Wednesday resigned from the empire he built.
Ceconi's e-mail apparently wasn't connected to another whistle-blower memo sent by Vice President Sherron S. Watkins to Lay in mid-August. 
Although Watkins warned that losses hidden in off-balance-sheet partnerships could cause Enron to "implode in a wave of accounting scandals," Ceconi's concerns focused on the juggling of losses within Enron units. A copy of her e-mail was obtained by The Times. 
According to Ceconi, whose allegations were reported Thursday in the Houston Chronicle, losses of more than $500 million were transferred from Enron Energy Services to Enron Wholesale Services--the firm's lucrative trading unit--in a financial sleight of hand to deceive investors and analysts. 
Until last spring, the energy services unit was co-headed by Thomas E. White Jr., who now is Army Secretary. He could not be reached for comment Thursday. 
"EES has knowingly misrepresented EES' earnings," Ceconi wrote. "This is common knowledge among all the EES employees, and is actually joked about. But it should be taken seriously." 
Ceconi wrote the e-mail--a rambling memo in which she lashes out at Enron management--after she was fired from EES. She complains in the memo that she was "fraudulently" recruited with misleading information about EES and then unfairly let go. 
Enron spokesman Mark Palmer could not be reached Thursday. In the Chronicle he characterized Ceconi as a "disgruntled" employee, but would not comment on the specifics of her memo. 
Ceconi could not be reached for comment. But her attorney, Demetrios Anaipakos, said her concerns about the accounting practices outweighed her personal beefs with Enron. "She felt that EES was being portrayed as a money-making operation when it was exactly the opposite," he said. 
EES provided energy services to commercial and industrial firms, promising them predictable long-term energy supplies and improved energy efficiency. Enron touted the unit as having huge growth potential. 
According to a filing with the Securities and Exchange Commission, Enron revamped the EES unit last year, moving some commodity "risk-management activities" to the Wholesale unit. 
As part of the restructuring, Enron restated its second-quarter 2000 results for EES. Originally, the unit had revenue of $840 million and operating income of $24 million. After the restatement, revenue was cut in half to $420 million, but profit almost doubled to $46 million. 
The restructuring could have been "an attempt to move a money-losing operation into a segment that was more profitable," said Randy Beatty, dean of the accounting school at USC, who reviewed the SEC document for The Times. 
Some analysts said Enron repeatedly restructured operations to boost the financial results of individual units. "They kept restructuring the business segments so they could shift earnings from one section to another," said Prudential Securities analyst Carol Coale. 
Accounting experts said companies can freely restructure their operations, thus altering the reporting of profits and losses. But, said William Kinney, an accounting professor at the University of Texas in Austin, such reorganizations should be done for valid business purposes, not just to "move things around." 
"It's subject to abuse if you're trying to hide bad performance," Kinney said. But proving intent is difficult, he said. 
Anaipakos said Ceconi, who left a senior job at GE Capital to join Enron in late 2000, received a call from someone in human resources after she sent the e-mail. "She was told her allegations were being taken seriously, [but] I can say she never heard from them again," he said. 
Ceconi, now employed by a Houston consulting firm, also contacted the SEC by phone twice in August and September to voice her concerns, Anaipakos said. 
"Some would say the house of cards [is] falling," Ceconi wrote in the e-mail to Lay, which also complained of favoritism and discrimination at the company. 
"You have to decide the moral or ethical things to do, to right the wrongs of your various management teams. I wish you luck."

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

Business/Financial Desk; Section A
ENRON'S COLLAPSE: SELLING ENERGY
Ex-Workers Say Unit's Earnings Were 'Illusory'
By ALEX BERENSON

01/25/2002
The New York Times
Page 1, Column 5
c. 2002 New York Times Company

A major division of the Enron Corporation overstated its profits by hundreds of millions of dollars over the last three years, and senior Enron executives were warned almost a year ago that the division's profits were illusory, according to several former employees. 
The division, Enron Energy Services, competed with utilities to sell electricity and natural gas to commercial and industrial customers. It was run by Lou L. Pai, who sold $353 million in Enron stock over the last three years, more than any other Enron executive, and Thomas E. White, who left Enron to become secretary of the Army last June.
Energy Services accounted for a small part of Enron's revenue but was promoted by the company as a big growth opportunity. Unlike the complex partnerships and other entities that Enron used to move debt and losses on outside investments off its books, this unit was a real business with more than 1,000 employees and customers like J. C. Penney. 
But former employees, including three who were willing to be identified, suggest that Energy Services used shoddy accounting practices to create ''illusory earnings,'' in the words of Jeff Gray, who joined Enron in 2000 and worked at the division for most of 2001. 
For example, by estimating that the price of electricity would fall in the future, Enron could book an immediate profit on a contract. 
The employees' allegations raise fresh questions about Mr. White's role at Enron, where he was an executive for 11 years. In a disclosure last May, just before he became Army secretary, Mr. White reported that he owned more than $25 million of Enron stock and would be paid $1 million in severance from Enron. 
Because he went from the Army to Enron and back to the Army, Public Citizen and others have voiced concerns about potential conflicts. While he was at Energy Services, it sold a $25 million contract to the Army. As secretary, he said that he would move energy services at bases to private companies, like Enron. 
A spokesman for Mr. White did not return repeated calls for comment. Mr. Pai, the former chairman, and a spokesman for Enron also did not return calls. Peggy Mahoney, a spokeswoman for Energy Services, said the division's financial results had accurately reflected its business. ''It was no pie in the sky,'' she said. 
Enron created Energy Services in 1997 to take advantage of the deregulation of electricity markets nationally. It promised to cut its clients' energy costs by installing energy-saving equipment and finding cheaper natural gas and electricity. 
Energy Services operated as essentially a freestanding company, but its results were included in Enron's financial statements, which were audited by Arthur Andersen. Energy Services organized itself so that it could use a financial reporting technique called mark-to-market accounting, which Mr. Gray and other former employees said the division had abused to inflate its profits. 
Under traditional accounting, companies book profits only as they deliver the services they have promised to customers. But Energy Services calculated its profit very differently. As soon as it signed a contract, it estimated what its profits would be over the entire term, based on assumptions about future energy prices, energy use and even the speed at which different states would deregulate their electric markets. 
Then Energy Services would immediately pay its sales representatives cash bonuses on those projections and report the results to investors as profits. By making its assumptions more optimistic, the division could report higher profits. 
As a result, the sales representatives and senior managers pressed the managers who made the central assumptions about deregulation and energy prices, said Glenn Dickson, a manager at Energy Services who was fired in December. 
''The whole culture was much more sales driven than anything else,'' Mr. Dickson said. ''The people that were having to sign off on the deals with a gun to their head knew that it wasn't a good deal.'' 
Mr. Dickson and other former employees said senior executives at Energy Services knew that their assumptions were unreliable. At the same time, expenses ballooned as Energy Services found that the costs of managing its contracts were higher than it had projected. 
''They knew how to get a product out there, but they didn't know how to run a business,'' said Tony Dorazio, a former product development manager at Energy Services. 
In 1999 and 2000, under the leadership of Mr. Pai and Mr. White, Energy Services would sign almost any deal, a former employee said. But by the end of 2000, the executives were no longer paying much attention to daily operations, Mr. Dickson said. 
None of the former employees said they knew whether Mr. Pai or Mr. White were aware of any accounting lapses at Energy Services. With Energy Services hemorrhaging cash in 2000, even as it began to report profits to investors, the unit began reviewing some of the contacts to determine whether it had overstated its profits. But publicly, Enron continued to promote Energy Services' prospects. A year ago, Jeffrey K. Skilling, Enron's president at the time, told Wall Street that the division was worth about $20 billion. 
''They said at one point they expected it to be as large as wholesale,'' said Jeff Dietert, an analyst at Simmons & Company in Houston. Enron's wholesale trading division, which bought and sold electricity and natural gas worldwide, was the source of most of its profits. 
The division generated $165 million in operating profit on $4.6 billion in sales in 2000, in contrast to a loss of $68 million on sales of $1.8 billion in 1999, according to Enron's 2000 annual report. 
Even as Enron promoted the division's potential, it accelerated its review of the contracts and brought in new management. By February 2001, Enron had transferred Mr. Pai out of the division and named David Delaney, who came from the wholesale business, as its top executive. A former brigadier general, Mr. White remained until he became secretary of the Army. 
A former employee said that in February or March 2001, senior managers within Energy Services spoke to Richard A. Causey, Enron's chief accounting officer, to discuss potential losses associated with a handful of large contracts. The potential losses on those deals topped $200 million, the employee said. 
About the same time, Mr. Delaney discussed the potential losses with Mr. Skilling and other top corporate executives, this employee said. 
Sales slowed last year as Mr. Delaney forced the division to use more conservative and accurate projections when deciding on a contract, Mr. Dickson said. The move frustrated some sales representatives, but stemmed losses, he said. 
Although Energy Services publicly reported profits until Enron collapsed, it continued to lose money last year because of the unprofitable contracts, employees said. 
Margaret Ceconi, a former sales manager, sent a letter in August to Kenneth L. Lay, then Enron's chairman, saying that Enron had hidden losses on its contracts by putting them in the wholesale division. 
''It will add up to over $500 million that E.E.S. is losing and trying to hide in wholesale,'' Ms. Ceconi wrote in her letter, which was previously reported in The Houston Chronicle. 
Today, Energy Services is essentially a shell. After filing for bankruptcy Dec. 2, Enron walked away from many contracts, an action allowed under bankruptcy rules. 
Energy Services' decision to exit so many contracts, including its largest, a $2.2 billion contract signed only last year with Owens-Illinois, the giant glass and plastic maker, is proof of the problems at the division, former employees said. 
''They kept telling me, and I heard it many a time, that it was a sound business plan,'' Mr. Dorazio said. ''After being in this business for 21 years, it didn't seem sound to me.''

Chart: ''Many Variables, One Profit'' Enron Energy Services sold contracts to provide natural gas and electricity to companies for long periods. The companies found the prices attractive. But when it had the chance in bankruptcy court, Enron walked away from many of the contracts, a tacit acknowledgement that they were not profitable. A HYPOTHETICAL 10-YEAR ENERGY CONTRACT 1. Enron would agree to provide electricity and natural gas at a fixed price for 10 years. 2. It then used a computer model to project the cost and profit of providing this service. Among the many variables that Enron considered were the prices of power in states that were deregulating, the expected dates when states would deregulate power supplies and the expected demand, based in part on the installation of energy-saving devices at the company. Such factors are very hard to project. ENRON'S ACCOUNTING: 10 YEARS IN ONE 3. Even though most of Enron's contracts were unprofitable at first, and would only become profitable later if its projections proved accurate, Enron could book those profits as soon as it signed them under mark-to-market accounting.(pg. C6) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

A Section
Andersen Officials Grilled on Shredding; Fired Enron Auditor Declines to Testify
Robert O'Harrow Jr. and Kathleen Day
Washington Post Staff Writers

01/25/2002
The Washington Post
FINAL
A01
Copyright 2002, The Washington Post Co. All Rights Reserved

House members probing the sudden demise of Enron Corp. pressed executives at the company's auditor, Arthur Andersen, yesterday on why they didn't do more to preserve Enron audit documents last fall, after they learned that federal regulators were investigating the energy trader's finances. 
Lawmakers cited an e-mail showing that an Andersen official in October had urged auditors on the Enron account in Houston to work "overtime" to follow the company's rules on document retention and destruction. The e-mail did not specifically say to retain documents. One committee member said he interpreted the memo as a veiled suggestion to destroy documents.
Another Andersen document said a computer analysis of Enron financial activity showed that the company warranted a "red alert" of possible fraud. It was dated Oct. 9, a week before Enron announced a large loss. 
Andersen officials played down the significance of the fraud warning, saying later that the software was unreliable. 
The Andersen witnesses staunchly defended the firm's actions, saying they sent out a detailed reminder to preserve documents as soon as the big accounting firm received a subpoena in November. They blamed the shredding on David B. Duncan, the lead Enron auditor, who was fired last week. 
Duncan, citing the advice of his attorney, declined three times to answer questions in a brief appearance before the committee. He invoked his Fifth Amendment privilege against self incrimination. 
"Mr. Duncan, Enron robbed the bank," said Rep. James C. Greenwood (R-Pa.), chairman of the House Energy and Commerce Committee's subcommittee on oversight and investigations. "Arthur Andersen provided the getaway car. And they say you were at the wheel." 
Greenwood questioned after the hearing whether Duncan was "a villain or a scapegoat." 
C.E. Andrews, a global managing partner at Andersen, tried to deflect responsibility from others at the accounting firm. "Destruction of documents during that period was wrong, and we admitted that," he said. "I cannot say more strongly Mr. Duncan was not following company policy." 
Andrews acknowledged that others at Andersen also destroyed Enron-related documents, although he said the volume and circumstances were different. 
Andrews said the document policy was later suspended because it was not clear enough. It was dropped Jan. 10 when Andersen first announced that some of its employees had destroyed Enron-related documents. 
As House lawmakers sought to determine exactly what Andersen knew about the shredding -- and when the firm knew it -- Federal Reserve Board Chairman Alan Greenspan made pointed statements about the potential impact of Enron's accounting practices in an appearance before the Senate Budget Committee. 
A visibly passionate Greenspan said that if "everybody did what is alleged in the Enron accounting system, our [economic] system could not work" because investors have to be able to rely on the information they receive. He referred to Enron's use of off-balance-sheet partnerships to conceal a large amount of corporate debt as "an egregious act." 
While saying that he is not worried that Enron's collapse will hinder investment in U.S. companies or cause interest rates to rise, he said the case "is going to create a really major rethinking in a lot of people about whether there is a spin game going on with respect to information coming out of business into the investment community." 
An Enron hearing before the Senate Governmental Affairs Committee also took a broader view of the issues raised by the nation's largest bankruptcy. Sen. Joseph I. Lieberman (D-Conn.), chairman of the committee, said his panel's examination will include questions about whether industry regulators and agencies such as the Securities and Exchange Commission tracked Enron's activity closely enough. "And if not, why not?" Lieberman added. 
One Senate witness, former SEC chairman Arthur Levitt Jr., chided an array of people, including analysts, rating agencies and government regulators, for failing to do enough to prevent the Enron debacle. 
"Enron's collapse did not occur in a vacuum," Levitt said, adding that it was partly a result of a "culture of gamesmanship" among go-go businesses that believe "it's okay to bend the rules." 
Yesterday's hearings were part of nearly a dozen congressional investigations into Enron's collapse and allegations that it misled investors and, along with Andersen, tried to hide questionable business practices. 
The Justice Department is investigating Andersen's document destruction as part of its criminal probe of Enron's collapse. In Houston yesterday, FBI agents were inside Enron's headquarters investigating the shredding of documents there, which was disclosed earlier this week. 
In remarks after the four-hour House hearing, Rep. W.J. "Billy" Tauzin (R-La.), chairman of the House Energy and Commerce Committee, said more people than previously disclosed knew about document destruction by Andersen, "perhaps in Chicago," at the company's headquarters. 
Greenwood scoffed at the idea of Andersen employees working overtime to uphold the document-retention policy. "It doesn't seem to us it takes a lot of overtime to retain documents," he said. 
The testy House session demonstrated the complexity, disagreement and posturing that are quickly coming to characterize the widening investigations of Enron's fall. 
Lawmakers from both parties have pledged to examine how the energy trader collapsed, the allegations of corporate fraud and coverups, and the impact on thousands of investors who lost billions of dollars when Enron's share price dropped to less than a dollar in recent months. 
Greenwood opened the House subcommittee hearing by calling it "just the first step in a thorough and rigorous investigation." He and other panel members were aggressive in their questioning -- and openly skeptical of the responses of Andersen executives. 
A focus of much of the questioning was the role of Nancy Temple, an Andersen lawyer who wrote an Oct. 12 memo that she said was meant to remind Duncan and others about the company's policy, which calls for the retention of some documents and the destruction of others. Temple told lawmakers her memo was not intended as a directive to shred documents. 
The 35-page policy statement said that under normal circumstances, employees were to retain only final work papers supporting client audits, and to throw out drafts, but that if litigation was anticipated, all documents were to be retained. In her testimony, Temple said she meant employees to understand that they were to retain documents. 
"Your memo was interpreted, as you know, as a shredding order," said Rep. Edward J. Markey (D-Mass.). Duncan's attorneys say he interpreted it to mean he should destory Enron-related documents. 
Temple's testimony also revealed that she contacted Andersen's outside legal advisers, Davis Polk & Wardwell, before sending an Oct. 16 e-mail to Duncan asking that he delete her name and other references to legal advice from a memo he had written about potentially misleading statements in an Enron news release about its earnings. 
She said the outside lawyers recommended she do that so that if Andersen was sued or investigated over its Enron auditing, discussions between Duncan, Temple and other lawyers would be protected by attorney-client privilege. 
Andrews said Davis Polk had been retained by Arthur Andersen on Oct. 9 because of "potential litigation" stemming from Enron's troublesome financial statements. 
Tauzin and other lawmakers yesterday questioned why Andersen's general counsel or compliance officer didn't issue clear instructions that day about preserving documents. 
Temple said she e-mailed an explicit directive to preserve Enron audit documents on Nov. 10, in response to a subpoena the company had received two days earlier from the SEC. Temple said she called Duncan directly the day before to underscore the message. After that call, Duncan's assistant sent out an e-mail to other secretaries in the Houston office saying "no more shredding." 
Among the questions Duncan would not answer yesterday was why, if he thought the Oct. 12 memo was a directive to destroy documents, he waited 11 days to accelerate the process. 
Temple also told lawmakers about a Sept. 28 telephone conversation among Andersen partners to discuss Enron and the possibility of problems and errors in the company's past financial statements. She said one partner brought up the idea of deleting a sentence acknowledging that the firm had given incorrect accounting advice. She testified that she told the partners they shouldn't do that. 
Tauzin said he is troubled that an accounting partner at Andersen would even suggest such a thing, and that Temple didn't seem surprised by it, even though "she did the right thing" by forbidding it. 
Tauzin said "the clear picture we're getting at this hearing is that somebody felt it was a good idea to get rid of an awful lot of documents . . . and it's not a pretty one." 
Staff writers John M. Berry, Susan Schmidt and Jackie Spinner contributed to this report.

http://www.washingtonpost.com 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Judge OKs depositions on shredding 
Order for 6 includes fired Andersen auditor 
By ROSANNA RUIZ 
Copyright 2002 Houston Chronicle 
Jan. 24, 2002, 8:59PM
A federal judge has approved an order allowing attorneys for Enron stockholders to take depositions from one former and five current employees of the company's auditing firm concerning document destruction. 
This settles a dispute raised by defense attorneys who asked to delay the process, mainly because their clients are facing inquiries from so many investigations. 
U.S. District Judge Melinda Harmon's order, issued late Wednesday, states that depositions may begin after Arthur Andersen completes its internal report about the shredding of Enron-related documents. The report is due within three weeks. 
"We're glad we persisted. We're glad we prevailed," said Bill Lerach, a San Diego attorney representing Amalgamated Bank. "We look forward to taking the testimony under oath of the officials at Andersen who destroyed documents." 
The New York-based bank is one of several plaintiffs suing Andersen and 29 former and current Enron executives and board members. The suit alleges the insiders were aware of accounting problems that led to Enron's inflated earnings and higher stock prices. 
Rusty Hardin, attorney for the accounting firm, opposed allowing depositions of David Duncan, the lead auditor fired by Andersen last week; four Andersen employees on administrative leave, and Andersen's in-house attorney, Nancy Temple. Hardin argued that the depositions might interfere with investigations by Congress, the departments of Labor and Justice and the Securities and Exchange Commission. 
The four Andersen employees placed on administrative leave -- Thomas H. Bauer, Michael Lowther, Michael Odom and Stephen Goddard Jr. -- must also answer plaintiffs attorneys' questions about the shredding or deletion of Enron documents. 
"We hoped those depositions would be put off because those people are being pulled in so many directions. But we don't have any problems with the order," Hardin said. 
Duncan, identified by Andersen as the organizer of the unauthorized destruction of Enron documents when the SEC began its investigation, invoked his Fifth Amendment privilege Thursday before the House Energy and Commerce Committee. He may do the same when he is deposed. 
Temple, based in Chicago, will be deposed about an ambiguous Oct. 12 e-mail she wrote regarding the company's document-retention policy. 
During her appearance before the House panel Thursday, Temple denied that the e-mail advised Andersen employees to destroy any documents. 
Hardin said he could not predict whether Duncan or the others would provide answers during the depositions. That decision, he said, rests with them and their attorneys. 
"I thought the plaintiffs would have a better chance of getting detailed information if they waited a while, but they didn't want to," Hardin said. 
Lerach argued this week that the depositions ought to be taken now while memories are fresh. 
Harmon's order states that each deposition will last up to eight hours and cover only the "document and data retention, storage, removal, deletion and attempts to restore or recover deleted or destroyed materials. No documents need be produced in connection with these depositions." 
The six may also be deposed at a later date about the document destruction. 
Andersen must allow experts hired by the plaintiffs' attorneys an opportunity to evaluate the company's efforts to recover or reconstruct Enron-related documents that were destroyed or deleted. 
The plaintiffs' attorneys will also be given access to Andersen's document-storage facilities to ensure appropriate security measures are in place. 

Business/Financial Desk; Section C
ENRON'S COLLAPSE: THE CHAIRMAN
An Optimist Sees the Chaos Become Surreal Spectacle
By JIM YARDLEY

01/25/2002
The New York Times
Page 7, Column 1
c. 2002 New York Times Company

HOUSTON, Jan. 24 -- In the last days before his resignation, Kenneth L. Lay was up there on the 50th floor, above the city that once lionized him, a fallen king barricaded atop his silver tower. Mr. Lay, a friend said, had hired a security guard to protect himself against death threats. Employees gossiped that he arrived by private car in the loading dock and was whisked to his office on a freight elevator, all to avoid attention. 
He must have struggled to recognize the new, chaotic world below. His company, Enron, had collapsed. His days, according to another friend, were filled with lawyers. His pal, the president of the United States, who had once referred to him affectionately as Kenny Boy, complained that his mother-in-law had taken a bath on Enron stock.
The Rev. Al Sharpton showed up calling for justice. The Rev. Jesse Jackson, who in November shared a private prayer with Mr. Lay, returned this evening in the midst of the crisis. That Mr. Lay merited the ministrations of Mr. Jackson, who is known to gravitate toward catastrophe, was only one indication of the surreal spectacle that his precipitous fall had become. 
''I do not think he's ever had a failure,'' said Bonnie Bourne, his older sister, who lives in Columbia, Mo. ''My father was eternally optimistic. I see that in Ken: things are going to work out. And it has." 
Until now. By stepping down Wednesday evening, Mr. Lay ends his tenure as Enron's chairman and chief executive and begins his new career -- that of a defendant in lawsuits, a witness before Congressional committees and a potential target of criminal investigations. The questions now facing Mr. Lay about Enron's partnerships and accounting practices represent the ultimate Washington endgame: what did he know, when did he know it and did he betray the trust of his employees and shareholders? 
Mr. Lay, 59, gathered top Enron executives and employees in a conference room on Wednesday to deliver the news that he was leaving the company, just as he had earlier told Enron's board via a conference call. He had been asked to resign by the court-appointed creditors committee, but he had floated the idea himself as far back as November when the company was negotiating its failed merger with its energy rival, Dynegy. 
''When the Dynegy deal was taking place,'' said Thomas A. Roberts, a lawyer for Enron in New York who is serving as a liaison to the creditor's committee, ''he at that point thought if his presence as an officer of the company was going to cause a problem, he would consider resigning.'' 
Mr. Lay had been thinking about resigning, on his own terms, even before Enron's troubles emerged. 
In August, when his hand-picked successor, Jeffrey K. Skilling, unexpectedly resigned as chief executive, Mr. Lay, then only the chairman, had told friends and family that he was easing toward retirement. But Mr. Skilling's abrupt departure, coupled with the steady decline in the company's stock price, prompted Mr. Lay to reassume the chief executive position. 
''He came home for a family reunion in August,'' Ms. Bourne said. ''Skilling had just resigned. I said, 'I thought you were ready to get a boat and take to the sea.' And he said, 'Well, not yet.' " 
Mr. Lay called a meeting of employees on Aug. 16, two days after Mr. Skilling's departure, and was greeted with a standing ovation. For many Enron employees, the unpretentious, folksy Mr. Lay represented the moral ballast of a company that they felt had spiraled out of control. He was a former chairman of the local United Way; a branch of the Y.M.C.A. was named after him. 
Even today, some workers who have lost their jobs refuse to blame Mr. Lay. 
''He had an almost cultish following,'' said one Enron executive who was among the more than 4,000 workers laid off on Dec. 3, the day after the company filed for Chapter 11 bankruptcy. 
But Mr. Lay could not work miracles, and a string of recent disclosures have raised questions. He said in August that questions about the partnerships used to inflate profits were ''way over my head,'' yet that same month he met with a vice president who detailed her concerns. 
At the same time that Mr. Lay was learning about these potential problems, he was encouraging employees to buy more Enron stock and reassuring them that the company would rebound. He continued to sell shares himself in September and October, a decision his lawyer has attributed not to a lack of confidence in his company but to pressure to pay off millions of dollars in loans. 
Either way, Mr. Lay's legacy is more than tarnished for many employees. Fired employees have printed T-shirts that read ''Layd Off,'' and howled after the company paid $55 million in retention bonuses while giving a $4,500 severance to those who were let go. The retirement funds of many employees have been wiped out. 
''It's clear to people with Enron that the paternal figure he represented -- that died a long time ago,'' said the executive who was among those laid off. ''He should have left last year.'' 
Those who have spent time with Mr. Lay say he has expressed frustration but not anger. Mr. Jackson said that when he met with Mr. Lay in November: ''When I did talk with him, and did have prayer with him, he seemed to be dazed by all these revelations. He seemed unaware of what all had happened.'' 
Robert Mosbacher, the former secretary of commerce who served on Enron's board during the 1980's, said he spoke briefly with Mr. Lay before Christmas. ''It was sort of a little telephone hug to say, 'I'm sorry,' '' said Mr. Mosbacher, who initiated the call. ''He didn't sound great, but I don't think you or I would be any better.'' 
Others checked in, too. Mr. Lay's friend and fund-raiser, Sue Walden, said she spoke with him on Tuesday about his frustrations with the press coverage of Enron's collapse. He felt it was one-sided, she said, and ''he seemed very upset that any of his political ties and his friendship with the president could be used to hurt the president.'' 
But few people talked with Mr. Lay as much as Mr. Roberts, the Enron lawyer who is liaison to the creditor's committee. He said they often talked five times a day. 
He said Mr. Lay was usually upbeat and surprisingly optimistic, mentioning that he and his wife ''pray over this regularly.'' On Wednesday, Mr. Roberts listened to the conference call as Mr. Lay told the board of his resignation. He said Mr. Lay then broke the news to top executives and staff members. 
Later, after the news was out publicly, Mr. Roberts said he called one final time, at 10:30 p.m. Eastern time. Mr. Lay, he said, told him, ''This has not been a good day.'' 
He is certain to face more of them.

Photo: Kenneth L. Lay, who resigned Wednesday as chairman and chief executive of Enron, now faces questions about the company's partnerships and accounting practices. (Reuters) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business/Financial Desk; Section A
ENRON'S COLLAPSE: THE OVERVIEW
Enron Hearings Open, Focusing on Destroyed Papers
By RICHARD A. OPPEL Jr. and STEPHEN LABATON

01/25/2002
The New York Times
Page 1, Column 6
c. 2002 New York Times Company

WASHINGTON, Jan. 24 -- Lawmakers investigating the Enron Corporation said today that new evidence showed that the company's auditors, Arthur Andersen, destroyed documents knowing that they might be relevant to criminal and civil investigations. 
At a hearing this morning before a House subcommittee examining the collapse of Enron, lawmakers heard evidence that two weeks before Andersen executives in Houston began destroying documents the accounting firm retained a law firm to prepare to defend itself in cases that could arise from Enron's problems.
A document released by lawmakers also shows that on the same day the law firm was hired, Oct. 9, some Andersen officials were worried that there was a ''heightened risk of financial statement fraud'' with Enron's books. 
In addition, the subcommittee released copies of an e-mail message received by Andersen employees a day after government regulators announced their investigation of Enron. Lawmakers said employees construed the message as a directive to begin destroying records. 
David B. Duncan, an Andersen partner until he was fired after acknowledging that he took part in destruction of records, declined to respond to questions from House lawmakers, invoking his Fifth Amendment right against forced self-incrimination. [Excerpts from Congressional hearings, Pages C8-9.] 
The hearings brought together many elements of American political and economic life: the partisan battle over the proper role of government regulation, the bursting of the financial bubble of the 1990's and the quarrel over the influence of money in politics. 
And the sessions were yet another indication of the mounting impact on Washington of Enron's collapse, the largest corporate bankruptcy in history. Even as the White House spokesman, Ari Fleischer, argued that the company's collapse was a corporate scandal, not a political one, its political effects were visible in Congress and at the White House. 
Controversy over large political contributions from Enron helped House members fighting to overhaul the nation's campaign finance laws to move their legislation closer to a floor vote, with Mr. Fleischer saying a Bush veto was unlikely. All the attention focused on the millions donated by Enron to members of the two parties has intensified the pressure on Mr. Bush and other political leaders to back change. 
There were other signs of how Enron's fortunes had intersected with politics. Associates of Karl Rove, Mr. Bush's top political adviser, said he had recommended a lucrative consulting contract with Enron for Ralph Reed, the Republican strategist, as Mr. Bush was weighing whether to run for president. The associates said the arrangement helped keep Mr. Reed's allegiance to the Bush campaign without putting him on any payroll. 
A new computer analysis of campaign finance records showed that of the 248 senators and House members on the 11 Congressional committees that are investigating the Enron affair, 212 had received contributions from Enron or Arthur Andersen. The donations from the two companies have been so pervasive that all the Senate's top 20 recipients of Enron donations are serving on at least one panel investigating Enron. Because many lawmakers who accepted Enron donations were Democrats, the burgeoning scandal has created bipartisan discomfort. 
Among those testifying today was Arthur Levitt, the former chairman of the Securities and Exchange Commission, who had tried with limited success to impose tough conflict-of-interest restraints on the accounting industry. 
''Too many elements of the system are not trustworthy today,'' Mr. Levitt told the Senate Governmental Affairs Committee. ''They have failed us because of self-dealing and self-interest.'' 
The House and Senate committees conducting today's hearings include members who had beaten back earlier proposals for tougher conflict-of-interest rules for auditors and who had supported legislation in the 1990's that made it harder for investors to sue unethical accountants and easier for corporations to put out misleading financial projections. 
Mr. Levitt proposed a number of changes to eliminate the possible conflicts of interests of Wall Street analysts and accountants and make corporate boards more independent-minded. He also suggested the adoption of a new rule that required companies to change auditors every five to seven years ''to ensure that fresh and skeptical eyes are always looking at the numbers.'' 
He also suggested that the recent proposals by his successor at the agency, Harvey L. Pitt, were weak. Mr. Pitt, whose proposals have come under heavy criticism since they were announced last week, has proposed that a group dominated by outside experts should discipline the accounting industry. 
Some lawmakers, including members who had received donations from Enron and the accounting industry, said the collapse demonstrated the need for changing campaign finance laws. 
''Because Enron has made substantial political contributions to members of Congress and the executive branch, some will question the independence in launching such an investigation,'' said Senator Joseph I. Lieberman, the Connecticut Democrat who heads the Governmental Affairs Committee. ''There are two things we in Congress can do to overcome that skepticism and rebuild public trust: conduct completely independent investigations of Enron and pass campaign finance reform.'' 
The committee's ranking Republican, Senator Fred Thompson of Tennessee, agreed. 
''We have an opportunity to do some good here on a bipartisan basis,'' Mr. Thompson said as he outlined issues raised by the scandal. ''In the process, we may even finally decide that allowing huge amounts of soft money contributions to public officials is not such a good idea.'''' 
In the House hearing, Representative Billy Tauzin, the Louisiana Republican who heads the the Energy and Commerce Committee, which will hold a hearing on Feb. 6 focusing on Enron, said ''scores and scores'' of Andersen employees were engaged in document destruction. 
''It's clear to us that our investigation, and other investigations, have been impeded by this policy,'' he said. 
The ranking Democrat on the committee, Representative John D. Dingell of Michigan, said Andersen's actions were ''either criminally stupid, or stupidly criminal or both.'' 
Lawmakers said it appeared plain that senior Andersen officials were aware by early October, when the firm hired the law firm of Davis Polk & Wardwell, that lawsuits were possible, yet they did nothing to ensure that crucial documents were preserved, waiting until receiving a subpoena on Nov. 8 to instruct employees to ''stop the shredding.'' 
This was a major mistake, lawmakers said, and it contradicted recent comments by Andersen's chief executive, Joseph F. Berardino, who said Sunday on ''Meet the Press'' on NBC that Andersen's policy was ''not to shred documents, not to eliminate documents if you have a reasonable basis to anticipate an investigation.'' 
This morning, the first witness, Mr. Duncan, strode to the hearing table flanked by his two lawyers, Robert Giuffra and Vince DiBlasi. Wearing a dark blue suit, Mr. Duncan, 42, rose and was sworn under oath, but he invoked his Fifth Amendment right against self-incrimination, and he was dismissed by the subcommittee chairman, Representative James C. Greenwood, Republican of Pennsylvania. 
Mr. Greenwood said he was frustrated by Mr. Duncan's refusal to testify and told him: ''Enron robbed the bank. Arthur Andersen provided the getaway car, and they say you were at the wheel.'' But speaking with reporters later, Mr. Greenwood said he remained concerned that ''Mr. Duncan and others were the fall guys'' for a firm that sanctioned document destruction when they knew litigation was likely. 
Andersen officials at the hearing said Mr. Duncan orchestrated the shredding without direction from superiors, and a firm spokesman, Patrick Dorton, played down the timing of the hiring of the outside law firm. ''It would not be unusual for this firm or any company to seek the advice of outside counsel in a situation like this,'' Mr. Dorton said. 
An Andersen spokesman dismissed the document that discussed the risk of ''financial statement fraud,'' saying it stemmed from an experimental computer model Andersen was using that often registered false results. 
In a statement after the hearing, Andersen said that it had ''deep regret for the disturbing actions of several of its employees on the Enron engagement'' but that the testimony ''further demonstrates the firm's complete resolve to learn the facts, make them known to the government and the public, and take every appropriate action against the individuals involved.'' 
Four Andersen officials testified today, but the committee saved its sharpest questioning for Nancy Temple, a lawyer in the firm's Chicago office who by early October was working closely with Andersen partners in Houston who were reviewing what they viewed as Enron's increasingly troubled accounting. 
On Oct. 12, Ms. Temple had sent to auditors in Houston a copy of e-mail showing the firm's document-retention policy, which some lawmakers said amounted to a green light to destroy documents. Mr. Duncan and other Andersen officials interviewed by the committee's investigators have called her e-mail unusual. 
Lawmakers also were critical that notes she took during an Oct. 23 conference call with Mr. Duncan and other partners involved with the Enron account did not indicate that preserving documents was mentioned. Her notes read, in part: ''AA trying to gather all docs re transaction from around the world.'' 
''And those notes don't say anything about preservation, do they?'' Representative Diana DeGette, Democrat of Colorado, asked. 
Ms. Temple also drew the ire of the subcommittee when she characterized as ''positive'' an October report by Enron's outside law firm, Vinson & Elkins, on Enron's accounting. 
Mr. Tauzin told her: ''We're trying to get the facts here. But if you will characterize a report that indicates a decline in the value of Enron's stock and a serious risk of adverse publicity and litigation as a positive report from the attorneys, we are going to have trouble with your testimony today.''

Photo: David B. Duncan, center, declined to testify at a hearing on Enron. His lawyer, Robert Giuffra, was at left. (Stephen Crowley/The New York Times) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business/Financial Desk; Section C
ENRON'S COLLAPSE: THE IMPACT
Bipartisan Outrage but Few Mea Culpas in Capital
By DON VAN NATTA Jr.

01/25/2002
The New York Times
Page 5, Column 1
c. 2002 New York Times Company

WASHINGTON, Jan. 25 -- The Enron scandal has grown so large that it took not one but two hearings on Capitol Hill today for the politicians to begin sorting through the mess, while also carefully sidestepping their own role in it. 
Anyone who tried to watch or listen to both proceedings simultaneously heard a bipartisan chorus of outrage about shredded documents and empty retirement accounts.
''Enron robbed the bank. Arthur Andersen provided the getaway car, and they say you were at the wheel,'' Representative James C. Greenwood of Pennsylvania, the Republican chairman of the House Energy Committee's subcommittee, told David B. Duncan, the dismissed Arthur Andersen partner who led the accounting firm's audit of Enron and who invoked his Fifth Amendment right today against self-incrimination. 
Senator Richard J. Durbin, Democrat of Illinois, said: ''When the corporate insiders at Enron realized the ship was sinking, they grabbed the lifeboats and left the women and children, their workers and investors, to drown.'' 
While politicians were quick to blame Enron's accountants for allowing the giant energy trading company to collapse, few on either panel were prepared today to accept any blame for the role Congress played. 
The White House, meanwhile, once again insisted today that the company's failure was a business scandal -- not a political one. 
White House officials adopted the stance of outraged victim and vengeful cop. ''Nothing is going to stop the president and this administration from pursuing justice,'' said Ari Fleischer, the White House spokesman. 
Vice President Dick Cheney continues to refuse to release a list of people who met with his energy task force last year, even though more senators have called for its release. Mary Matalin, a counselor to Mr. Cheney, said today that the administration felt the list should be withheld to protect the participants' privacy. 
On Capitol Hill, some of the members posing the toughest questions today had in earlier years voted for legislation that deregulated commodities markets. They also blocked several attempts to toughen accounting standards. Those decisions helped make it easier for Enron to escape the scrutiny of government regulators. 
Several senators sitting on the Governmental Affairs Committee, like Senator Robert G. Torricelli, Democrat of New Jersey, pressured the Securities and Exchange Commission in 2000 to abandon a proposed rule that would have barred accounting firms from performing auditing and consulting work for the same client, as Andersen did for Enron. He was one of 13 senators who intervened to quash the plan. 
Yet Mr. Torricelli offered one of the day's only mea culpas. Addressing Arthur Levitt Jr., the former chairman of the Securities and Exchange Commission who had pushed for the rule and testified today, Mr. Torricelli said: ''We were wrong. You were right.'' 
Both at the White House and in Congress, the message is simple: Punish those responsible for the Enron debacle, and do everything possible to make sure another Enron does not happen. There is not much appetite on either end of Pennsylvania Avenue for the news media or the public to dwell on any role the legislative or executive branches may have played in creating an environment to allow Enron to flourish. 
''After all of the sound and fury of these investigations, the bottom line questions are: Is Congress willing to amend the law to rein in the greed of the next Enron?'' Mr. Durbin asked. ''Are we willing to concede that the genius of capitalism can result in ruthless behavior without our oversight and the protection of law?'' 
Just as the White House has tried to avoid any political fallout from the Enron debacle, members of Congress have tried to escape any collateral damage from the scandal. So the House Energy Committee resembled a bipartisan corporate tribunal. Members acted as both prosecutors and judges and the accused, Arthur Andersen L.L.P., was left with almost no defense. 
But many of the 11 House and Senate investigations into the scandal plan not only on looking back, as was today's chore, but also on trying to draft legislation that will prevent another Enron. Whether that includes the campaign financing laws that have helped give the public the impression that many legislators have been tainted by contributions from Enron or the accounting firms remains to be seen. 
''They are going to hit the easy targets first and hit the easiest bad guys first,'' said Larry Noble of the Center for Responsive Politics. ''But they are going to have to deal with the tougher questions, too, about their own role in this.'' 
Senator Joseph I. Lieberman of Connecticut, one Democrat who has come under scrutiny for his role in accounting legislation, has vowed his committee will recommend changes in the law and regulations. 
The inquiries are reminiscent of the role played by Congress during the savings and loan crisis of the 1980's. Some lawmakers touched by the scandal, most notably Senator John McCain of Arizona -- who took contributions from Charles Keating, the operator of a failed thrift, and spoke on his behalf -- were deeply affected by that experience and made campaign finance overhaul a signature issue. Mr. McCain said of the Enron scandal, ''It's clear there is a taint out there on all of us.'' 
As Mr. McCain's campaign finance bill regains momentum on Capitol Hill, it is unclear whether the Enron debacle will have a similar effect on House members and senators who once sided with Enron and the accounting industry. 
One candidate is Representative Billy Tauzin, the Republican chairman of the House Committee on Energy and Commerce. On July 20, 2000, in a letter co-signed by 20 House members, Mr. Tauzin opposed any toughening of accounting rules. In the previous five years, Mr. Tauzin had received nearly $150,000 from accounting firms. 
As chairman of Congress's most aggressive committee investigating Enron, Mr. Tauzin has hammered away at the accounting profession. 
His spokesman, Ken Johnson, said the case had changed Mr. Tauzin's view of auditor independence. Two years ago, Mr. Tauzin was convinced Mr. Levitt's plan was ''a solution to a problem that didn't exist,'' Mr. Johnson said. ''Now we know there's a problem. It's time to fix it.''

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

Business/Financial Desk; Section A
ENRON'S COLLAPSE: THE PARTNERSHIPS
Investors Lured To Enron Deals By Inside Data
By KURT EICHENWALD

01/25/2002
The New York Times
Page 1, Column 4
c. 2002 New York Times Company

Enron executives enticed wealthy individuals and institutions to invest in one of the partnerships that helped wreck the company by dangling the prospect that inside knowledge could potentially help them double their money in a matter of months, according to partnership records and prospective investors. 
In dozens of pages, the confidential records of a partnership called LJM2 describe the inner workings of an entity at the heart of the Enron debacle. The records show company executives wearing two hats, offering banks, insurance companies, Wall Street firms and wealthy investors inside knowledge about Enron and its off-the-books holdings -- information that they denied company shareholders.
The Securities and Exchange Commission is investigating whether Enron's accounting for its partnerships violated the law, though details of its inquiry have not been disclosed. 
Under pressure from the S.E.C. investigation, Enron began disclosing details of its partnerships last fall and started down what turned out to be the road to collapse. 
The records show that Enron disclosed to potential investors the conflicts of interest posed by Enron executives' playing a dual role, but sought to allay concern over them. 
The LJM2 partnership was run by Andrew S. Fastow, who at the same time was Enron's chief financial officer. It was set up, in part, to invest in entities that Enron controlled and to purchase investments that Enron did not want on its books. 
Mr. Fastow and other Enron executives who managed the partnership had a duty to maximize returns for Enron shareholders, the documents note, even as they were offering a separate set of lucrative deals to banks, Wall Street firms and wealthy individuals who owned stakes in the partnerships. 
According to the documents, the spectacular returns were possible because the partnerships would be investing in deals originated by Enron, then in its heyday as a swashbuckling global pioneer of energy deregulation. The investments would draw on confidential, nonpublic information developed by the energy company, the documents explained. 
''Enron frequently has access to investment opportunities that are not available to other investors,'' the private placement memorandum for LJM2 said. 
Securities experts say that knowledge of the investment plans and strategies of hot companies, like Enron was at the time, is a coveted commodity on Wall Street because it can provide investors a leg up. 
The records show that investors in LJM2, which set out to raise $200 million and ultimately took in $349 million, were given more information about Enron's financial situation than the company's shareholders. 
For example, documents sent to potential investors in 2000 revealed that Enron controlled about 50 percent more assets than disclosed in Enron's securities filings. The difference -- $34 billion versus $51 billion, as of June 30, 1999 -- was the value of assets moved off Enron's books through various partnership deals. 
The disclosures created conflicts for Wall Street firms, as well. For example, the investment banking arm of Merrill Lynch & Company, which underwrote the LJM2 offering, was aware of the off-balance-sheet figures for Enron; indeed, Merrill's name is on the cover page of the offering containing the data. 
But because the numbers were confidential, that information could not be shared with Merrill brokerage clients who were investing in Enron stock. Joe Cohen, a Merrill spokesman, declined to comment. 
Merrill was not alone. Dozens of other banks, brokerage firms, pension funds and other institutional investors were approached to invest in LJM2 just over two years ago, and all were provided with the confidential data about the extent of Enron's off-balance-sheet dealings. 
Enron's shareholders learned little of these deals until the company restated its financial results last fall, erasing nearly $600 million in profits over five years, and provided additional, but still fragmentary, details. 
Wall Street firms are supposed to maintain a so-called Chinese wall to ensure that customers of their brokerage operations are not made privy to inside information gleaned by their investment bankers. In this case, securities experts said, the intent of those laws was undermined. 
The transactions ''followed the legal norms to produce a perverse result,'' said John C. Coffee Jr., a securities law expert at Columbia University. ''It's a case where the Chinese wall is working to injure public investors, rather than benefit them.'' 
At the same time, analysts of the Enron stock were provided little information about the partnerships. 
John Olson, an analyst with Sanders Morris Harris in Houston who was long a skeptic on Enron stock, recalled that he once questioned company executives about their partnerships. 
''They told us, 'We can't discuss it, it's confidential, and we are enjoined from disclosing anything about it,' '' Mr. Olson said. 
Among the investors in LJM2, according to court records, are Citicorp, the American Home Assurance Company, the Travelers Insurance Company, and an investment partnership affiliated with Morgan Stanley. 
The partnership documents made clear to potential investors the magnitude of the conflicts of interest created by the dual roles of the executives. ''One of the most challenging due diligence issues for the partnership is the potential for conflict as a result of the principals' dual positions as Enron employees and principals of the partnership,'' the offering memorandum said. 
A separate document disclosed last week by Congressional investigators said that Enron's board waived the company's code of ethics to allow Mr. Fastow to serve as LJM2's general partner. Investors were told that Richard A. Causey, who is still Enron's chief accounting officer, was assigned responsibility for monitoring the partnership and mediating conflicts of interest. 
The partnership documents -- including sales presentations made by Mr. Fastow to potential institutional investors in LJM2 -- describe in detail the workings and performance of several partnerships that have gotten the most attention since the Enron scandal began to unfold. 
Among them are limited partnerships known as JEDI I and JEDI II, an acronym with a ''Star Wars'' glint that stood for Joint Energy Development Investments. 
The records said that investors in those partnerships initially were promised returns of 15 percent and 20 percent, respectively. By the time LJM2 was being marketed, JEDI I had returned 23 percent annually for its life, and JEDI II -- which was still in operation -- was expected to return 194 percent annually. 
For the LJM2 partnership, according to internal records and marketing materials, the Enron executives were expecting a minimum annualized return of 30 percent. But sales agents also emphasized the earlier partnerships' results. 
''The implication of their pitch was very clear,'' said one person who heard it. ''At least 30 percent could mean well over 100 percent or more.'' 
As of last March 31, according to confidential partnership records, three of the four largest investments in LJM2 brought in returns of more than 100 percent. The lowest return, from an investment in another Enron entity called Raptor I, was 58 percent over four months; the highest, in Raptor II, was 212 percent in just over three months. 
In the first quarter of last year, the partnership distributed $75 million to investors -- or about 44 percent of the total of $171 million that was invested in the partnership by the end of 2000.

Photo: Andrew S. Fastow was Enron's chief financial officer while also managing its LJM2 partnership. (Associated Press)(pg. C4) Chart: ''Hidden Assets'' Prospective investors in the LJM2 partnership were told that Enron's total assets, including those moved off of its balance sheet, far exceeded the assets reported to shareholders. Graph tracks assets including those held off balance sheet and assets disclosed by Enron, measured in billions, from 1990 to 1998. (Source: LJM2 offering document)(pg. C4) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business/Financial Desk; Section C
ENRON'S COLLAPSE
How LJM2 Tripped Up Enron
By Dylan Loeb McClain

01/25/2002
The New York Times
Page 4, Column 4
c. 2002 New York Times Company

When Enron restated its earnings last year, reducing its profits from 1997-2001 by almost $600 million and shrinking its shareholder equity by more than $1.2 billion, it said that the reason was partly its deals with a partnership named LJM2. According to Enron, the partnership was independent of the company, but the top executives of LJM2 were also top executives at Enron -- a connection highlighted in the partnership offering papers as one reason LJM2 would be a desirable investment. Here is one way that the partnership became a problem. Dylan Loeb McClain

Chart SENIOR EXECUTIVES INCLUDED Andrew S. Fastow Chief financial officer Michael J. Kooper Managing director Enron Global Equity Markets Group Ben Glisan Jr. Vice president Enron Global Equity Markets Group LJM2 FORMED: Oct.1999 OUTSIDE INVESTORS Included Citicorp, American Home Assurance Company, American International Group, Travelers Insurance, Morgan Stanley GENERAL PARTNERS Mr. Fastow, Mr. Kooper, Mr. Glisan Raptor Subsidiary partnerships created to invest in Enron holdings. 1. Enron lent $1.2 billion of its stock to the Raptor partnerships. Enron also promised to issue more stock if the value of the Raptor investments fell, thus ensuring the solvency of the partnerships. 2. LJM2 invested millions of dollars in the Raptor partnerships. 3. Raptor invested in some of Enron's assets, like power plants and gas pipelines. It also bought some of the stocks that Enron had invested in, particularly New Power Holdings, a company Enron had spun off. What went wrong 4. The interests of LJM2 and Enron were at odds. At one point, in September 2000, LJM2 entered into an agreement that obligated it to buy Enron stock at a fixed price anytime Enron wanted to sell over the next six months. This was a way for Enron to protect itself against a decline in its stock price. But LJM2 asked to settle the contract early when it could pay less for the stock than its current price, thereby making $10 million. 5. Selling some of its stockholdings and assets to the Raptor partnerships insulated Enron against a decline in their value. But, when the value of those assets declined precipitously, Enron was obligated to provide more of its own stock to keep the partnerships solvent. Worse, as its own stock declined, it became necessary to issue more and more stock, further diluting the value of the stock held by its shareholders. 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business/Financial Desk; Section C
ENRON'S COLLAPSE: MUTUAL FUNDS
Many May Be Surprised To Be Enron Investors
By GRETCHEN MORGENSON

01/25/2002
The New York Times
Page 1, Column 3
c. 2002 New York Times Company

In the last year, more than 50 mutual funds and insurance companies, including some of the largest and best known in America, invested in a trust created by Enron in 1997 to finance the operations of several of the energy company's shadowy partnerships. As a result, many individual investors -- through these funds -- unwittingly owned a piece of an entity that was used to finance some of the partnerships that contributed to Enron's failure. 
In September 2000 the trust, called the Osprey Trust, raised $2.4 billion from institutional investors in a so-called private placement of notes due in January 2003. Within the last year, mutual fund and financial services companies like Putnam Investments, the Vanguard Group, Travelers and Prudential have bought Osprey debt.
By last fall, when Enron's troubles started to surface, prices on the Osprey debt began to drop. Since they were ultimately backed by Enron shares, the securities appear to have lost 60 percent of their value for any fund or investor still holding them. 
Osprey seems to have been a central fund-raising entity for several of Enron's partnerships, including LJM and Whitewing L.P., a partnership created by Enron that invested in energy-related projects in Europe and South America, including an electric distribution company in Brazil. Whitewing allowed Enron to realize cash from the partnership's investments, while keeping the partnership's debt obligations -- including the $2.4 billion it raised from large investors -- off Enron's balance sheet. 
Enron had included Whitewing in its consolidated financial statements in 1998 but removed it in March 1999, arguing that since it was owned jointly by Enron and Osprey it no longer belonged in Enron's reports. But when Enron's fortunes started to decline last autumn, it became clear that Enron's shareholders were ultimately responsible for the debt raised by Osprey. In a conference call with analysts and investors on Nov. 14, Jeffrey McMahon, who had only recently been appointed Enron's chief financial officer, disclosed that Osprey's assets, which had carried a book value of $4.7 billion, had declined in value by $600 million. 
Mr. McMahon also disclosed for the first time that the Osprey debt was backed by 50 million shares of Enron common stock and that the company had an additional obligation to issue more shares if the assets held in Osprey and the common shares were insufficient to repay the debtholders in 2003. 
Robert McCullough, a consultant to the electric utility industry at McCullough Research in Portland, Ore., calculated that the value of Osprey today is roughly 60 percent lower than its $4.7 billion book value stated last fall. His calculation takes into account the $600 million write-down disclosed by Mr. McMahon last November as well as the fact that the Enron stock backing the assets is now practically worthless. 
''That means exposing the Osprey owners to a large discount from book value as well,'' Mr. McCullough said. 
But it is not clear whether those left holding Osprey notes have written their values down appropriately. In documents dated as recently as this month, Mr. McCullough found several funds still valuing their Osprey holdings at levels that do not appear to reflect the diminished value of those positions. 
Owning a piece of Osprey may come as a surprise to some holders of bond mutual funds. Investors who buy bond funds are typically more conservative than those who buy stock funds. Bond investors usually seek income and preservation of their capital; some buy funds which limit their holdings to securities issued by the United States government or high-grade corporations, while others take on more risk by purchasing lower-grade bonds that carry higher yields. 
Private placements, like the one Osprey used to raise money from investors, are offered only to large institutional investors with more than $100 million under management. As such, they are initially exempt from registration with the Securities and Exchange Commission. Although Osprey's securities should have become registered automatically with the commission six months after they were offered, no Osprey filings could be found in the course of several searches of S.E.C. documents. 
Among the largest buyers of the debt was the AXP Bond Fund, an American Express Financial Advisers fund, which held $10 million worth in 2001. Several Prudential funds were big holders of Osprey; the Prudential Series Fund held more than $17 million of the debt. The Putnam Income Fund held $6.6 million in Osprey. To be sure, such holdings are minuscule when compared with the assets under management at these funds. 
The Osprey notes carried high yields even before Enron began its decline. One investor who owned the debt last year said that the holdings yielded around 13 percent before trouble struck. As Enron's fortunes sank last fall, but before the company filed for bankruptcy, the notes' yields climbed to 24 percent. 
Alan Papier, an analyst at Morningstar in Chicago, said that private placement debt, like the Osprey notes, are common holdings in mutual funds, especially those seeking high levels of income. ''These securities might have a little bit higher yield because by design there cannot be as wide an audience for them,'' he said. 
Delaware Investments, a money management concern in Philadelphia with $84 billion under management, bought and sold a small amount of Osprey debt several times the last 18 months. The firm, a subsidiary of the Lincoln Financial Group, owned roughly $6 million of Osprey notes in several of its mutual funds, which had assets totaling $2.4 billion. 
Matt Stephens, an analyst at Delaware, explained that he bought the Osprey notes because they were backed by assets owned by Enron but which the company had decided were not a part of its core business and had moved into the Osprey trust. That trust, Mr. Stephens explained, was set up to operate the assets and liquidate them over time. 
''We looked at it as a secured way to play the Enron credit story, and we used it as a trading vehicle,'' he said. Mr. Stephens added that the Osprey notes carried a higher yield than Enron's corporate debt and that made the investment attractive as well. 
Delaware lost money on its Osprey holdings, but not nearly as much as it would have if it had held on through Enron's bankruptcy filing. During the course of the last 18 months, the firm bought Osprey notes at $950 to $1,000 (or face value). It sold them at roughly $835 in November, after Enron executives had a conference call with investors and analysts outlining some of the company's problems. Mr. Stephens said the conference call created doubts at his firm about Enron's credibility. ''When we lose faith in management, it is a clear sell signal to us,'' he said. 
Other Osprey investors declined to comment on whether they still held the debt or whether they had written down its value in their funds. Spokeswomen for Prudential, Vanguard and Putnam all said their firms' policies were not to comment on individual holdings.

Chart: ''Osprey's Noteholders Osprey was a central financing trust for a group of Enron-related entities. Holders of Osprey debt within the last year were mostly well-known mutual fund and insurance companies that put the Osprey debt into their bond funds. COMPANY: Prudential TOTAL INVESTMENT: $48,463,986 COMPANY: American Express TOTAL INVESTMENT: 28,551,783 COMPANY: USAA TOTAL INVESTMENT: 14,000,000 COMPANY: Putnam Investments TOTAL INVESTMENT: 13,908,769 COMPANY: Blackrock TOTAL INVESTMENT: 13,420,289 COMPANY: Diversified Investors TOTAL INVESTMENT: 12,000,000 COMPANY: Principal Financial TOTAL INVESTMENT: 10,000,000 COMPANY: SEI Institutional Investments TOTAL INVESTMENT: 9,456,000 COMPANY: First American TOTAL INVESTMENT: 8,094,000 COMPANY: Travelers TOTAL INVESTMENT: 6,502,125 COMPANY: Smith Barney TOTAL INVESTMENT: 5,350,000 COMPANY: Lincoln National TOTAL INVESTMENT: 5,025,819 COMPANY: All American TOTAL INVESTMENT: 4,000,000 COMPANY: Keynote TOTAL INVESTMENT: 4,000,000 COMPANY: Firstar TOTAL INVESTMENT: 3,750,000 COMPANY: Delaware Investments TOTAL INVESTMENT: 2,503,524 COMPANY: Fischer Francis Trees & Watts TOTAL INVESTMENT: 2,329,798 COMPANY: General Electric TOTAL INVESTMENT: 1,575,663 COMPANY: American United Life Insurance TOTAL INVESTMENT: 1,544,386 COMPANY: Federated Investors TOTAL INVESTMENT: 1,541,445 COMPANY: Valic TOTAL INVESTMENT: 1,395,000 COMPANY: MMA Praxis TOTAL INVESTMENT: 1,224,000 COMPANY: Northern Institutional TOTAL INVESTMENT: 847,000 COMPANY: Consulting Group Capital Markets TOTAL INVESTMENT: 750,000 COMPANY: Baird TOTAL INVESTMENT: 500,000 COMPANY: Vanguard TOTAL INVESTMENT: 436,706 COMPANY: Oppenheimer TOTAL INVESTMENT: 368,117 COMPANY: Hartford TOTAL INVESTMENT: 362,500 COMPANY: Pioneer TOTAL INVESTMENT: 358,176 COMPANY: Mainstay TOTAL INVESTMENT: 83,087 COMPANY: Pimco TOTAL INVESTMENT: 79,296 (Source: McCullough Research)(pg. C6) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business/Financial Desk; Section C
ENRON'S COLLAPSE
Ruling Accelerates Key Depositions
The New York Times

01/25/2002
The New York Times
Page 5, Column 5
c. 2002 New York Times Company

HOUSTON, Jan. 24 -- A federal judge overseeing lawsuits against Enron and its executives lifted certain trial rules today, allowing lawyers to interrogate quickly some partners from the company's accounting firm, Arthur Andersen, about the destruction of documents. 
Under the order, handed down by Judge Melinda Harmon of the Federal District Court in Houston, the lawyers could schedule depositions in as little as three weeks from David B. Duncan, who was the lead partner in charge of the Enron account, as well as four other partners and an in-house lawyer. Andersen fired Mr. Duncan on Jan. 15.
Mr. Duncan could invoke his Fifth Amendment right to decline to testify in a civil trial, as he did before a Congressional panel, but civil lawyers said they could use such a decision to insinuate that he had something to hide. 
''It can be a very powerful weapon,'' said Joseph A. McDermott, a lawyer representing Staro Asset Management, an investment firm in the Midwest that holds Enron bonds. A lawyer for Mr. Duncan, Robert Giuffra, said he had not received the judge's order and declined to comment.

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

Why Bush Stiffed Enron
By Virginia Postrel

01/25/2002
The Wall Street Journal
A18
(Copyright (c) 2002, Dow Jones & Company, Inc.)

Enron Corp. gave the Bush campaign lots of money. When Enron got in trouble, cabinet secretaries took its calls. But they did nothing to save it. 
What are we to make of this peculiar chain of events? What, after all, is the point of handing out corporate money to politicians if the company can't get favors when its life is on the line? Was there a secret bailout deal that hasn't made the papers? Or were administration officials just doing what was good for the country?
It would be nice to conclude that the Bush administration turned down Enron's entreaties because of its deeply held free-market principles. But the most likely explanation is more complex and cynical. In any Republican administration, there are three forces (sometimes organized in factions, sometimes operating within the same individuals) determining economic policy: pro-business instincts, pro-market principles, and political considerations. Get two of the three on one side, and chances are that side will win. 
Enron's problem, then, was exactly what Bush opponents tend to think of as its greatest strength. It was a Houston-based oil company. Enron, in other words, represented just the sort of voters President Bush can take for granted. In a reelection campaign, there's no way he would lose Texas. Indeed, many observers believe he lost the 2000 popular vote because he didn't work hard enough to get a large turnout in his home state. 
So Enron had no electoral clout, giving the Bush administration no political reason to sacrifice its economic principles to help save the company. By helping Enron, the administration could only lose, angering free market supporters and embroiling itself in a business mess. A bankrupt Enron couldn't even promise future campaign funds. If only Enron had been based in Pennsylvania or West Virginia. Then things would have been different. 
Just ask the steel industry. There, the Bush administration has pursued a dangerously protectionist policy, jettisoning not only its own stated principles but American leadership in breaking down barriers to free trade. 
To help ailing steel companies, the administration initiated what is known as a section 201 action. This allows the government to establish import quotas or tariffs for five years, limiting competition while the domestic industry tries to get its act together. Under this law, the protected industry doesn't have to show that foreign producers get any unfair advantages from their own governments or even that imports are the main source of its problems. The industry merely has to demonstrate that it's hurt by foreign competition. Since any competition makes business tougher, that's an easy case for a struggling industry to make. 
So the free-trade president has adopted a blatantly protectionist position, raising prices for everyone who buys or makes anything that uses steel. Big Steel is now demanding 40% tariffs and a bailout of $12 billion to cover lavish retirement benefits, particularly health costs. Steel retirees, who are, of course, already covered by Medicare, outnumber steel employees about 5 to 1. 
Why is the administration that wouldn't try to save Enron entertaining such pro-business, anti-market ideas? It's a simple political calculation. President Bush won steel-producing West Virginia (and, arguably, the presidency) by a mere 40,000 votes. He lost steel-producing Pennsylvania by only 200,000 votes. He doesn't have to worry about carrying Texas. He does have to worry about the swing states of the steel belt. 
That sort of calculation is nothing new in American politics. The first President Bush also denied the oil industry federal help while extending steel quotas. 
Nor is the split a purely Republican phenomenon. Back in the early 1970s, economic historian Gavin Wright took a careful statistical look at New Deal largess. He found that the Roosevelt administration directed money not at the poorest states, which were in the solidly Democratic South, but at the swing states of the West. After controlling for how rural states were, Mr. Wright found that 80% of the variation in spending could be explained by factors that defined political swing states. 
In a democracy of concentrated interests, some votes clearly count more than others. But, to look at the bright side, at least sometimes predictable votes lead to principled policies. The Bush administration dodged a bigger Enron scandal because it could take Texas for granted. 
--- 
Ms. Postrel is the author of "The Future and Its Enemies: The Growing Conflict Over Creativity, Enterprise, and Progress" (Free Press, 1998).

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

Trading Charges: Lawsuit Spotlights J.P. Morgan's Ties To the Enron Debacle --- Insurers Balk at Paying Bank Up to $1 Billion in Claims On Complex Transactions --- Update in a Glass Room
By Jathon Sapsford and Anita Raghavan
Staff Reporters of The Wall Street Journal

01/25/2002
The Wall Street Journal
A1
(Copyright (c) 2002, Dow Jones & Company, Inc.)

When J.P. Morgan & Co. set up an energy-trading business in the British Channel Islands a decade ago, the tiny venture barely caused a ripple at the giant bank. 
The operation, called Mahonia Ltd., consisted of just a small office with lots of phone lines. But the Jersey-based business grew over the years to transact billions of dollars of natural-gas contracts with other energy companies. Mahonia's trading followed a simple pattern: Many of its transactions took place just before year-end. Often, the deliveries of natural gas and oil were sold right back to those who delivered them through complex derivative transactions. And about 60% of Mahonia's trades were with just one company: Enron Corp.
The point of the choreographed trading? People familiar with Mahonia say Enron used the transactions to manage tax liabilities by transferring losses in one financial reporting period to another. As Enron's troubles mounted, the Houston company eventually turned to Mahonia as a sort of surrogate bank, these people say, using it to raise at least $2 billion in financing over the years. 
For J.P. Morgan, the arrangement was lucrative -- at least at first. The bank received as much as $100 million in revenues. It also thought it had insurance in place to cover any default by Enron. 
But in the wake of Enron's collapse and bankruptcy-court filing, Mahonia could cost the nation's second-largest bank as much as $1 billion. Several insurers have alleged in a lawsuit in New York federal court that the trading transactions were shams, thereby negating the insurance contracts. The bank, now known as J.P. Morgan Chase & Co., disputes the court allegation. Credit-rating concern Standard & Poor's cited J.P. Morgan's overall exposure to Enron as one reason it is reviewing the bank's credit rating for a possible downgrade. J.P. Morgan, which acted as a lender, underwriter and merger adviser to Enron, says the energy concern owes it a total of $2.6 billion. 
The Mahonia arrangement -- which J.P. Morgan hadn't disclosed to investors until last month's suit -- represents just a sliver of the many complicated ventures Enron participated in. But unlike the hundreds of partnerships Enron constructed on its own to keep debt off its books, this venture was conceived, launched and operated by J.P. Morgan. Though many Wall Street firms helped finance Enron -- acting as traditional lenders, underwriters and advisers -- the fact that J.P. Morgan set up the partnership suggests that Wall Street may have played a more active role in the Enron scandal. 
J.P. Morgan won't comment on some key aspects of the dispute, citing pending litigation. A spokesman says that "many companies routinely raise funds using pre-paid commodity forward contracts. The benefits vary from client to client, including pricing advantages and diversity of credit sources." 
Enron spokesman Mark Palmer says the trades were "perfectly legitimate and proper transactions" made as part of the normal course of trading commodities. 
Many things about the operation remain mysterious. It is unclear, for instance, who owns Mahonia. According to records from the Jersey Financial Services Commission, the company was incorporated on Dec. 16, 1992. It has two nominee shareholders, Lively Ltd. and Juris Ltd., who represent undisclosed owners. 
"The question is: Was Mahonia a conduit on behalf of Enron or a conduit on behalf of J.P. Morgan?" says Manfred Knoll, a managing director for Germany's Westdeutsche Landesbank, which issued a $165 million letter of credit to J.P. Morgan to guarantee against losses. He says Mahonia legally was a conduit of J.P. Morgan. But in practice, "it was a conduit that was set up to transact a variety of financial transactions for Enron." 
On Tuesday, a New York bankruptcy-court judge ruled that Enron will have to make available documents relating to Mahonia to the German bank, people familiar with the matter say. 
As part of its broad investigation into Enron, the Securities and Exchange Commission is reviewing J.P. Morgan's multifaceted relationship with Enron, people familiar with the matter say. Among other things, investigators are examining whether the bank, through vehicles such as Mahonia, helped Enron draw a misleading financial picture for investors. 
People close to the matter say Enron told J.P. Morgan the trades were for tax purposes. Tax experts say it is common for companies to manage tax liabilities by, for instance, deferring certain losses from a bad year, when the tax bill might be low, to a future period when they can be used to offset high earnings. There's nothing inherently illegal about trying to minimize corporate tax bills. Enron hasn't paid corporate income tax in four of the past five years, a spokesman says. 
The Mahonia maneuvers may draw additional scrutiny now, however, in light of admissions by Enron that it used a series of outside partnerships to hide losses. 
Whatever the ultimate goal, the transactions worked like this: J.P. Morgan would pay Enron between $150 million and $250 million for the future delivery of natural gas or crude oil. This was constructed as a "trade," not a loan. So Enron would report this as earnings that would cancel out, temporarily, losses on Enron books. 
But Enron had to eventually deliver the oil or gas, usually in regular installments with the value of $10 million to $20 million, the people familiar with Mahonia say. With each delivery, the losses began again to appear on Enron's ledger. These deliveries would begin the following year, so the losses were carried from one year to the next, without showing up clearly on Enron's books. 
The result: Enron kept those losses in reserve in case Enron had any profit windfall on which it might pay tax, the people familiar with the matter say. If it did, it would use those losses to cancel out profits, and thus lower its tax burden. Or if Enron didn't have big profits to hide, it would just roll the losses over again to the next fiscal year -- by going back to J.P. Morgan and selling it another gas contract. Two tax experts contacted for this article described the technique as unusual but potentially very effective. "It certainly makes sense as a tax strategy," says Doug Carmichael, a professor of accounting at New York's Baruch College. 
The whole process fed on itself. As one Wall Street banker put it, the arrangements "practically guaranteed" Enron would come back to J.P. Morgan for more. 
What was in it for Morgan? The deals generated, over the decade, fees and interest measuring as much as $100 million. In paying for future delivery of gas to Mahonia, J.P. Morgan got the gas at a discount -- reflecting the interest rate Enron would have paid were it getting a straightforward loan. In the summer of 1999, this amounted to somewhere between 7% and 8%, or roughly $7 million to $8 million for every $100 million J.P. Morgan channeled to Enron under the Mahonia arrangement. (That revenue, of course, was offset in part by the bank's funding costs.) The bank often got a small fee for arranging the financing. 
The arrangements were for years a source of pride within the bank's small commodities division, which directed the trades. Dinsa Mehta, one of J.P. Morgan's senior commodity traders, praised the deals to colleagues, saying that while Enron put out its other commodity financing needs for all of Wall Street to bid on, Enron kept coming back to J.P. Morgan for trades that would carry its losses forward. Mr. Mehta, contacted through a spokeswoman, declined to comment. 
In a basic way, the trading pact is a throwback. Prepaying for future delivery of a commodity is known as a "gold trade," because it is the way gold bullion has been trading for centuries. In recent years, trading companies, whether from Houston or Wall Street, have been making more use of this structure to buy and sell oil, natural gas and other commodities. Some commercial banks, including Chase Manhattan, a predecessor of J.P. Morgan, had to set up part of these trades overseas because their banking charters wouldn't allow them to take delivery of commodities. 
J.P. Morgan also bought commodities contracts from a number of other energy companies. Yet by far Mahonia's biggest customer was Enron, accounting for roughly 60% of its business, people familiar with the matter say. 
Over the years, the size of the transactions grew and the repayment periods stretched out further and further into the future. 
Mahonia's business with Enron jumped sharply in 1999. Oil prices were weak, causing concerns over the future profitability of the energy industry. The stock and bond capital markets had become reluctant to finance energy companies, leaving J.P. Morgan's offshore arrangements one of the few places this industry could raise money. 
In the summer of 1999, Enron officials contacted Morgan with requests to do bigger and bigger trades, including a large arrangement of $650 million in one trade. It was a far cry from earlier trades in the range of $150 million, and suggested to some people within the bank that Enron was no longer merely interested in tax avoidance, but was actively using the arrangement to meet its financing needs. 
J.P. Morgan officials couldn't do the business without hedges. The firm would be on the hook for a large chunk of cash if Enron defaulted before it delivered the natural gas. These arrangements, after all, presented the same default risk as any loan to Enron. J.P. Morgan effectively had been paying a portion of its earnings to other banks in exchange for their guaranteeing portions of the arrangement. This move shifted some of the risk to other banks like ABN Amro Holding NV or West LB. 
It wasn't enough. By this time, companies including Enron wanted to raise more through Mahonia than the banking syndicate was willing to handle amid the oil-price slump. So Enron, if it wanted more money, needed to find new players to share the risk of financing the gas payments. 
Enron turned to 11 insurance companies -- including National Fire Insurance Co., Safeco Insurance Co., St. Paul Fire & Marine Insurance Co. and Citigroup Inc.'s Travelers unit -- to issue "surety bonds." These are financial guarantees insurance companies commonly issue to ensure a project is completed, whether it's a bridge or Hollywood movie. Enron arranged these contracts for J.P. Morgan -- and paid the insurance companies for it -- so that the bank would feel more comfortable making increasingly large trades with the energy company, according to a person familiar with the arrangement. 
As Enron's trades grew bigger and bigger, the bank was also financing other energy companies, and the accounting on these trades became a source of concern within the bank. On Aug. 5, 1999, Vice Chairman Marc Shapiro and senior credit officer David Pflug convened a meeting in a glass room off the bank's commodity trading floor. 
As part of that briefing, the group went through a lengthy history of the bank's trading with energy companies. The managers were told one reason companies like Enron were entering the complex trades was to carry forward losses and lower tax burdens, a person familiar with the briefing said. This person said Mr. Shapiro reviewed the trades and said they were fine. Mr. Shapiro declines to comment. Mr. Pflug, confirming the meeting, said it was called to discuss another client and commodity derivative contracts in general. 
Two years later, the arrangement was still functioning as Enron's troubles deepened. Both Enron and J.P. Morgan kept looking for other institutions to share the risk as Enron kept running new trades through Mahonia. 
That's when Enron and Morgan turned to the German bank for more comfort. On Sept. 10, 2001, Enron and Morgan arranged to obtain a $165 million letter of credit from West LB to guarantee derivatives trades between Mahonia and Enron North America, according to Mr. Knoll, the bank managing director. 
In an unusual move underscoring Morgan's keen interest in the letter of credit, the legal documents were reviewed by Philip Levy, Morgan's associate general counsel. Mr. Levy didn't return a call seeking comment. 
Enron's woes deepened further. After a planned merger with rival Dynegy Inc. fell through, Enron filed for Chapter 11 bankruptcy protection on Dec. 2. After the filing, Morgan requested to be paid under the letter of credit, Mr. Knoll says. So far, West LB has refused to pay, depositing the $165 million in an escrow account which it says it will make available when the Mahonia transactions underlying the lending facility are proved proper. 
It was only after the bankruptcy filing that investors first got a whiff of Mahonia. Morgan's insurers, due to make a payment on the surety bonds by a Dec. 21 deadline, refused to pay. Morgan sued in New York federal court. The insurers filed a counterclaim, alleging that Mahonia was a fabrication meant to disguise loans in the forms of commodity trades. 
In court papers, the insurers say they were led to believe the arrangements were meant to "actually supply natural gas and crude oil by Enron to Mahonia." But the insurers refuse to pay the guarantees because the arrangements "were not intended to be fulfilled," the insurers' complaint alleges. It adds that Mahonia was a "mechanism to obtain surety bonds to secure loans to be made to Enron in the guise" of trades. 
J.P. Morgan says the insurers' claims are without merit, noting that the surety contracts say the insurance liability is "absolute and unconditional." 
The case is pending. But the spat already has dented Morgan's credibility. Morgan Chief Executive Officer William Harrison called his board shortly after the Enron bankruptcy filing and told them the bank had some $500 million in unsecured exposure and some other secured exposures, including loans of $400 million backed by pipeline assets. 
But after the insurers refused to honor their commitments on the surety bonds, Mr. Harrison had to hit the phones again to directors, and raise the number to $2.6 billion -- with roughly $1 billion of the additional exposure directly related to Mahonia. 
Morgan has been defending its position ever since. Last week, the bank reported a fourth-quarter loss of $332 million, partly because of its exposure to Enron. 
Meanwhile, Mr. Shapiro, the vice chairman, asserts that Morgan has known all along the extent of its Enron vulnerability. "It's not an issue of what we knew," he said late last month "but what was appropriate to disclose." 
--- 
Michael Schroeder contributed to this article.

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

Accounting for Enron: Former SEC Chief Levitt Reverses Stand, Calls for New Laws on Accounting Rules
By Michael Schroeder
Staff Reporter of The Wall Street Journal

01/25/2002
The Wall Street Journal
A4
(Copyright (c) 2002, Dow Jones & Company, Inc.)

WASHINGTON -- Former Securities and Exchange Commission Chairman Arthur Levitt, reversing an earlier stand, told Congress that the collapse of Enron Corp. uncovered systemic accounting problems that can be fixed only through legislation. 
"The environment today calls for very different remedies, very different action," Mr. Levitt told the Senate Governmental Affairs Committee. "If you would have asked me a year ago whether a legislative solution was desirable, I would have said `no.' "
With Enron, "the smoking gun has exploded," he said, adding. "That's often what it takes for a wake-up call." 
Congress needs to authorize a new, independent oversight board for the accounting industry, he said. He also told lawmakers that the SEC needs to adopt new accounting standards to better track the effect of executive stock options and to require full disclosure of off-balance-sheet "special purpose entities," which Enron formed to conceal losses. 
Mr. Levitt was joined by Lynn Turner, former SEC chief accountant, who called for an overhaul of the Financial Accounting Standards Board, the industry's independent rule-making body, as well as an overhaul of accounting rules as well. 
"What is reflected here is a shared sense of outrage," said Committee Chairman Joseph Lieberman (D., Conn.). He said the committee would do a thorough investigation and hold more hearings, with "a shared desire to end this investigation with serious proposals for reform." 
In the aftermath of the Enron bankruptcy filing, Mr. Levitt has been upstaging his SEC successor, Harvey Pitt, in promoting needed reforms. He applauded Mr. Pitt's recently announced proposal for a new private-sector oversight board, but questioned whether it went far enough. Mr. Levitt proposed that Congress approve and fund a new board that is completely independent of the accounting industry. 
Messrs. Levitt and Turner said that FASB, which is responsible for creating accounting standards, fails to approve needed changes because they are blocked by board members appointed by the securities and accounting industries. 
For instance, the SEC first asked the FASB to improve the standards for reporting special purpose entities in 1985. The end result was a "weak set of rules," Mr. Turner said. Because of growing problems, the SEC called for new stiffer rules in its 2000 report to Congress. "We cannot afford to wait another 15 years," Mr. Turner said. "If the FASB were unable to resolve this by the end of 2002, then I would urge the SEC to act promptly." 
Also in testimony yesterday, University of San Diego law professor Frank Partnoy said he has independently gathered information that Enron manipulated its derivatives trading revenue. "In a nutshell, it appears that some Enron employees used dummy accounts and rigged valuation methodologies to create false profit and loss entries for the derivatives Enron traded," Mr. Partnoy said. 
Mr. Partnoy, who formerly worked as a derivatives salesman at J.P. Morgan, said Enron's extensive use of derivatives was a major cause of the company's financial downfall. Enron reported more than $16 billion in gains from derivatives over the three years to 2000. 
Vance Meyer, an Enron spokesman, said he hadn't seen the testimony and as a general rule Enron wouldn't offer a counterpoint to testimony from Washington hearings.

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

Business; Business Desk
A Renewed Call to Redo Accounting Reform: Two years after initially urging changes in industry, a former SEC chairman has Senate panel listening closely.
EDMUND SANDERS
TIMES STAFF WRITER

01/25/2002
Los Angeles Times
Home Edition
C-1
Copyright 2002 / The Times Mirror Company

WASHINGTON -- Two years ago, Arthur Levitt couldn't muster much support for a proposal to make accounting firms more independent by limiting their ability to sell consulting services to their audit clients. 
Amid strong opposition from the accounting industry, corporations and members of Congress, the then-chairman of the Securities and Exchange Commission backed down.
On Thursday, however, the same proposal held the rapt attention of a roomful of fawning senators and caused Levitt to be mobbed by reporters after his testimony. 
"So do you feel completely--or just absolutely, totally--vindicated?" quipped Sen. Mark Dayton (D-Minn.). 
In another sign that government priorities have changed as a result of the Enron Corp. bankruptcy, the Senate on Thursday held its first full committee hearing to examine why the energy giant collapsed and what the government could have done to prevent the loss of billions of dollars by employees and investors. 
The hearing set the stage for what is certain to be a vigorous debate in the coming months over sweeping regulatory proposals to rein in financial markets, retirement funds, campaign fund-raising and the energy industry. 
Sen. Joseph I. Lieberman (D-Conn.), who chairs the Senate Governmental Affairs Committee, promised Thursday to lead an aggressive nonpartisan investigation into the Enron debacle, seeking answers from government agencies including the Commodity Futures Trading Commission and the White House. 
"We will follow the facts wherever they lead us," Lieberman said. 
Among the questions Lieberman hopes to answer are: How did Enron hide its debts and losses from SEC oversight? Could the Labor Department have intervened to prevent Enron employees from losing their retirement savings? Are Wall Street analysts providing objective analysis of stocks? Did regulatory gaps allow Enron's problems to slip through the cracks? 
But Republicans warned against rushing to new regulations. Only a year ago, the Bush administration and the Republican Party were vowing to slash government rules in many of the same areas currently under a microscope. 
The blame for Enron's bankruptcy filing Dec. 2--less than a month after it restated earnings to account for $586 million in previously unreported losses--may ultimately rest with illegal activity of individuals, not a breakdown in regulation, said Sen. Fred Thompson (R-Tenn.), the ranking Republican on the committee. 
"No system known to man can prevent unscrupulous and clever individuals from manipulating the system and even getting away with it for a period of time," Thompson said. 
He also warned Democrats not to try to take political advantage of the investigation by focusing on "titillating" issues, such as the contacts between Enron officials and the Bush administration. 
Levitt called upon Congress to pass new laws to tighten regulation of financial markets, which he said have been eroded by a "culture of gamesmanship that says it's OK to bend the rules, tweak the numbers and let obvious and important discrepancies slide." 
In addition to renewing his call for limits on the types of consulting work accounting firms can perform for an audit client, Levitt said companies should be required to change audit firms every five to seven years; stock exchanges should require that a majority of directors on company boards be independent; and analysts should be forced to disclose how their compensation is affected by their firms' investment relationship with companies they cover. 
Levitt and Lynn E. Turner, the SEC's former chief accountant, said a new accounting oversight board is needed with independent members, reliable funding and a mandate to move quickly and aggressively to eliminate accounting loopholes and gimmicks. 
Turner said it has taken the Financial Accounting Standards Board longer to approve new rules for special-purpose entities--the kind of off-the-books partnerships used by Enron to mask its problems--than "it's taken my children to get through high school." 
Derivatives trading is another area ripe for government regulation, said University of San Diego law professor Frank Partnoy, who told the committee Thursday that Enron's heavy reliance on the high-risk market rivaled that of the Long-Term Capital Management hedge fund, which failed in 1998. 
In fact, Partnoy said, Enron reported earning more money from trading derivatives in 2000 than Long-Term Capital Management made in its history. 
"Enron makes Long-Term Capital Management look like a lemonade stand," said Partnoy, a former derivatives trader who is writing a book about Enron's collapse. 
Derivatives, used by sophisticated investors as a risk-management tool, are complex financial instruments whose value is based upon a future variable, such as interest rates or gas prices. 
Though some derivative trading occurs on regulated exchanges, the vast majority--more than $95 trillion a year--take place on over-the-counter markets that were exempted from regulation in 2000 under the Commodity Futures Modernization Act. 
Enron used derivatives in two ways. First, they were key to structuring Enron's controversial partnerships, which allowed it to hide debt, mask investment losses and inflate earnings. Enron used them as a kind of financial "plastic surgery to make itself look better than it really was," Partnoy said. 
Second, they were key to Enron's profit. The company used its Enron Online division to act as a go-between for other parties wishing to trade not only energy-related derivatives, but also contracts for such commodities as fiber-optic bandwidth. By the time Enron filed for bankruptcy, the soaring revenue from the derivatives trading business was masking problems in Enron's core energy business. 
The lack of government oversight may have enabled Enron to smooth out profits from derivatives trading to make the business appear less volatile. He said that was accomplished by creating accounts that enabled Enron to carry over trading profits from year to year. 
An Enron spokesman could not be reached for comment on Partnoy's allegations.

PHOTO: Arthur Levitt, former head of SEC.; ; PHOTOGRAPHER: Associated Press 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Accounting for Enron: Grand Jury to Investigate Plaintiffs' Firm Involved in Shareholder Suit Against Enron
By Rick Schmitt and Jonathan Weil
Staff Reporters of The Wall Street Journal

01/25/2002
The Wall Street Journal
A4
(Copyright (c) 2002, Dow Jones & Company, Inc.)

A noted plaintiffs' law firm, which is taking a highly visible role in a shareholder suit against Enron Corp., is being investigated by federal authorities in connection with allegations that it improperly solicited investors to file class-action suits, people familiar with the probe said. 
The U.S. Attorney in Los Angeles has convened a grand jury to investigate Milberg Weiss Bershad Hynes & Lerach LLP, these people said. Officials are trying to determine whether the firm paid money to people to act as plaintiffs in lawsuits, the people familiar with the probe said.
Milberg Weiss, which has offices in New York and San Diego, didn't return phone calls seeking comment. The grand-jury investigation was reported yesterday by the Los Angeles Daily Journal, a legal-industry newspaper. 
Disclosure of the probe comes as Milberg Weiss is in a pitched battle with other plaintiffs' firms vying for the role of lead counsel in securities-fraud suits filed against Enron in federal court in Houston. The firm made headlines earlier this week marching into court with a box of shredded documents carted out of Enron headquarters by an ex-employee. 
Until recently, law firms that filed securities-fraud actions first often were given control of cases -- and the chance to make the largest fees. Firms such as Milberg Weiss often maintained a stable of clients to help launch the suits. The probe is looking at how Milberg Weiss identified those clients, and whether they were paid. 
Since 1995, larger, institutional investors have been taking a greater role in securities-fraud suits, because of a change in federal law. In the Enron case, Milberg Weiss is representing the Regents of the University of California. Lloyd Lee, a university lawyer, said the regents have consulted with Milberg Weiss, and "they assured us that they were cooperating fully with the inquiry." 
Separately, the federal judge in Houston presiding over the shareholder lawsuits related to Enron's collapse, ordered Arthur Andersen LLP to make six of its current and former officials available for depositions by next month and provide a detailed account of document shredding that took place in its Houston office. 
The order is unusual because it comes so early in the litigation. Typically, under federal securities laws, plaintiffs' attorneys must wait until all pending motions for dismissal have been resolved before they are allowed to proceed with the discovery phase of a case. 
"It is a very sensible order under these extraordinary circumstances," said Jeff Kaiser, an attorney at Kaiser & May LLP in Houston, one of the law firms representing shareholders in the Houston case. His firm also is pursuing a separate lawsuit against Andersen in a Galveston County, Texas, state district court. 
The order by U.S. District Judge Melinda Harmon requires Andersen to submit a report within 20 days cataloging the documents it destroyed, describing any documents it has been able to recover and explaining the efforts it has made to do so. Additionally, Andersen's report must include a description of Enron-related materials currently in the firm's possession.

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

After Enron, a Push to Limit Accountants to...Accounting
By Deborah Solomon
Staff Reporter of The Wall Street Journal

01/25/2002
The Wall Street Journal
C1
(Copyright (c) 2002, Dow Jones & Company, Inc.)

When it was flying high, energy-trading company Enron Corp. was famous for pioneering new markets. Here is something else it is helping to develop: a relatively new breed of shareholder proposal. 
A number of institutional investors -- with Enron's rapid collapse in mind -- are calling for companies to adopt "conflict of interest policies" that would prevent their accounting firm from providing anything beyond auditing services. Shareholder proposals seeking to limit the accounting firms' roles have surfaced at a wide range of companies following Enron's meltdown. At the heart of such proposals: concerns that accounting firms have a financial incentive to sign off on overly aggressive accounting practices at companies that simultaneously pay them large sums for nonaudit work.
In Enron's case, the Houston company paid Arthur Andersen LLP $25 million for its audit and $27 million for nonauditing work, including tax-related and consulting services, in 2000, the last year for which figures are publicly available. In November, Enron restated its results for the previous four years, wiping out $586 million, or 20%, of its previously reported earnings. In recent testimony before Congress, Andersen officials have said they don't believe their independence as an auditor was compromised by the nonauditing fees. 
"It took Enron to get shareholders interested in addressing this issue, but many investors want auditor independence," says Patrick McGurn, vice president of Institutional Shareholder Services, a proxy adviser that makes recommendations for how institutions should vote. 
Shareholders are proposing these policies for about 30 companies, including Apple Computer Corp., Johnson & Johnson, Motorola Inc., PG&E Corp. and Walt Disney Co. Most of the companies are fighting the initiatives and have asked the Securities and Exchange Commission to rule that they don't have to put the proposals to a vote. Corporate-governance specialists expect the SEC to rule in favor of shareholders, putting the initiatives on the ballots for annual meetings later this year. 
Whether any of the proposals become policy at the individual companies is another matter; rarely do shareholder proposals pass. But some who track corporate-governance developments say support for these new ones could be strong enough to prompt companies to agree to limit the use of their auditing firms for other activities. "It can embarrass management," says John C. Coffee Jr., law professor at Columbia University. "The real success of these kinds of proposals is that they will lead to negotiations . . . that might put restrictions on the amount of consulting that these companies can do." 
The no-conflict-of-interest initiatives are being proposed by labor unions, which hold shares in companies as part of pension plans and other investments. The United Brotherhood of Carpenters, which controls $35 billion in pension assets, proposed the policy at several companies after reviewing the ratio of audit to nonaudit fees. The SEC began requiring that companies disclose that information as of the year 2000. 
Many of the companies were paying 10 to 15 times more for nonaudit-related services than for auditing fees. Ed Durkin, director of special programs for the United Brotherhood of Carpenters, says: "The impression somebody could get from looking at these numbers is that there might be issues of independence and of the integrity of the financial-reporting system." 
But some say a blanket policy restricting the accounting relationship isn't necessarily going to prevent an Enron-like blow-up. "It's probably more a matter of disclosure than limitations," says David Bowers, an analyst with Evergreen Investment Management Co., which owns shares of PG&E. While investors need to pay attention to what the accountants are doing, there is some benefit to having a firm perform multiple duties, he says. "It's hard to paint it over with a broad brush and say you can't have both relationships." 
Companies also note that some of the fees labeled as "nonaudit" under the new SEC rules are for services traditionally provided by auditors, such as work done on registration statements or on taxes. Renee Parnell, a spokeswoman for PG&E, says the company often has to use its accounting firm, Deloitte & Touche LLP "for things like regulatory filings," adding that PG&E is "seeking SEC recommendation on whether to include the proposal" in its proxy. A spokeswoman for Disney declined to comment beyond what is written in the proxy, which recommends that shareholders vote against the proposal. Representatives from Apple, Motorola and Johnson & Johnson declined to comment. 
The shareholders' proposals aren't original in this sense: Two years ago, former SEC Chairman Arthur Levitt Jr. sought to limit dual auditing/consulting roles for accounting firms. But his plan met fierce resistance from the accounting industry and its lobbyists, as well as from members of Congress, and he backed down, settling for less-stringent limits on certain types of nonauditing work. Mr. Levitt has said several congressmen threatened to cut the SEC's appropriations if he didn't back away from the tough conflict-of-interest rules he originally promoted. Current SEC Chairman Harvey Pitt has said he doesn't support the limitations sought by his predecessor, believing other reforms are more relevant. 
James D. Cox, a professor of law at Duke University who has written extensively on accounting and legal issues, says shareholder proposals may be the best way to change the rules. "There are a lot of investors out there, including financial institutions, who believe this is a good idea," he says. Before the Enron debacle, "we lulled ourselves into a complacent state thinking that accountants who know their client from performing nonaudit services can better perform the audit function. I think that's a mantra that after Enron is going to fall on deaf ears." 
Backers of the proposals say restricting the types of services accounting firms perform for clients won't eliminate the potential for fraud, but can help bolster confidence in public companies. "I don't think there's any benefit for a company if its accounting firm has a consulting relationship," says Ted O'Connor, portfolio manager at Cambiar Investors Inc., which owns shares of Motorola. He expects to vote for the proposal at Motorola.

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

A Section
NSC Aided Enron's Efforts; Agency Sought Lay Meeting With Indians on Plant
Dana Milbank and Alan Sipress
Washington Post Staff Writers

01/25/2002
The Washington Post
FINAL
A18
Copyright 2002, The Washington Post Co. All Rights Reserved

The White House's National Security Council is the president's nerve center for international crises and strategy. For a moment last year, it also acted as a sort of concierge service for Enron Chairman Kenneth L. Lay and India's national security adviser, Brajesh Mishra. 
A June e-mail sent from the NSC said Mishra would "be willing to meet with Mr. Lay and the bankers . . . but only at the residence. Pls. let me know your decision on this soonest." A second e-mail, also originating in the NSC, added, "We are not involved in arranging any meetings for Mr. Lay. . . . I will ask the Indians if he is invited to the dinner. Also, the Indians did not agree to see the lenders. I will go at them again, but if they come around it might be for a Friday meeting and not the dinner."
The efforts to get an audience with Indian officials for Lay and the bankers over the company's Dabhol power plant were detailed in documents released last week by the government-funded Overseas Private Investment Corp. under a Freedom of Information Act request. They provide a glimpse of a government function normally conducted in secret to avoid political embarrassment for foreign governments that face U.S. pressure on behalf of American corporations. 
Susan Schwab, a Commerce Department official from the first Bush administration and now dean of the University of Maryland's School of Public Affairs, said she was surprised that the commercial advocacy has become "one where it's not the State Department or Commerce Department but the NSC leading the working group." 
Daniel Tarullo, a Georgetown University law professor who oversaw international economics issues for President Bill Clinton's National Economic Council, concurred that "the norm would have been NSC participation in a discussion rather than NSC chairing it." 
That change is symbolic of the heightened government priority on aiding commercial interests overseas. The effort, which expanded in the first Bush administration and in the Clinton administration, is evolving to a more explicit link to national security as the Bush administration elevates ties between the NSC and economic and commercial considerations. 
"It's a new definition of national interest that embodies the national economic interest," Schwab said. "It's not as blatant as 'what's good for General Motors is good for America,' but it's the globalized version of that." 
The trend grew after the end of the Cold War, when it appeared American companies were not competitive with the Japanese and others. "It was a sense that our strategic position was at stake," said Leon Fuerth, who was security adviser to Vice President Al Gore. U.S. multinationals came to be seen as "agents of American national power." 
Under the Clinton administration, U.S. diplomats were evaluated on their performance in cooperating with American business, according to Stuart E. Eizenstat, who held a senior post in the State Department. "This was a major activity and something they were expected to engage in," he said. 
Even back then, Enron received a disproportionate share of government help -- not necessarily because of the company's political connections but because of its bold expansion into emerging markets. "With the possibility of Boeing, there is no U.S. company I had more interaction with, involved in more projects abroad [and] had more of a call on our time than Enron," Eizenstat said. 
The effort, which decelerated after Sept. 11, may have peaked last year with U.S. support for Enron in its dispute with India. At times it was difficult to separate Enron interests from national interests. In late August, Lay, frustrated with progress in India, told the Financial Times: "There are U.S. laws that could prevent the U.S. government from providing any aid or assistance to India going forward if, in fact, they expropriate property of U.S. companies." 
At the time, Enron was seeking $2.3 billion for itself and its lenders to sell its 65 percent interest in the Dabhol plant, which had been mired for years in a dispute with its main customer, an Indian state government. "If they try to squeeze us down to something less than cost, then it basically becomes an expropriation by the Indian government," Lay told the newspaper. 
The chief minister of Maharashtra state in India decried "the strong-arm tactics of Enron" he interpreted in Lay's words. Just two weeks before, the United States had indicated that it might lift sanctions imposed on India for earlier nuclear tests. 
Enron issued a statement the next day saying Lay "was merely referring to U.S. laws" and was not issuing a threat. Lay sent a letter to Indian Prime Minister Atal Bihari Vajpayee to say "I have not asked anyone in the U.S. government to consider sanctions. I did not say that the Dabhol power issue had been expropriated." 
The administration correspondence released last week suggested various overlaps between Enron and U.S. efforts in India. A July 30 memo to the "Dabhol Working Group" in the administration listed among the actions taken in July that "Enron Chairman Ken Lay visited India" and met various government officials. The Dabhol working group's plans in August included an "Enron trip" to a location that was blacked out on the document before the government released the information. 
September's actions by the Dabhol group were to include a visit by U.S. Trade Representative Robert B. Zoellick to India; Zoellick had been a paid consultant to Enron before joining the administration. Zoellick has since said he did not raise the issue. The group also planned to make use of a visit to the United Nations in September by Vajpayee. 
The NSC working group coordinated a push at the highest levels of government. Vice President Cheney, as reported, brought up the matter with Sonia Gandhi, leader of India's Congress Party. The e-mail exchanges indicate Cheney planned to raise the matter again on Oct. 3 with India's foreign minister. A list of "Dabhol talking points" for Cheney's meeting with the minister were "passed to Veep's staff for inclusion" by the NSC. The minister, Jaswant Singh, heard again from the administration in October, when Undersecretary of State Alan P. Larson raised Dabhol. 
Last weekend, the State Department disclosed that Secretary of State Colin L. Powell had discussed the Dabhol project on April 6 in a meeting with Singh. According to an account provided by State, Powell told his Indian counterpart that "failure to resolve the matter could have a serious deterrent effect on other investors." 
Before the November meeting between Vajpayee and Bush, at which Bush was to raise the subject of Dabhol, an e-mail apparently from the NSC to the Overseas Private Investment Corp. suggested a resolution was close. It asked: "Do you still want to sign an MOU [memorandum of understanding] with the Indians or announce one during Vajpayee's visit?" Plans for Bush to raise the subject were scratched as Enron's problems became public. 
The administration continues to talk about Dabhol, even after Enron's bankruptcy filing. Larson mentioned it with the Indians during a visit to New Delhi last week with Powell.

http://www.washingtonpost.com 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business/Financial Desk; Section C
ENRON'S COLLAPSE: THE SECRETARY
Army Chief Being Challenged on Ties to Company
By CHRISTOPHER MARQUIS

01/25/2002
The New York Times
Page 6, Column 1
c. 2002 New York Times Company

WASHINGTON, Jan. 24 -- When Thomas E. White was chosen last spring to become secretary of the Army, administration officials portrayed his nomination as part of an effort to bring corporate discipline to the Pentagon. 
Mr. White, who had been vice chairman of Enron Energy Services, arrived with a boardroom boast that he and his private-sector colleagues were the new ''C.E.O.'s of wholly owned subsidiaries of the Department of Defense.''
But now an advocacy group founded by Ralph Nader contends that Mr. White's business dealings present a conflict of interest. The group, Public Citizen, is raising questions while Congress investigates the collapse of the Enron Corporation, which has filed for bankruptcy protection. 
Mr. White, through a spokesman, denied any wrongdoing. 
Public Citizen this week accused Mr. White of taking action to benefit Enron within weeks of becoming Army secretary. In remarks to the media in June, Mr. White vowed to accelerate efforts to privatize energy utilities serving the military. 
The privatization effort had slowed while California's energy crisis unfolded, but Enron continued to promote the program. Mr. White himself had lobbied on its behalf while at Enron, and in 1999 the energy division had been awarded a contract worth $25 million over 10 years to provide energy to Fort Hamilton in Brooklyn, Public Citizen said. 
''It's a huge conflict of interest,'' said Tyson Slocum, the group's research director. At the time of Mr. White's confirmation as Army secretary, Mr. Slocum said, Enron had seven bids pending at the Pentagon. 
A spokesman for Mr. White denied today that Mr. White had behaved inappropriately. The secretary had explicitly excused himself from decisions affecting Enron, but he was determined to advance efforts to privatize Defense Department services and save taxpayers money, said the spokesman, Lt. Col. Ryan Yantis. 
As part of a government ethics agreement, Mr. White was compelled to sell his shares in Enron. He was given 90 days to do so, then received an extension that gave him until Nov. 20 to complete the sale. He sold the last of his shares for $13 each in mid-October, just before the company disclosed the problems that led to its bankruptcy filing. 
Mr. White acknowledged having contacts with Enron employees since last June, including a call with Kenneth L. Lay, the chairman and chief executive, in September, but he called them personal in nature. 
Administration officials voiced confidence in Mr. White, and Congress members investigating the Enron collapse say they have no evidence that he acted in bad faith during his 11 years as an Enron executive or subsequently. 
Mr. White, in a letter to one investigator, Representative Henry A. Waxman, Democrat of California, noted this week that he had incurred ''significant personal losses'' in the Enron bankruptcy. 
In the letter, which responded to questions by Mr. Waxman, Mr. White said he had briefly discussed Enron with Defense Secretary Donald Rumsfeld in November and with Secretary of State Colin L. Powell last month. 
''The nature of both conversations was a concern on their part for the impact that the bankruptcy of Enron may have had on my personal well-being,'' Mr. White wrote. ''My response in both cases was that I had suffered significant personal losses, but that I would persevere.'' 
Mr. White also detailed the 30 contacts he had with Enron employees since last June, involving both phone calls and personal meetings. The contacts included a telephone conversation on Sept. 10 with Mr. Lay. 
Mr. White initiated the call to Mr. Lay ''to wish him luck as he assumed his new duties as C.E.O. of Enron,'' Mr. White's letter said. The contacts with other Enron officials, he said, were all ''personal in nature, with their inquiring about my progress as Secretary of the Army and my inquiring about their personal challenges as they dealt with Enron's deteriorating financial conditions.'' 
Mr. White added that ''at no time'' did Mr. Lay or any other Enron employee ask him to intercede with federal officials on Enron's behalf. 
Mr. Waxman, the ranking Democrat on the Government Reform and Oversight Committee, is still studying Mr. White's letter, aides said, and was not available for comment. 
A review of Mr. White's financial disclosure information shows that he amassed a considerable fortune while working for Enron. 
According to his filings in May, Mr. White last received a salary of $5.5 million at Enron and owned homes in Naples, Fla., and Aspen, Colo., valued at more than $5 million each. He bought a $5.5 million penthouse in Washington last June. 
Mr. White held more Enron stock than any other senior official joining the Bush administration. According to the disclosure forms, he held $25 million to $50 million in Enron shares, $25 million to $50 million in stock options and $5 million to $25 million in a phantom stock award, which is a promise to pay a future bonus in appreciated stock or its cash equivalent. 
To comply with the ethics agreement, Mr. White was compelled to sell 405,710 shares of Enron. He made the sales, from June 13 to Oct. 14, 2001, as the value of Enron stock steadily diminished. For example, he sold 92,000 shares at $50 in mid-June and 86,709 shares at $13 in October. 
In his letter, Mr. White said he had sold all of his Enron stock and had renounced his stock options.

Photo: The Army secretary, Thomas White, used to be vice chairman of Enron Energy Services. Ethics rules made him sell Enron stock to hold office. (Paul Hosefros/The New York Times) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

National Desk
THE NATION With the Theater or PACs, Texans Saw Kenneth Lay as 'On Top of the World' Influence: The former Enron chief 'was a guy with swagger and loot who bought his way into whatever needed buying.'
RONE TEMPEST
TIMES STAFF WRITER

01/25/2002
Los Angeles Times
Home Edition
A-26
Copyright 2002 / The Times Mirror Company

HOUSTON -- For all his clout in Washington, Kenneth L. Lay's greatest influence was back home in Texas where the mirror-sheathed Enron headquarters building glimmers above the Houston skyline. 
Operating here in his home base, Lay--who resigned Wednesday night as chairman of the once high-flying energy trading company he founded--was a kingmaker who could create or crush political careers, spearhead professional sports stadium drives, finance youth clubs and endow theater troupes.
"This was a man on top of the world. It was well known that if you needed something done you went to Ken Lay," recalled Felix Fraga, a former Houston city councilman who has known Lay more than 30 years. "He could have run for mayor, governor, or done anything he wanted." 
As part of President Bush's celebrated "pioneers" club, Lay and his wife, Linda, donated more than $145,000 to the national Republican Party and the Bush campaign. The Lays also contributed $100,000 to the Bush inaugural gala and $10,000 to the election recount fund. 
But in Texas, where his money was less diluted, state Ethics Commission records show Lay gave $55,000 to one state Senate campaign alone. Other large contributions graced the coffers of Gov. Rick Perry, Atty. Gen. John Cornyn and Houston Mayor Lee P. Brown, for whom Lay sponsored a $50,000 fund-raiser Oct. 8. 
However, in a sign that Enron fortunes were already on a slide, Brown campaign finance director Sue Walden said Lay failed to show up for the fund-raiser and never sent a check. 
Always the Go-To Guy 
Over the years, Texas officeholders ranging from Houston City Council members to state railroad commissioners benefited from Lay's political largess. 
"Ken Lay was a guy with swagger and loot who bought his way into whatever needed buying," said Texas populist politician and commentator Jim Hightower. "He had this aura of being bulletproof, a corporate superstar who was real connected to the Bushes." 
After Lay's spectacular fall from power and grace, the extent of Lay's and Enron's insertion into Texas government only now is surfacing. 
The first casualty was Texas Public Utilities Commission chairman Max Yzaguirre, a former Enron executive Lay helped get appointed as the state's chief utility regulator. Yzaguirre, tainted by his Enron connections, resigned his post Jan. 17. 
Others caught in the backwash of the Enron collapse are Perry, who received a $25,000 contribution from Lay the day after he appointed Yzaguirre to direct the PUC; Cornyn, a U.S. Senate candidate who reversed an earlier position and recused himself from the state Enron investigation because of donations he received from Lay and Enron; and Texas elected Supreme Court Justice Priscilla Owens, whose appointment by Bush to the U.S. 5th Circuit Court of Appeals now is in jeopardy because of Enron contributions she received beginning in 1995 and decisions she made favoring the company. 
According to Rice University political scientist Bob Stein, Lay displayed a particular genius for picking out politicians on the rise. 
"These were investments about where these guys were going, not necessarily where they were at the time," Stein said. "Ken Lay was a big supporter of Bush probably before Bush himself knew he was running for president." 
According to the Austin-based watchdog group Texans for Public Justice, the Lays personally donated $122,000 to Bush's two gubernatorial campaigns. Similarly, Lay was an early backer of Cornyn, even before the Republican attorney general announced his candidacy for the seat to be vacated by Republican Sen. Phil Gramm, who is retiring after this year's elections. 
Payroll Deductions to the Company PAC 
Gramm, whose economist wife served as a paid member of the Enron board of directors, is caught up in the vortex because of the tens of thousands of dollars he received in contributions from Enron and Lay. 
Enron's system for political contributions operated on two fronts. Employees were encouraged to give money to candidates believed to be supportive of company issues, particularly those involving market deregulation central to the energy trading business. 
Additionally, top executives were tapped for what amounted to a tithe to the Enron Political Action Committee, one of the country's biggest corporate political PACs. A percentage of each executive's paycheck was withheld from every biweekly pay period. For example, Joe Allen, Enron vice president for state government affairs, gave $83.34 every two weeks to the Enron PAC, for an annual total of $2,166. Other executives gave much more. 
The money primarily was used to fund campaigns of candidates for Congress, particularly those with key energy-related positions. According to documents on file with the Texas Ethics Commission, the Enron PAC collected $336,000 from executives in 2001. 
But not all of Lay's and Enron's munificence was reserved for major political offices, nor was it limited to politics. 
Spreading Wealth Among Nonprofits 
One of the largest political contributions Lay made in 2001 was for a state Senate race in the Piney Woods of rural East Texas. In that race, one of the most expensive legislative races ever undertaken in Texas, Democratic trial lawyer David Marsh was pitted against Republican businessman/rancher Todd Staples. 
The race became a key contest for the Houston-based Texans for Lawsuit Reform, a conservative movement Lay supports that seeks to limit lawsuits. Staples won, backed by $55,000 in contributions from Lay. 
Even in the grandest Texas tradition of alms giving and support for the arts, few have surpassed Lay and his company. 
The Lays and Enron were prominent givers to virtually every important Houston charity ranging from a new cancer ward at the city's famous M.D. Anderson Hospital to support for the Houston Ballet. 
Lay encouraged giving by offering matching funds for as much as $15,000 for each employee. The results often were spectacular. Enron's 7,500 employees alone, led by Lay with a $100,000 pledge, accounted for $5.5 million of the $75 million raised by the Houston United Way campaign. 
"Enron was a visible leader in the charity world," said Houston Ballet managing director Cecil C. Conner, whose troupe received a $10,000 gift from the Lays. "It helped make this city a vibrant, important city, not just an oil town. We have lost a leading voice." 
Occasionally, Lay's influence went beyond money. 
When former City Councilman Fraga, 72, a longtime social worker and prominent leader in the Latino community, found himself snared in a 1997 FBI bribery sting operation that sent another councilman to jail, Lay was one of the prominent Houstonians who wrote a letter in Fraga's support. 
After returning the $2,000 offered by two undercover agents, Fraga never was charged. 
But Lay may be missed most as a civic leader. He served a term as president of the Greater Houston Partnership, the city's influential super-chamber of commerce. Before that he served as head of the Board of Regents at the University of Houston, where he received his graduate education. 
According to political scientist Stein, Lay was instrumental in the revival of Houston's historically moribund downtown, including the successful referendums to build stadiums for baseball and basketball/hockey, the building of a light rail line connecting Houston's renowned medical center complex to downtown and development of the theater district. 
"Ken Lay was a great promoter of the city," Stein said. "His business was based on attracting productive capital and labor, and when it worked, it worked to make the city a more attractive place to live." 
Scrambling for a New Look 
But even this legacy already is fading, as Lay's and Enron's woes continue to deepen. On a recent afternoon in Houston's gritty 2nd Ward District, the Enron Boys and Girls Club, renovated with $500,000 in Enron donations, was busy changing its name. The Enron logo on the center of the newly resurfaced basketball court was being sanded off and replaced with the new sponsor's name: Holt House. 
"We've already got us a new sponsor," said club director Glen Sherrod, showing a reporter a roomful of new computers donated by Enron. 
In a statement issued Thursday, Mayor Brown made no mention of Lay's role in rebuilding the city. 
"My fervent hope," Brown said, "is that Enron is able to hire a CEO who can put the company back in a position to rehire its employees and remain a viable part of the business community."

PHOTO: Kenneth L. Lay, shown in 1999, and Enron gave to many important Houston charities, from a hospital cancer ward to a ballet troupe.; ; PHOTOGRAPHER: BRETT COOMER / For The Times 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Editorial Desk; Section A
Spreading It Around
By PAUL KRUGMAN

01/25/2002
The New York Times
Page 23, Column 1
c. 2002 New York Times Company

A bizarre thing happened to me over the past week: Conservative newspapers and columnists made a concerted effort to portray me as a guilty party in the Enron scandal. Why? Because in 1999, before coming to The New York Times, I was briefly paid to serve on an Enron advisory board. 
Never mind that, scrupulously following the Times conflict of interest rules, I resigned from that board as soon as I agreed to write for this newspaper -- making me much more fastidious than, say, William Kristol, who served on that same board while editing The Weekly Standard. Never mind that I disclosed that past connection a year ago, the first time I wrote about Enron in this column -- and also disclosed it the one time I mentioned Enron before, in a Fortune column. Never mind that the compensation I received per day was actually somewhat less than other companies were paying me at the time for speeches on world economic issues.
And never mind that when I started writing in this column about issues of concern to Enron -- in particular, criticizing the role that market manipulation by energy companies played in the California power crisis -- my position was not at all what the company wanted to hear. (Compare this with the board member Lawrence Kudlow, a commentator for National Review and CNBC. He wrote vehemently in favor of the Cheney energy plan -- and has called this the ''Clinton-Levitt recession,'' blaming Arthur Levitt, the former Securities and Exchange Commission chairman, who tried to fight the accounting laxity that made Enron possible.) 
Yet reading those attacks, you would think that I was a major-league white-collar criminal. 
It's tempting to take this vendetta as a personal compliment: Some people are so worried about the effect of my writing that they will try anything to get me off this page. But actually it was part of a broader effort by conservatives to sling Enron muck toward their left, hoping that some of it would stick. 
A few days ago Tim Noah published a very funny piece in Slate about this effort, titled ''Blaming liberalism for Enron.'' (Full disclosure: I used to write a column for Slate -- and Slate is owned by Microsoft. So I guess that makes me a Bill Gates crony. I even shook his hand once.) It describes the strategies conservative pundits have used to shift the blame for the Enron scandal onto the other side of the political spectrum. 
Among the ploys: Enron was in favor of the Kyoto treaty, because it thought it could make money trading emission permits; see, environmentalism is the villain. Or how about this: Enron made money by exploiting the quirks of electricity markets that had been only partly deregulated; see, regulation is the villain. 
And, of course -- you knew this was coming -- it's all a reflection of Clinton-era moral decline. Traditionally, as we all know, Texas businessmen and politicians were models of probity; they never cooked their books or engaged in mutual back-scratching. 
One doubts that the people putting out this stuff really expect to convince anyone. But they do hope to muddy the waters. If they can get a little bit of Enron dirt on everyone -- the Clinton administration, environmentalists, liberal columnists -- the stain on people and ideas they support will be less noticeable. 
Why is Enron a problem for conservatives? Even if the Bush administration turns out to be squeaky clean, which we'll never know unless it starts to be more forthcoming, the scandal threatens perceptions that the right has spent decades creating. After all that effort to discredit concerns about the gap between haves and have-nots as obsolete ''class warfare,'' along comes a real-life story that reads like a leftist morality play: wealthy executives make off with millions while ordinary workers lose their jobs and their life savings. After all that effort to convince people that the private sector can police itself, the most admired company in America turns out to have been a giant Ponzi scheme -- and the most respected accounting firm turns out to have been an accomplice. 
You might think that the shock of the Enron scandal -- and it is shocking, even to us hardened cynics -- would make some conservatives reconsider their beliefs. But the die-hards prefer to sling muck at liberals, hoping it will stick. 
Sorry, guys; I'm clean. The muck stops here.

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

California; Editorial Pages Desk
Enron Fraud: Appoint a Special Prosecutor

01/25/2002
Los Angeles Times
Home Edition
B-16
Copyright 2002 / The Times Mirror Company

Re Enron: Let's get this straight. Fraud is fraud. 
Enron executives have conspired with their auditors to cook the books to wildly inflate profits and stock prices, failed to report illegal transactions, broken multiple rules of the Securities and Exchange Commission and then instituted a cover-up by a massive destruction of files and evidence. The result has been literally billions of dollars of losses to investors and the virtual destruction of employee 401(k)s, while they manipulated their personal stock options and walked away with millions in illegal profits.
Our attorney general, the overly pious John Ashcroft, has excused himself for conflicts of interest, as has the entire federal prosecutor's office in Houston. The administration is staffed by multiple "graduates" of Enron and is tainted by massive campaign contributions, as are large numbers of representatives and senators of both parties. Isn't it time for a special prosecutor? 
Malcolm D. Wise 
Ontario 
* 
Regarding all the calls I see for a special prosecutor in the Enron case, with its ties to the Bush administration, I can only say this: a special prosecutor for what? 
Until someone can make some sort of illegal connection between the two there is nothing but guilt by association. 
When a special prosecutor was assigned to the Whitewater matter, at least there was evidence of a shady land deal and inappropriate pressure being put on people by then-Gov. Clinton to make improper loans, for example. 
No linkage of this sort has been made between Enron and President Bush. 
And until a linkage is made, all these shouts and murmurs for a prosecutor are nothing but shameless partisanship. 
Richard Vaczy 
Los Angeles 
* 
I came away from "Why Insiders Get Rich and the Little Guy Pays" (Opinion, Jan. 20) ashamed to be a little guy. While we're busy vilifying the fat cats at Enron and other larcenous corporations for sticking it to us, it might be wise for us "littles" to examine our own culpability in the sticking. 
Union membership is at historical lows; we allow our representatives to green-light monopolistic mergers, and we continue to elect politicians who ignore or undermine real campaign finance reform. 
Until we start protecting ourselves from corporate avarice, we will continue to be perfect "little" victims. 
Russell Buchanan 
Woodland Hills 
* 
I fail to understand why President Bush and Vice President Dick Cheney are trying to distance themselves from former Enron Chairman Kenneth Lay. 
Lay is without question an exemplar of Republican values. Having taken advantage of his position of privilege to maximize his personal wealth, whatever the consequences, this role model of Republican values is at least due a presidential commendation. 
Chris Hopkins 
Los Angeles 
* 
Is it a coincidence that both Enron and its auditing firm Andersen started massive document shredding operations about the same time? It may be a concerted effort to make sure that all the documents no longer exist. The investigation will be greatly hindered without documents to support the allegations, especially of criminal wrongdoing. 
Welcome to the new economy highly touted by this administration. 
Wimol Chanjamsri 
Rowland Heights 
* 
What slays me is that high-ranking CEOs in large companies quickly learn how to get big money for themselves but in actuality they do not know how to run a profitable business. This includes successful orchestration of deregulation that is also for their further benefit. 
Bad management is the bane of our existence. 
June Cox 
Yucca Valley

PHOTO: Kenneth Lay; ; PHOTOGRAPHER: TAYLOR JONES, Augusta, Ga. 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Editorial
Business Spin; It's just like political spin, only not quite as dishonest.
Michael Kinsley

01/25/2002
The Washington Post
FINAL
A25
Copyright 2002, The Washington Post Co. All Rights Reserved

How could the chairman of Enron have been telling his employees that they should buy the company's stock at the same time he was selling it? How could Ken Lay have been saying that the company was in great shape when he had a report from one of his vice presidents saying it most definitely wasn't? 
Well, it might have been an innocent mistake. You don't need to believe every report that crosses your desk. If some of your own actions had slipped your mind, you might find them as hard to believe as anyone else would. And you might be selling your stock for reasons other than concern that it might be about to tank.
So now that we've gotten the presumption of innocence out of the way, let's consider two other possibilities. One is that he was lying. The other is that he was spinning. What's the difference? It's often said that there is none. (Come to think of it, I've said this myself.) But there is: Lying means flouting the truth. Spinning means indifference to the truth. The culture of spin is one in which the relation between what you're saying and what happens to be true is a question that doesn't even arise. This doesn't make spin less objectionable. In fact, it's more objectionable precisely because it's culturally ingrained. We all know that it's wrong to lie. The signals we send and receive about spin are very different. 
The political equivalent of Ken Lay would be a politician who insisted he was going to win the election even though all the polls showed him heading for near-certain defeat. In the political world, though, spin is not merely tolerated: It is required. It is regarded as a basic test of competence. 
Tim Russert: Senator, you're down by 40 points in every poll. Your opponent is openly consulting real-estate agents in Washington. Your own dog called a news conference yesterday to demand that you withdraw from the race. Are you going to lose? 
Politician: No, Tim, it'll be a tough fight -- make no mistake about that -- but I'm confident that . . . blah blah blah. And my cat is behind me 100 percent. 
The purpose of such exchanges is not to elicit the truth, but to see how well the politician can spin. If he admits that he's probably going to lose, he flunks. If he survives the barrage with his preposterous optimism and poker face unbroken, he wins. 
But this example is entry-level spin. It shows a basic willingness to ignore reality, but no special effort or talent in creating an alternative reality. The other difference between lying and spinning is that while lying is often spontaneous, spinning usually involves advanced planning. There are a few naturally gifted improvisational spinners, such as the brilliant White House spokesman, Ari Fleischer. Characteristically, though, spin does not wing it. Often spin production is an industrial process involving many people, maybe or maybe not including the person who ultimately delivers it. 
In recent years the Washington spin industry has invaded the corporate world, as professional spinmeisters who learned their craft from politicians (or who actually used to be politicians) have come to realize that big companies are just as spinologically needy as politicians and have more money. Of course, the corporate world is where PR and advertising were invented -- two activities that also strain the relationship between assertion and truth. But in some ways spin, or at least untruthful spin, remains less acceptable in the corporate world than in politics. 
One reason for this is that in spinning a commercial product -- which goes by the polite name of "marketing" -- the mountain can come to Mohammed. That is, you can design the product around the spin rather than design the spin around the product. John Kenneth Galbraith argued 35 years ago in "The New Industrial State" that corporations often create the demand for their products rather than satisfy hungers that already exist. Controversial at the time, this now seems obvious. And when marketing is paramount, the product itself is secondary. Oddly, this makes it easier for corporate spin to be truthful: You can decide what you want to say and build reality around it. Businesspeople used to marketing sometimes trip up when they forget that reality is less malleable in non-marketing situations. 
Spin is also illegal in many corporate circumstances where it would be legal, acceptable and even expected in politics. If a corporate insider knows something important about the company's future, he or she not only may not say something that directly contradicts the truth -- in most circumstances they may not even spin by silence. Imagine if politicians were under that kind of legal requirement! And why aren't they? Well, obviously because money is at stake with the business executive whereas nothing depends on the politician's truthfulness except democracy. 
In the pervasive culture of spin, it's possible that Ken Lay was describing a reality he wanted without even considering the relation of what he was saying to reality as we actually experience it. If so, his mistake was forgetting that he's not a politician. 
Michael Kinsley, editor of Slate (www.slate.com), writes a weekly column for The Post.

http://www.washingtonpost.com 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business/Financial Desk; Section C
ENRON'S COLLAPSE
Excerpts From a House Hearing on Destruction of Enron Documents

01/25/2002
The New York Times
Page 8, Column 1
c. 2002 New York Times Company

Following are excerpts from remarks at a hearing yesterday before the House Energy and Commerce Committee on the destruction of documents related to the Enron Corporation, as recorded by the Federal Document Clearing House, a private transcription service. The speakers included Representatives James C. Greenwood, Peter Deutsch, Billy Tauzin and Diana DeGette; the Arthur Andersen officials C. E. Andrews, Dorsey L. Baskin and Nancy Temple; and David B. Duncan, a former partner at Arthur Andersen. 
REPRESENTATIVE GREENWOOD -- The chair will now call the first panel. 
Mr. Duncan, will you please come forward? Please be seated right there. Thank you, sir. 
Good morning, Mr. Duncan.
DAVID DUNCAN -- Morning. 
MR. GREENWOOD -- Mr. Duncan is here with us today under subpoena. To date, Mr. Duncan has cooperated with this committee in our search for the facts by submitting to an interview last week with our committee investigator that lasted more than four hours. 
Yet, we received a letter from his counsel yesterday stating that Mr. Duncan authorized his counsel to advise the committee that he will, quote, ''rely on his constitutional right not to testify,'' close quote. 
I believe that this privilege should be personally exercised by, before the members, and that's why we have requested Mr. Duncan's appearance here today and request that he reconsider. 
Mr. Duncan, you are aware that the committee is holding an investigative hearing and that, when doing so, we have the practice of taking testimony under oath. Do you have objection to testifying under oath? 
MR. DUNCAN -- No, sir. 
MR. GREENWOOD -- Thank you. 
The chair also advises you that, under the rules of the House and the rules of the committee, you are entitled to be advised by counsel. 
Do you desire to be advised by counsel during your testimony today? 
MR. DUNCAN -- Yes, sir. 
MR. GREENWOOD -- O.K. In that case, would you please rise and raise your right hand, and I will swear you in. 
Mr. Duncan, do you swear that you will tell -- the testimony you will give this committee is the truth, the whole truth and nothing but the truth? 
MR. DUNCAN -- Yes, I do. 
MR. GREENWOOD -- Thank you, Mr. Duncan. You are now under oath, and you may give a five-minute summary of your written testimony if you choose to. 
MR. DUNCAN -- I have no summary, sir. 
MR. GREENWOOD -- O.K. The chair will recognize himself for questioning. 
Mr. Duncan, Enron robbed the bank. Arthur Andersen provided the getaway car, and they say you were at the wheel. 
I have a specific question for you, Mr. Duncan. You were fired by Andersen last week for orchestrating an expedited effort among the Andersen-Enron engagement team to destroy thousands of paper documents and electronic files relating to the Enron matter after learning of an inquiry by the Securities and Exchange Commission into Enron's complex financial transactions. 
Did you give an order to destroy documents in an attempt to subvert governmental investigations into Enron's financial collapse? And if so, did you do so at the direction or suggestion of anyone at Andersen or at Enron? 
MR. DUNCAN -- Mr. Chairman, I would like to answer the committee's questions, but on the advice of my counsel I respectfully decline to answer the question based on the protection afforded me under the Constitution of the United States. 
MR. GREENWOOD -- Let me be clear, Mr. Duncan. Are you refusing to answer the question on the basis of the protections afforded to you under the Fifth Amendment to the United States Constitution? 
MR. DUNCAN -- Again, on the advice of my counsel, I respectfully decline to answer the question based on the protection afforded me under the United States Constitution. 
MR. GREENWOOD -- Will you invoke your Fifth Amendment rights in response to all of our questions here today? 
MR. DUNCAN -- Respectfully, that will be my response to all your questions. 
MR. GREENWOOD -- I'm disappointed to hear that, but it is therefore the chair's intention to dismiss the witness. 
Mr. Duncan, we thank you for your attendance today and your respect for this committee's process. You are dismissed, and perhaps we will see you on another occasion. 
MR. DUNCAN -- Yes, sir. . . . 
MR. GREENWOOD -- I think it is very important to lay out for the subcommittee, our panel and our audience our current understanding of Mr. Duncan's recollection of relevant events based on the committee counsel's interview of Mr. Duncan last week. 
It is my understanding that Mr. Duncan said that, in the September and October time period, he participated in frequent meetings and teleconferences with a group of senior-level Andersen partners in Houston and Chicago to discuss matters relating to the Enron account. 
That group included Ms. Nancy Temple from the legal group and Mr. Michael Odom, the audit practice director, both of whom are testifying today. 
The consultation group, which was created in late August or early September, was fluid in membership and was formed in response to growing concerns over the accounting for Enron's special-purpose entities. 
Specifically, Mr. Duncan said that the group was formed at the suggestion of Mr. Odom and himself in response to, one, Sherron Watkins' allegations of accounting improprieties on the Enron Raptor and LJM transactions; two, the $1 billion accounting error discovered in August by Enron and Andersen with respect to the accounting for the Raptor entities; and, three, the rapidly declining stock price of the Enron merchant assets transferred to the Raptor partnerships, which made it look like there would be a significant write-down by Enron. 
During these conference calls prior to Oct. 12, 2001, Mr. Duncan recalls receiving advice from Ms. Temple with respect to the proper documentation of Andersen's evolving position with respect to the correct accounting for the Raptor transactions. 
Also, prior to receiving Ms. Temple's Oct. 12 e-mail regarding compliance with Andersen's documentation retention policy, Mr. Duncan recalls Ms. Temple, on one or two of these three group conference calls, asking him, quote, ''How are you on compliance with the document retention policy on Enron?'' He said that his response to her was, ''At best, irregular.'' 
Mr. Duncan then received Ms. Temple's Oct. 12 e-mail, forwarding from Mr. Odom with a note, quote, ''More help,'' close quote. He did not know what Mr. Odom meant by that phrase, but he viewed Ms. Temple's e-mail as a follow-up to the question she had posed to him orally about compliance with the retention policy and as a device from his attorney to ensure that the entire Enron audit engagement team was in compliance with that policy. 
He added that he had never before, during his lengthy tenure at Andersen, been asked about compliance with the retention policy, nor had he ever received such an e-mail about ensuring compliance with that policy from anyone in Andersen's legal group. 
Mr. Duncan does not recall the precise date, but sometime after Oct. 12, 2001, Mr. Duncan met with his top Enron audit partners, Mr. Tom Bauer, Ms. Debra Cash and Mr. Roger Willard, to discuss the advice he had received from Ms. Temple. 
According to Mr. Duncan, the meeting participants concluded that they should call a meeting of all the Enron audit managers to discuss timely compliance with the retention policy. 
Mr. Duncan does not recall when this meeting occurred but does not dispute that his secretary sent out an e-mail on Oct. 23, 2001, calling an urgent meeting of the Enron managers for later that same day. 
Just days earlier, on either Friday, Oct. 19, or Saturday, Oct. 20, Mr. Duncan had first learned of the S.E.C. informal inquiry of Enron. He recalled that he had discussions with the Andersen consultation group about the S.E.C. development over the weekend, including Ms. Temple. 
He also recalled that on Oct. 22 he and other Andersen engagement team members met with Enron chief accounting officer Rick Causey to discuss the S.E.C. inquiry. Duncan said that Causey requested Andersen's assistance in creating documents to explain the related party transactions to the S.E.C. 
Mr. Duncan said that at the meeting he called with all the Andersen audit managers on the Enron account, whenever it may have occurred, he advised them of the importance of compliance with the document retention policy and handed out copies of the policy to participants. 
Mr. Duncan said that he observed individuals on the engagement team actively complying with the firm's document policies by shredding documents, and that the activity continued up until the 9th of November, when he received a voice mail from Ms. Temple ordering the preservation of all Enron-related documents. 
Mr. Duncan also said that he destroyed some of his own Enron-related documents in an effort to comply with Andersen's document retention and destruction policies. 
Again, that is my understanding of Mr. Duncan's interview with committee staff. 
Mr. Deutsch, would you agree that I have characterized our current understanding of Mr. Duncan's recollection of relevant events accurately? . . . 
MR. DEUTSCH -- I would. 
MR. GREENWOOD -- Thank you. 
MR. BASKIN -- My name is Dorsey Lee Baskin Jr. 
Since 1999, I have been managing director of Andersen's assurance professional standards group, which has firm-wide responsibility for providing guidance on auditing standards, including professional standards relating to the preservation of audit work papers and client files. I've been at Andersen for almost 25 years, since receiving my M.B.A. from Texas A&M University in 1977. 
I'm here with my partner, C. E. Andrews, who is managing partner for Andersen's global audit practice. He and I will both answer the committee's questions. 
I would like to make three essential points at the outset of our testimony. First, as our C.E.O. has said, this is indeed a tragedy on many levels. 
Second, the committee and the broader public should know that Andersen came forward voluntarily and disclosed the destruction of documents by Andersen personnel. However improper that destruction was, Andersen did not hide from its obligation to do what it could to take corrective action. We promptly alerted all investigative authorities, including this committee. 
Although the firm was well aware of the potentially devastating impact this disclosure could have on our reputation, we did the right thing. We certainly are not proud of the document destruction, but we are proud of our decision to step forward and accept responsibility. 
Third, it bears emphasis that Andersen has cooperated fully and unreservedly with all of the ongoing investigations into the destruction of Enron-related documents. We are determined to get to the bottom of what happened. 
We have publicly acknowledged, and will continue to acknowledge, mistakes that we have made. We have tried, and will continue to try, to answer every question that is put to us. And we will take whatever decisive action is necessary to restore public confidence in the firm. 
I have to tell you, in all candor, that we are limited in what we can say today about the destruction of documents by Andersen personnel working on the Enron engagement. 
Our investigation into that destruction is far from complete. We have not yet had the opportunity to review all of the many relevant documents or to hear from all of the people who have relevant information. 
But having said that, this is what I can tell you about Andersen's retention and destruction of documents. 
To begin with, it is the usual, routine and wholly legitimate practice of auditors to preserve their final working papers while disposing of drafts, personal notes and other materials that are not necessary to support the audit report. So far as I'm aware, this is the policy of all the large accounting firms. 
This policy toward document disposal reflects longstanding and sound audit practice. It is designed to assure that the audit work papers, which are the principal materials reflecting and documenting the conclusions of the audit, unambiguously reflect the judgments that actually were reached. 
This understanding of proper audit practice was reflected in the Andersen document retention policy in effect last fall, which provided that documents other than work papers ordinarily should be disposed of when no longer needed but that such documents should be retained when litigation has commenced or is threatened. 
Of course, precisely when that occurs, often we'll require the application of informed judgment to the particular circumstances of a given case. And that may well be a point on which reasonable people can differ. 
As for the destruction of Enron-related documents, we know that on Oct. 23, just six days after the S.E.C. requested information from Enron, David Duncan, Andersen's lead partner on the Enron engagement, called an urgent meeting of the Enron engagement team, at which he organized an expedited effort to shred or otherwise dispose of Enron-related documents. 
This effort was undertaken without any consultation with others in the firm or, so far as we are aware, with legal counsel. 
Over the course of the next several days, a very substantial volume of documents and e-mails were disposed of by the Enron engagement team. This activity appears to have stopped shortly after Mr. Duncan's assistant sent an e-mail to other secretaries on Nov. 9, the day after Andersen received a subpoena from the S.E.C. telling them, ''No more shredding.'' 
Once this activity came to light, Andersen's response was immediate. Andersen notified the Department of Justice, the S.E.C. and all relevant congressional committees. At the same time, the firm suspended its records management policy and asked former Senator Danforth to conduct an immediate and comprehensive review. 
On Jan. 15, approximately two weeks after our C.E.O. learned about the document destruction, Andersen dismissed Mr. Duncan. The firm also placed three other partners from the Enron engagement on administrative leave, pending completion of the investigation into their responsibility for these events. 
The firm relieved four partners in its Houston office of their management responsibilities, and the firm indicated that it will take disciplinary action against any Andersen personnel who are found to have acted improperly. 
I should address the question, why Andersen took the forceful action it did regarding Mr. Duncan. In our view, Mr. Duncan's actions reflected a failure of judgment that is simply unacceptable in a person who has major responsibilities at our firm. 
He was the lead engagement partner for a significant client, exercising very substantial responsibility within the firm. Yet our investigation indicated that he directed the purposeful destruction of a very substantial volume of documents just as the government investigation was beginning. This is the kind of conduct that Andersen cannot tolerate. 
When Andersen's C.E.O., Joe Berardino, testified before Congress almost six weeks ago, he observed that all of us here today, and many others who are not here, have a responsibility to seek out and evaluate the facts and take needed action. 
We have tried to fulfill that responsibility. We uncovered the document destruction. Our firm's management brought it to the attention of the governmental authorities. 
We already have started to implement decisive disciplinary and remedial action, and we're continuing our investigation resolved to take all steps that are necessary to restore public confidence in the integrity of our firm. . . . 
MR. GREENWOOD -- Let me turn it to Ms. Temple, and since I don't have any other members here right now, I'll continue with the questioning. 
We have a memo from you, Ms. Temple, that's dated, I believe, Nov. 10. . . . 
And that memo is very explicit and it's very clear that you took action on that date in the form of that memo to make it crystal clear that no one was to destroy documents. 
Can you explain to us why it took you until Nov. 10 to issue a statement with that clarity, when, a month ago, you knew that the question of retention and destruction of documents was going to be critical to investigations and to litigation? 
MS. TEMPLE -- Yes, Mr. Chairman, I'll tell you the circumstances of sending the Nov. 10 memo and the facts, as I understood them, in the previous time period. 
On Nov. 10, the memo we sent, it was drafted by our outside counsel, a law firm, Davis Polk & Wardwell. 
MR. GREENWOOD -- When was that firm retained for this purpose? 
MS. TEMPLE -- I did not personally retain that law firm. I know I spoke to a partner at that law firm on Oct. 16. 
MR. GREENWOOD -- Is your testimony that you do not know when they were retained? 
MS. TEMPLE -- I don't recall the exact date of the retention. I know I spoke to a partner at that law firm on Oct. 16. 
MR. GREENWOOD -- O.K., you may proceed. 
MS. TEMPLE -- It is the legal group's practice and protocol, when Arthur Andersen receives a subpoena or a request for documents, to send a written notification ---- 
MS. TEMPLE -- My recollection, the firm received a subpoena from the Securities and Exchange Commission at the end of the business day on Nov. 8. And a voice mail was distributed to the audit engagement team, notifying them of that the following business day. And once this e-mail was drafted, it was circulated to the engagement team. 
Now, moving back in time frame to the previous period that you talked about, the firm does have a written policy that provides guidance. It is self-enforcing, and we trust our partners to exercise their good judgment and to consult with either the legal group or the practice directors as appropriate. 
MR. GREENWOOD -- Let me interrupt you for a second. I asked Ms. Temple when Davis Polk was retained for this purpose, and she indicated that she, her response was that she didn't know. 
Mr. Baskin, Mr. Andrews, do you know when this firm was retained? 
And I will remind you that I asked you last night to be prepared to answer that question this morning. 
MR. ANDREWS -- Mr. Chairman, the firm was retained on Oct. 9 and commenced work with us on Oct. 16. 
MR. GREENWOOD -- O.K. And what was the purpose for retaining that firm on Oct. 9? 
MR. ANDREWS -- Well, as if we -- just for a moment -- what was going on during that particular period of time, around that Oct. 9 time ---- 
MR. GREENWOOD -- Are they handling the potential litigation for the firm now? 
MR. ANDREWS -- But what they were, are they handling it now? Yes, they are. 
What was going on at that particular time was that we were involved, the company was closing its third quarter. They were about to reach conclusions on the third quarter. There were a lot of financial reporting issues occurring during that period that were obviously unusual and were concerning. So we engaged them to help us with the financial reporting issues and with possible litigation. 
MR. GREENWOOD -- Mr. Baskin or Mr. Andrews, or even Ms. Temple, you may want to answer this question. 
The document in Tab 29 in your binder is a copy of an Enron announcement to its employees and others on the Enron worldwide e-mail list, which I believe includes Andersen, on Oct. 25, 2001, telling them to preserve records relating to the related party transactions including the accounting of those transactions. 
Did Andersen learn about this action by Enron, which by the way also seems rather late given that it is eight days after Enron learned of the S.E.C. inquiry? And if so, why didn't Andersen act right then to order its employees to do the same? 
MR. BASKIN -- Well, as it pertains to --this is the first time I've read this memo -- but as it pertains to our actions, again, we believe that it was the engagement partners' responsibility in this situation, given what was occurring in that late-October period, which is the date of this memo, that there was enough information available that, in that partner's judgment, the instruction and oversight of that partner would in fact cause us not to destroy documents. And certainly, you would not convene a meeting and give instructions, if you will -- apparently that's what happened -- to destroy documents. 
So we would agree that during this period it would be appropriate to, at a minimum, seek counsel before doing such an exercise. 
And destruction of documents in that period is wrong, and we have admitted that. It is wrong. And once we learned of that in our investigation, we took firm actions. That is not Andersen, that is not what we encourage our employees to do, and it is inappropriate. . . . 
REPRESENTATIVE TAUZIN -- The gentleman's time has expired. The chair recognizes himself for a round of questions. 
First of all, I want to turn to the week of Oct. 9. Now, you've testified Oct. 9 was the date that Arthur Andersen hired counsel, outside counsel, right? And the outside counsel firm was Davis Polk & Wardwell of New York, right? Is that correct, sir? Mr. Andrews? 
MR. ANDREWS -- Yes, that's correct. 
MR. TAUZIN -- My understanding is that's a litigation team, right? 
MR. ANDREWS -- Davis Polk is a reputable firm. I'm sure they do litigation in other things, but we hired them for purposes to help us with the financial reporting and possible litigation. 
MR. TAUZIN -- And possible litigation, right? 
MR. ANDREWS -- Yes, sir. 
MR. TAUZIN -- This Oct. 9 -- I want to turn to you, Ms. Temple, real quickly. Sometime before the week of Oct. 12, in your interviews with us, you informed us that there was a conference call about the Enron engagement team's compliance with the document retention policy. 
Mr. Duncan says that it was you who raised the question about the retention policy. You had some other recollections of that conversation. 
Give us your recollections of what happened in that conference call. And what date was that? 
MS. TEMPLE -- Sure. Let me give you the context of my role in this matter. 
I was asked, beginning on Sept. 28, 2001, to participate in a conference call. I understood that the firm was addressing one accounting issue that had arisen at that point in time. 
And between that time and Oct. 12, I provided legal advice, including, after consultation with my supervisor and others, about specific documentation and retention issues. 
MR. TAUZIN -- Ms. Temple, in that conversation, though, that occurred right about the time that the firm was hiring other litigation counsel -- you're the litigation attorney for the firm, isn't that correct? 
MS. TEMPLE -- My background is in litigation, yes. 
MR. TAUZIN -- But they just hired an outside litigation firm to advise them on possible litigation. About the same time, there's a conference call and there's a discussion about the retention policy. And obviously, the memo is sent out following it regarding that policy that includes information about destruction of documents as well. 
You said something to our investigators about conversations in that conference call, referencing changing memos and deleting information from past memos, substituting a memo to the file for an old memo with a new memo. Is that accurate? Was that discussion held in that conference call? 
MS. TEMPLE -- The advice I gave was different from that, Mr. Chairman. The advice I gave was ---- 
MR. TAUZIN -- What were the questions being asked that you had to give advice? 
MS. TEMPLE -- The team was discussing a draft of a memo about a particular accounting issue on asset impairment. The advice that my supervisor and I gave initially was that that memo, which was being currently drafted, needed to be dated currently ---- 
MR. TAUZIN -- But what did they want to do that you told them they couldn't do? What did they ask you to do? 
MS. TEMPLE -- I don't recall with respect to that particular legal advice that there was a question raised, but we pointed out to the team ---- 
MR. TAUZIN -- Was there not a request or discussion of substituting a new memo for an old memo and, in effect, backdating a memo to the file? 
MS. TEMPLE -- No, there was not a question about backdating that particular memo, but the date ---- 
MR. TAUZIN -- Was there a question about substituting it and deleting information from the memo? 
MS. TEMPLE -- There was a question in that current memo that was raised, can we delete a sentence, acknowledging that the firm had given incorrect accounting advice in the first quarter of 2001 ---- 
MR. TAUZIN -- What I want to know is ---- 
MS. TEMPLE -- ---- and I said absolutely not. 
MR. TAUZIN -- What I want to know is, essentially, you said don't do that. 
MS. TEMPLE -- Right. 
MR. TAUZIN -- Is it customary that in those kind of discussions, when the firm finds itself in error, that anyone would suggest substituting memos or deleting information that was in memos already in the file? Was that unusual conversation? 
MS. TEMPLE -- I expect the engagement partners to raise questions about documentation and seek advice, which they were doing. 
The other legal advice that I gave on documentation was, the memos for any prior periods, first quarter of 2001, year-end 2000, could not be changed or deleted. 
MR. TAUZIN -- You're telling them no changes. I understand that. I'm asking you, was it customary? Was this unusual for members of the firm to be talking to you about changing documents, altering documents, substituting documents that were on file already regards to Enron operations? 
MS. TEMPLE -- At the time, based on my recollection, I understood that there were good-faith questions that were being asked about how to properly document the firm's ---- 
MR. TAUZIN -- Was it a good-faith question to change a memo that's already in the file with a new memo? 
MS. TEMPLE -- I received the question and consulted with my supervisor and others -- -- 
MR. TAUZIN -- You said, don't do it. 
MS. TEMPLE -- ---- and gave the advice. And to the best of my knowledge, the advice was followed. 
MR. TAUZIN -- Were you shocked that they would raise such a question? Were you alarmed? Were you disturbed? Did it bother you, as litigation counsel for the firm, that any member would even suggest altering the record, altering documents, substituting memos to the file? 
MS. TEMPLE -- I don't recall everything going on in my mind. I recall making sure, giving advice to make sure that the written record was complete and accurate and truthful. And I do recall seeing that my advice was followed. 
MR. TAUZIN -- And my time is up, but you do recall also that Oct. 16 memo, that you did discuss with them changing that memo so that your name was not included because you might be a potential witness. Is that correct? 
MS. TEMPLE -- I do recall giving legal advice after consultation with others, including outside legal counsel, Davis Polk, that the audit partners should document the recommendations and communications he had with the client about the client's, Enron's, draft press release. 
And I did, after consulting with outside legal counsel, and it's our standard practice in the legal group to advise the engagement team not to write down and discuss in their memos legal advice that the legal group might give, because it might be a waiver down the road of attorney-client privilege. 
MR. TAUZIN -- Thank you, gentlelady. 
The chair recognizes the gentlelady, Ms. DeGette, for a round of questions. 
REPRESENTATIVE DEGETTE -- Thank you, Mr. Chairman. . . . 
If you can tell me very briefly, under what circumstances you believe documents should be retained? When is it, what is the trigger under which documents need to be retained? 
MS. TEMPLE -- There are several provisions in the policy that address retention. 
MS. DEGETTE -- And, in fact, there's an exhibit to document No. 27 here, Exhibit 1, that says examples of situations to be reported, and that's a list of examples of situations where, if you see that coming, then you treat that as threatened legal action under Section 2.5 of the litigation procedures and you retain them. Is that right? 
MS. TEMPLE -- Yes, there is a list of examples to be reported to the legal group that calls for notification. I don't believe ---- 
MS. DEGETTE -- And that would trigger, then, a notification such as the one that you made, I think, on Oct. 12 in your e-mail, right? 
MS. TEMPLE -- My understanding ---- 
MS. DEGETTE -- I mean, it's not just threatened litigation, is it? There's other things that would trigger Arthur Andersen to recommend retention of documents. 
MS. TEMPLE --The policy does require retention of all related material if there's threatened litigation. 
MS. DEGETTE -- Or other situations, right? And one of those situations would be oral indications from management or owners that the firm was somehow responsible for the failure of operations or the failure to detect fraud, right? That's the third one on the list of examples of situations to be reported, right? 
MS. TEMPLE -- Right. And this list of examples is from the policy statement No. 780, which ---- 
MS. DEGETTE -- Right. 
MS. TEMPLE -- ---- requires notification to the legal group of those examples. 
MS. DEGETTE -- -- O.K. So now, there was a memo that was written on Aug. 15, 2001, from Sherron Watkins, an Enron vice president, alleging improper accounting and all kinds of other problems. Was the legal department aware of that? 
MS. TEMPLE -- I don't recall if I was aware of that particular document. I was aware of circumstances about allegations by an employee of Enron, and the fact that Vinson & Elkins had conducted an investigation and concluded and reported positively to the board the week of Oct. 8. 
MS. DEGETTE -- So you were aware that in August an employee had made these allegations, and then Vinson & Elkins had done an investigation also in August. Is that right? 
MS. TEMPLE -- Not exactly. 
MS. DEGETTE -- No? 
MS. TEMPLE -- Before Oct. 12 I was aware that Vinson & Elkins had been engaged and completed and reported orally to the board that the results of their investigation were positive. 
And the engagement team also assured the practice directors who were being consulted at that time and myself that they had reviewed the information about the allegations, and that the allegations were, to the extent that they had any information in them in reference to transactions, involved transactions that the audit team had carefully reviewed in its prior work. 
MS. DEGETTE -- O.K. So you thought that, because Vinson & Elkins had said there's no problem, that that did not trigger any kind of requirement. Is that correct? Yes or no, please. 
MS. TEMPLE -- No, that's not ---- 
MS. DEGETTE -- O.K, thank you. 
MS. TEMPLE -- ---- what I was thinking at the time. 
MS. DEGETTE -- Now, what caused you to send that memo on Oct. 12? Did you do that on a regular basis? 
MS. TEMPLE -- There were several factors that caused me to send the memo on Oct. 12. 
MS. DEGETTE -- O.K, let me back up for a minute. How many times in your two years, roughly, at Andersen did you send memos like this, reminding people of the document retention and destruction policy? 
MS. TEMPLE -- I don't recall the number of times. I have referred ---- 
MS. DEGETTE -- Had you done it before? 
MS. TEMPLE -- I believe I had referred people to the firm's policies on document retention and destruction, as well as ---- 
MS. DEGETTE -- How many times before? 
MS. TEMPLE -- I don't recall the number of times. 
MS. DEGETTE -- One time? Five times? Ten times? 
MS. TEMPLE -- To the best of my recollection, at least one other occasion, and I ---- 
MS. DEGETTE -- And was that in relation to Enron, or was that in relation to another client? 
MS. TEMPLE -- No, that was not in relation to Enron. . . . 
MR. TAUZIN -- I just want to clarify your testimony to the gentlelady's questions. You indicated that Vinson & Elkins issued a positive report. I want a quote from that report. 
''There is a serious risk of adverse publicity and litigation. It also appears, because of the inquiries and issues raised by Ms. Watkins, Arthur Andersen will want additional assurances that Enron had no agreement with LJM that LJM would not lose money,'' et cetera. 
Is that a positive report? 
MS. TEMPLE -- As I recall, the outcome of the report, as reported to me, the ---- 
MR. TAUZIN -- You have a copy of this, I believe we've submitted, you have a copy of this letter, don't you, from Vinson & Elkins? You saw it yourself, didn't you? 
MS. TEMPLE -- After the week of Oct. 12, I did receive a copy ---- 
MR. TAUZIN -- But here's the point, Ms. Temple. I mean, we're trying to get the facts here. But if you will characterize a report that indicates a decline in the value of Enron's stock and the serious risk of adverse publicity and litigation as a positive report from the attorneys, we're going to have trouble with your testimony today. 
MS. TEMPLE -- Later on, when I did receive a copy of the report and sent a copy to outside counsel, I did note the comments that you referenced. But I also noted that the law firm reported that there was nothing further to follow up on at that point in time. 
And the law firm was representing Enron Corporation, not Arthur Andersen. And I understood and recall at the time thinking that there might be a challenge to the business judgment decisions of Enron to enter into certain transactions. 
MR. TAUZIN -- Did you know at the time that Vinson & Elkins had signed off on these agreements as a counsel for the firm? There may have been a conflict of interest in them commenting on them now? 
MS. TEMPLE -- I don't recall the circumstances ---- 
MR. TAUZIN -- You're not aware of that? 
MS. TEMPLE -- I don't recall at this time. 
MR. TAUZIN -- Thank you, gentlelady. 
MS. DEGETTE -- Do you recall a conversation with Mr. Duncan in which he assured you he was gathering the documents to preserve them? Do you recall specifically having that conversation? 
MS. TEMPLE -- I don't recall ---- 
MS. DEGETTE -- According to your notes? 
MS. TEMPLE -- ---- his specific words, but I do recall that we had a group conference call on Oct. 23. And I have these notes from that call. 
MS. DEGETTE -- And the notes don't say anything about preservation, do they? 
MS. TEMPLE -- The notes. . . . 
MS. DEGETTE -- Yes or no? 
MS. TEMPLE -- The notes do not have the word ''preservation'' in them. 
MS. DEGETTE -- And on Oct. 12, you had just sent a memo to Mr. Duncan and his group, advising them of the Arthur Andersen document retention and destruction policy, which involved destroying of all of the notes and backup documents and so on. Correct? 
MS. TEMPLE -- No. Actually, I sent a reference to the policy to the practice director in Houston. 
MS. DEGETTE -- So you never sent that to Mr. Duncan? 
MS. TEMPLE -- I did not send it personally to Mr. Duncan. 
MS. DEGETTE -- Mr. Odom had that, correct? Mr. Odom, did you have that? 
MS. TEMPLE -- Yes, I sent it to the Houston practice director, based on several factors ---- 
MS. DEGETTE -- Just cutting through, in this Oct. 23 phone call, you don't recall specifically -- and your notes do not reflect -- you telling Mr. Duncan to retain records, do they? Yes or no. 
MS. TEMPLE -- I don't see that in my ---- 
MS. DEGETTE -- Yes or no, ma'am? 
MS. TEMPLE -- No, it's not. . . . 
MS. DEGETTE -- Thank you. I yield back. 
MR. TAUZIN -- Ms. Temple, if you received this e-mail from Mr. Duncan indicating he was collecting all these documents, and assumed that he was preserving them, why did you feel it necessary on November the 9th to leave a voice mail with Mr. Duncan, directing him to preserve those documents because of the receipt of the S.E.C. subpoena? If he was preserving them already, why on earth did you feel it necessary to advise him to preserve them on Nov. 9? 
MS. TEMPLE -- It is our firm's practice to notify the engagement team when the legal group receives a subpoena. I believe it had been received in the general counsel's office, and I promptly notified the engagement partner and reminded about the need to, at this point in time, we'll have to collect the documents for production. 
MR. TAUZIN -- Well -- but you understand why common sense gets a little lost here. If you're in a position where you know that the retention policy also means destruction -- you know that, didn't you? 
MS. TEMPLE -- There are aspects of instruction guidelines ---- 
MR. TAUZIN: -- Yes. 
MS. TEMPLE -- ---- in that policy. Yes. 
MR. TAUZIN -- So you know that the retention policy, as long as it's operating, permits Mr. Duncan and however many people he has working for him to destroy documents. 
You hear, you get a memo from him saying, ''I'm gathering them all up.'' And you tell us today that you assumed that meant he was gathering up to preserve them for litigation, not to destroy them. 
Why would you even bother to say, ''By the way,'' on Nov. 9, ''quit destroying documents. We've just got an S.E.C. subpoena?'' Why would you do that? 
MS. TEMPLE -- The legal group notifies the engagement partner and engagement team when subpoenas are served. It was received by the legal group, and I felt it was appropriate to follow the firm protocol to notify the engagement partner. 
MR. TAUZIN -- Yes. But, you see, we also have your memo on November the 10th, and I'm going to read you from it. It says, ''One of the first things we must do in preparing to respond to these subpoenas and lawsuits is to take all necessary steps to preserve all of the documents and other materials that we may have relating to claims that are being filed.'' 
Now, if that was already being done, if you had received a notice from Mr. Duncan that he's gathering them all up to preserve them, if that was your conclusion, why would you say, ''the first thing we have to do now, now that the subpoena has arrived is start preserving these things?'' 
You see, common sense, Ms. Temple, common sense tells me that destruction was going on up until this time when the subpoena arrived and that until you said, ''preserve them'' they may well have been gathered up for destruction, and that somebody should have known that. And was that somebody you? 
MS. TEMPLE -- I never counseled any destruction or shredding of documents. And I only wish that someone had raised the question so that we could have consulted and addressed the situation.

Photos: JAMES C. GREENWOOD -- Republican of Pennsylvania (Stephen Crowley/The New York Times); NANCY TEMPLE -- Arthur Andersen (Bloomberg News)(pg. C8); BILLY TAUZIN -- Republican of Louisiana (Agence France-Presse)(pg. C9) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	




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