ENRON'S MANY STRANDS
The Report
The New York Times, 02/04/2002

ENRON'S MANY STRANDS: ANOTHER INQUIRY
Company Hobbled Investigation by Its Law Firm, Report Says
The New York Times, 02/04/2002

Internal Probe of Enron Finds Wide-Ranging Abuses --- Unanswered in Board Report Are Some Big Questions Regarding Legal Liability
The Wall Street Journal, 02/04/2002

ENRON'S MANY STRANDS: NEWS ANALYSIS
Talk of Crime Gets Big Push
The New York Times, 02/04/2002

THE FALL OF ENRON
CFO's Deals Detailed by Enron Probe: Andrew Fastow headed partnerships in which the energy firm's representatives were his own subordinates, panel's report shows.
Los Angeles Times, 02/04/2002

How Chewco Brought Down an Empire
The Washington Post, 02/04/2002

ENRON'S MANY STRANDS: THE BOOKKEEPING
Too Clever by Half: Enron's Doomed 'Triumph of Accounting'
The New York Times, 02/04/2002

ENRON'S MANY STRANDS: THE BOARD
Shareholder Advocates Press For Actions Against Directors
The New York Times, 02/04/2002

ENRON'S MANY STRANDS: LITIGATION
Lawyers Say Board Report Has Limited Value for Them
The New York Times, 02/04/2002

Internal Probe of Enron Finds Wide-Ranging Abuses --- Former CEO Kenneth Lay Won't Testify This Week At Hearings in Congress
The Wall Street Journal, 02/04/2002

ENRON'S MANY STRANDS: THE POLITICS
At 11th Hour, Lay Refuses to Testify as Congressional Criticism Grows More Pointed
The New York Times, 02/04/2002

THE FALL OF ENRON
Enron's Ex-Chief Won't Testify Hearings: Kenneth L. Lay pulls out of scheduled appearance before Senate Commerce Committee, evoking harsh reaction from congressional leaders.
Los Angeles Times, 02/04/2002

Ex-Chairman of Enron Cancels Hill Testimony; Lawyer Warns Of Accusatory Atmosphere
The Washington Post, 02/04/2002

Lay cancels date with Congress 
Ex-Enron leader won't testify 
Houston Chronicle, 02/04/2002

Text of withdrawal letter 
Houston Chronicle, 02/04/2002

Ex-workers let down as Lay alters his plans 
Houston Chronicle, 02/04/2002

As Enron Purged Its Ranks, Dissent Was Swept Away
The New York Times, 02/04/2002

ENRON'S MANY STRANDS: THE BUZZ
World Economic Forum Plays Down the Scandal
The New York Times, 02/04/2002

Bentsen heads roundtable session 
Congressman gathers hearing questions from ex-Enron employees 
Houston Chronicle, 02/04/2002

Meltdown Is Deja Vu for Some at Enron Energy: Executives who warned about practices had similar experiences at MG Corp. in the 1990s.
Los Angeles Times, 02/04/2002

White House Is Expected to Recommend Only a Slight Boost in Funding for SEC
The Wall Street Journal, 02/04/2002

Questioning the Books: In Spoof Video, Former CEO Steers Enron To Places No Firm Has Gone Before
The Wall Street Journal, 02/04/2002

O'Neill Wants Stiffer Penalties for CEOs --- Under Proposal, Executives Who Mislead Holders Couldn't Use Insurance
The Wall Street Journal, 02/04/2002

ENRON'S MANY STRANDS: THE AUDITORS
FORMER FED CHIEF PICKED TO OVERSEE AUDITOR OF ENRON
The New York Times, 02/04/2002

Questioning the Books: Andersen Retains Volcker in Effort to Boost Its Image --- Former Fed Chairman Is Set To Lead Panel to Help Change Audit Practices
The Wall Street Journal, 02/04/2002

Questioning the Books: Companies Mull Separation of Auditing, Consulting
The Wall Street Journal, 02/04/2002

Derivatives Cop Wanted, but Terms Vary
The Wall Street Journal, 02/04/2002

Enron's Woes Are Felt by Firms Overseas --- In U.K. and Elsewhere, Accounting Rules Get Newfound Attention
The Wall Street Journal, 02/04/2002

Enron's Rise and Fall Gives Some Scholars A Sense of Deja Vu --- Decades Ago, a Big Power Trust Likewise Pushed Its Luck -- And Earned a Place in Infamy
The Wall Street Journal, 02/04/2002

BOOM TOWN: Enron's Lessons Can Be Applied To Web Issues
The Wall Street Journal, 02/04/2002

ENRON'S MANY STRANDS
Hearings This Week
The New York Times, 02/04/2002

As If The Enron Story, With a Plot as Thick as Pea Soup It all started with a deal on carnivals, then snowballed into a carnival of deals.
Los Angeles Times, 02/04/2002

_______________________________________________________________


National Desk; Section A
ENRON'S MANY STRANDS
The Report
By DIANA B. HENRIQUES

02/04/2002
The New York Times
Page 19, Column 1
c. 2002 New York Times Company

The 217-page report of a special investigative committee of the board of the Enron Corporation, released late Saturday, provides the first independent assessment of what went wrong at the company, which filed for bankruptcy in early December. Here are the principal findings. DIANA B. HENRIQUES 
CONFLICTS OF INTEREST -- Senior executives who owed their primary allegiance to Enron and its shareholders participated in a number of private partnerships that did business with Enron. Through the partnerships, these executives, including Andrew S. Fastow, the chief financial officer, and Michael J. Kopper, who worked with him, were enriched, in the aggregate, by tens of millions of dollars they should never have received.
INADEQUATE DISCLOSURE AND ACCOUNTING ERRORS -- Enron disclosed the existence of one set of partnerships, LJM1 and LJM2, to its shareholders. However, these disclosures were obtuse, did not communicate the essence of the transactions completely or clearly, and failed to convey the substance of what was going on between Enron and the partnerships. 
Certain transactions allowed Enron to manipulate its publicly reported earnings, to offset and conceal very large losses and, from September 2000 through September 2001, to report profits that were almost $1 billion higher than should have been reported. 
The accounting treatment for some partnerships was clearly wrong, apparently the result of mistakes either in structuring the transactions or in basic accounting. In other cases, the accounting treatment was likely wrong. As a result, business entities that should have been included in Enron's financial statements were not disclosed. A set of entities called the Raptor partnerships were instrumental in Enron's systematic concealment of its losses and inflation of its earnings. 
A FAILURE AT THE TOP -- Procedures that were set up to police the potential conflicts in the partnerships' dealings with Enron were not rigorous enough and were inadequately monitored by both senior management and the board. Individually, and collectively, Enron's management failed to carry out its substantive responsibility for ensuring that the transactions were fair to Enron -- which in many cases they were not. 
The captain of the ship, Kenneth L. Lay, functioned almost entirely as a director, and less as a member of management. 
Jeffrey K. Skilling, although he certainly knew or should have known of the risks associated with these transactions, he did not monitor them, even after Enron's treasurer, Jeffrey McMahon, told him in March 2000 that he had serious concerns about Enron's dealings with the LJM partnerships. 
Richard Causey, Enron's chief accounting officer, presided over a series of accounting judgments that went well beyond the aggressive and failed to provide the board with sufficient information about transactions. 
The board failed to adequately oversee management, especially in its dealings with the problematic partnerships. The board's compensation committee failed to review Mr. Fastow's compensation from the partnerships. Nor did the board react to warning signs when they occurred. 
Enron's outside advisers also failed to protect shareholders. The accounting firm Arthur Andersen did not fulfill its professional responsibilities in connection with its audits of Enron's financial statements. Besides making errors that allowed Enron to conceal business transactions that should have been disclosed, Andersen also failed to alert Enron's audit committee to the accounting firm's own concerns about the adequacy of Enron's disclosure of the conflicts involved in these transactions. 
Vinson & Elkins, Enron's legal counsel, should have brought a stronger, more objective and more critical voice to the disclosure process.

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

Business/Financial Desk; Section A
ENRON'S MANY STRANDS: ANOTHER INQUIRY
Company Hobbled Investigation by Its Law Firm, Report Says
By KURT EICHENWALD

02/04/2002
The New York Times
Page 19, Column 3
c. 2002 New York Times Company

An investigation last year by outside lawyers for Enron into accusations of improprieties raised in an anonymous employee letter to the chairman was hampered by restrictions placed by executives, causing the findings to be ''largely predetermined,'' according to a report from a committee of Enron's board. 
The inquiry into the accusations in the letter, later determined to have been written by Sherron S. Watkins, an executive who worked in the company's finance area, failed to detect many of the problems that subsequently contributed to the company's collapse, even though the letter described them in detail.
''Watkins was right about several of the important concerns she raised,'' the report stated. ''On certain points, she was right about the problem, but had the underlying facts wrong. In other areas, particularly her views about the public perception of the transactions, her predictions were strikingly accurate. Over all, her letter provided a road map to a number of the troubling issues presented'' by certain partnerships. 
But the investigation by Enron's lawyers at Vinson & Elkins was inadequate largely because of restrictions placed by the company on the lawyers' efforts from the outset, the report says. The lawyers were told not to review the underlying accounting for the partnerships, the very area where Ms. Watkins said a problem existed and where the report found its evidence of errors and potential malfeasance. ''The result of the V.& E. review was largely predetermined by the scope and nature of the investigation and the process employed,'' the report says. 
The investigators wrote that they found the most serious problems ''only after a detailed examination of the relevant transactions and, most importantly, discussions with our accounting advisers,'' both steps that Enron determined would not be part of Vinson & Elkins's investigation. 
A representative of Vinson & Elkins, speaking on the condition of anonymity, said the accusations raised by the letter were strongly examined by the investigators. 
''Sherron Watkins's complaints were taken quite seriously,'' the representative said. 'The exercise of ascertaining the facts was a serious one.'' 
A series of events surrounded the sending of the Watkins letter. Jeffrey K. Skilling stepped down as chief executive on Aug. 14, after only months in the job, and was succeeded by his predecessor, Kenneth L. Lay. A week later, Ms. Watkins sent the anonymous letter to Mr. Lay. 
Mr. Lay passed the letter to Enron's general counsel, James V. Derrick, who in turn hired Vinson & Elkins to investigate, even though the law firm had played a role in some of the transactions challenged by Ms. Watkins. 
''Derrick says that he and Lay both recognized that there was a downside to retaining V.& E. because it had been involved'' in some of the transactions under investigation, the report says. ''But they concluded that the investigation should be a preliminary one.'' 
But even in that preliminary investigation, the effort went nowhere, largely because the lawyers sought answers almost exclusively from the people at Enron and its accounting firm, Arthur Andersen, who had been involved in setting up the partnership deals. 
Vinson & Elkins ''spoke only with very senior people at Enron and Andersen,'' the report says. ''Those people, with few exceptions, had substantial professional and personal stakes in the matters under review.''

Photo: Sherron S. Watkins wrote in August to Enron's chairman and said there were improprieties in the company. (James Estrin/The New York Times) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Internal Probe of Enron Finds Wide-Ranging Abuses --- Unanswered in Board Report Are Some Big Questions Regarding Legal Liability
By Rebecca Smith and John R. Emshwiller
Staff Reporters of The Wall Street Journal

02/04/2002
The Wall Street Journal
A3
(Copyright (c) 2002, Dow Jones & Company, Inc.)

A highly anticipated report by a special committee of Enron Corp.'s board investigating the energy trader's collapse portrayed a company riddled with improper financial transactions and extensive self-dealing by company officials. But the report left unanswered major questions whose resolution could determine whether the company and its officials will face criminal or civil liability. 
Some of those questions might begin to be addressed this week as Congress holds a round of hearings on Enron, once the nation's seventh-largest business, by revenue, which sought bankruptcy-law protection in early December. Kenneth Lay, Enron's chairman and chief executive for most of the past 15 years, was slated to testify this morning before the Senate Commerce Committee, but yesterday canceled his appearance. Mr. Lay resigned his Enron positions last month.
The committee's report essentially focuses on certain off-balance-sheet partnerships first disclosed by The Wall Street Journal beginning in October. Controversial accounting related to the partnerships was the major factor contributing to Enron's collapse. The 211-page report by the three-member special board committee and its staff amounts to a scathing indictment of the way the company did business in recent years. Enron "improperly" implemented various transactions "to conceal from the market very large losses" resulting from some of its business operations, the report said. Between the third quarter of 2000 and the third quarter of 2001, alone, reported earnings were "almost $1 billion higher than should have been reported," it added. The committee said the report was prepared with limitations of time and access to certain witnesses. 
Additionally, the report said, several Enron officers and other employees "were enriched" by tens of millions of dollars that "they never should have received" as the result of being investors in partnerships that did large business deals with the company. Among those employees cited by the report were former chief financial officer Andrew Fastow, who allegedly made at least $30 million from heading and partly owning two entities known as the LJM partnerships; Michael Kopper, a former managing director of an Enron unit, who supposedly made at least $10 million from the Chewco Investments partnership and former treasurer Ben Glisan, whom the committee quoted as acknowledging that he received about $1 million within two months of putting $5,800 into one partnership arrangement. 
A spokesman for Mr. Fastow declined to comment. Neither Mr. Kopper nor Mr. Glisan could be reached for comment. In the past, both have declined to comment. 
The report also takes a hard shot at Arthur Andersen LLP, noting that in addition to being Enron's external auditor, the Chicago firm was paid $5.7 million in return for helping design the controversial partnerships that investigators found were fraught with ethical problems from the start. In a statement, the big accounting firm said the report wasn't credible because it sought to "insulate" Enron officers and directors by "shifting the blame to others." 
Enron's main outside law firm, Vinson & Elkins, also comes in for criticism. Vinson & Elkins "should have brought a stronger, more objective and more critical voice" to the issue of what Enron needed to disclose publicly about its partnership-related transactions, the report said. 
A senior Vinson & Elkins partner declined to discuss what advice the firm gave to Enron executives, citing attorney-client confidentiality. The lawyer pointed out that the report notes that Vinson & Elkins, based in Washington, did push Enron to disclose more but the lawyers were overruled by Enron's investor-relations department. 
Still, there's plenty the report doesn't say. It rarely ventures beyond an examination of the LJM and Chewco partnerships, uncovered by The Wall Street Journal in articles published last fall. Since then, allegations have emerged concerning possible fraudulent accounting schemes at several Enron units including Enron Energy Services and Enron Broadband Services. These aren't addressed in the report. The report also didn't answer questions concerning who had crucial information about the creation and financing of the Chewco partnership in 1997. In testimony to Congress in December, Andersen Chief Executive Joseph Berardino said that those 1997 Chewco-related activities involved "possible illegal acts." 
The provenance of the report also casts a shadow on its handling of issues concerning the investigating committee itself and its advisers. The chairman, William Powers, is dean of the law school at University of Texas, a facility that has ties to Vinson & Elkins. Another member, Herbert "Pug" Winokur Jr., was an outside director on Enron's board when many of the transactions now under scrutiny were approved. Raymond Troubh, the final member of the committee, has no apparent conflict. 
As for the advisers, William McLucas, former head enforcement officer for the Securities and Exchange Commission, now works for the Washington-based law firm of Wilmer Cutler & Pickering, which is representing Enron in a case against federal energy regulators that is currently before the U.S. Supreme Court. The accounting firm that helped advise the committee, Deloitte & Touche, has previously done tax work for Enron, including "certain limited tax-related services for Chewco Investments," according to the report. 
Despite these potential conflicts, the report provides a wealth of detail about specific transactions -- including the nearly two dozen involving the LJM partnerships created by Mr. Fastow. 
The theme of the report remains consistent from deal to deal: Officers who should have been concerned with doing their fiduciary duty to shareholders instead cooked up Rube Goldberg-like structures to circumvent already weak accounting rules. Not only did the ventures engage in transactions that violated accounting rules, the report says, but numerous transactions were done that "served no apparent business purpose for Enron" and appear ginned up simply to generate fees for insiders. 
According to the report, one of the most egregious examples of financial engineering concerned LJM partnership subentities known as "Raptor" that were used to "hedge" or provide offsets to fluctuating values in other Enron investments. 
Had they been true hedges, says the report, there would have been a true transfer of risk from Enron to another party, in return for fair compensation. But that isn't the way Enron did business. Instead, Enron engaged in apparently false transactions with related parties, using its own stock, in some cases. This provided big bursts of profits for the company while stocks were rising. But it also generated big losses when prices were moving in the opposite direction. In late 2000 and early 2001, according to the report, two of the Raptor vehicles had insufficient credit capacity to pay Enron on its hedges. 
"As a result, in late March 2001, it appeared Enron would be required to take a pretax charge against earnings of more than $500 million," the report says, "to reflect the shortfall in credit capacity" of the Raptor structures. 
Rather than take the lump, Enron chose to "restructure" the Raptor vehicles by transferring more than $800 million of contracts to the vehicles that entitled the holder to receive still more Enron stock. The report says the transactions don't appear to have been authorized by the board of directors. 
This maneuver enabled Enron to put off declaring substantial losses from the first quarter of 2001 until the third quarter -- by which point the company's chief executive had departed. Shortly before Mr. Skilling resigned as president in August 2001, both he and Mr. Lay told investment analysts that the company's financial condition had never been stronger. 
Another troublesome series of transactions detailed in the report concerned Chewco, a vehicle run by Mr. Kopper, a member of Enron's Global Finance team who reported to Mr. Fastow. The committee said it found no evidence that any waiver from Enron's code of conduct ever was obtained from the board, prior to Mr. Kopper's involvement. 
Chewco was created to hold part ownership in another Enron-related investment vehicle. Enron was prohibited from holding this interest directly unless it wanted to put the related debt back on its balance sheet. But to keep the investment "unconsolidated," Chewco had to be separate from Enron, in terms of management, and it had to have outside equity equal to at least 3% of its total capacity. 
It failed both tests, the investigators found. The outside equity piece was provided by two other entities controlled by Mr. Kopper called Little River Funding LLC and Big River Funding LLC. Mr. Kopper in December 1997 transferred his interest in these entities to William Dodson, the report says. The two men, according to the report, are "domestic partners." The nature of their relationship at the time of the Chewco transactions isn't clear. 
Mr. Kopper received $2 million in "management and other fees" related to Chewco during a three-year period that ended in December 2000. The committee said it couldn't identify "what, if anything, Kopper did to justify the payments." All told, Mr. Kopper and Mr. Dodson received more than $12 million from Enron and Enron-related entities in return for what is believed to have been an initial investment of $125,000. 
(See related article: "Former CEO Kenneth Lay Won't Testify This Week At Hearings in Congress" -- WSJ Feb. 4, 2002)

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

Business/Financial Desk; Section A
ENRON'S MANY STRANDS: NEWS ANALYSIS
Talk of Crime Gets Big Push
By KURT EICHENWALD

02/04/2002
The New York Times
Page 1, Column 5
c. 2002 New York Times Company

The report released Saturday evening by a special committee of the Enron Corporation's board clearly raises the specter that at the foundation of the company's downfall was a series of multimillion-dollar crimes, legal experts and former prosecutors said yesterday. 
Until now, much of the investigation into Enron's free fall has been focused on complex transactions that, while suspicious and poorly executed, appeared to fall within the framework of workaday corporate finance. These include the now notorious off-balance sheet deals that shifted assets and debt from the company's books and into a byzantine collection of partnerships, many of them controlled by Enron's former chief financial officer, Andrew S. Fastow.
But with the committee's report, if it proves accurate, investigators into the company's collapse will seek to pinpoint whether the same kinds of fraudulent acts that were at the foundation of the savings and loan scandals of the late 1980's and early 1990's occurred at Enron, too. These include false valuation of assets, bogus deals between related parties, and millions of dollars pocketed by participants along the way. 
''This report is a road map for the Department of Justice to bring a criminal indictment,'' said John J. Fahy, a certified public accountant who was once a federal prosecutor in New Jersey. 
With its detailed description of seemingly irrational transactions that served no economic purpose other than to pump up Enron's earnings, the report has shifted the focus from the company's balance sheet, which lists assets and liabilities, to its income statement, which describes revenues and profits. 
To those uncomfortable with the internecine workings of finance, that may sound like a distinction without a difference. 
But in truth, the shift allows the federal inquiries trying to unravel the Enron collapse to move from an area weighed down by dueling professional opinions to the familiar stomping ground of criminal prosecutions. 
''Moving from the balance sheet to the income statement makes the case a lot easier for a prosecutor to bring and a lot easier for a prosecutor to explain to a grand jury,'' Mr. Fahy said. 
To prove any case against Enron, prosecutors would have to establish that potential defendants intended to commit a crime. Under the law, a person can participate in activities that result in false information being given to investors without committing a crime, so long as he believed -- even falsely -- that the activities were appropriate. 
That is what created difficulties for a criminal case based on Enron's incorrect accounting for the partnerships as separate entities. Executives at Enron could point to approvals from Arthur Andersen, the company's accounting firm, as evidence that they intended nothing improper. 
But with the report's conclusion that certain transactions served no purpose other than to manipulate the reported earnings of the company -- and with certain executives personally receiving millions of dollars in undisclosed profits from their partnership dealings -- the hurdle of proving intent to commit a crime has been dramatically lowered. 
''It's going to take a herculean salesmanship job to persuade a jury that the Enron executives involved in this could not appreciate the fraudulent nature of these transactions,'' said Christopher J. Bebel, formerly a federal prosecutor and a lawyer with the Securities and Exchange Commission who is now with Shepherd, Smith & Bebel in Houston. 
''Their reliance on the advice of experts is starting to go out the window,'' Mr. Bebel added, ''and the accountants could end up being key witnesses for the government in some respects.'' 
Members of Congress, who have been investigating the Enron debacle, made it clear yesterday that what they are seeing now appears to fall within the realm of a criminal conspiracy. 
''We're finding what may clearly be securities fraud,'' Representative Billy Tauzin, Republican of Louisiana and chairman of the House Energy and Commerce Committee, said on NBC's ''Meet the Press.'' 
Most criminal fraud prosecutions must show that participants had some financial motive to participate in an illegal scheme, and in this instance, former prosecutors said, there are plenty of examples of such benefits. Enron insiders received millions of dollars in undisclosed compensation from their dealings with the partnerships; Mr. Fastow alone, whose spokesman has declined comment, received at least $30 million from his partnership dealings. 
An array of other insiders received huge sums in a deal offered to them by Mr. Fastow and another executive, Michael J. Kopper, who declined to be interviewed by the committee. Two participants in the deal earned about $1 million in profits in just two months from an investment of $5,800 each, the report said. 
''The magnitude of these returns raise serious questions as to why Fastow and Kopper offered these investments to the other employees,'' the report said. 
Ultimately, if the report proves correct that profits were improperly manipulated, the range of charges that would be under consideration are the standard mix for corporate frauds, according to former federal prosecutors. They include, at their base, securities fraud from the filing of false information regarding corporate profits with the Securities and Exchange Commission. Those, in turn, lead to charges of mail fraud and wire fraud relating to the transmission of that information, both to the S.E.C. and to the investing public. 
Despite the dozens of people involved in the transactions, the report describes an atmosphere of compartmentalized information, where few people understood the full scope of anything that was going on. 
Employees had little understanding of their roles and responsibilities in the transactions; in one particularly stunning passage, the report describes how an executive who negotiated a deal with Enron on behalf of one of the partnerships believed that, instead, she was acting on behalf of the energy company. 
But, for investigators, the most damning information relates to the repeated instances in which the company engaged in transactions that served no purpose other than to inflate the earnings Enron reported to investors and the public. 
Indeed, the portrait painted by the report is one of a corporation where facts were fungible, capable of being massaged and manipulated to create whatever outcome most benefited the executives involved. It describes, for example, transactions with backdated documentation, done for the apparent purpose of taking advantage of a high price in a stock that was at foundation of the deal. By the time the deal was actually done, the price of the stock had fallen dramatically, but Enron was able to book millions more in profit by simply pretending that the transaction had taken place weeks before it did. 
Repeatedly, the report said, there were transactions in which Enron sold an asset to a partnership near the end of an accounting period, only to buy them back later after profits had been booked. The partnership involved in those transactions never lost money on any deal, the report said, even when the value of the asset being bought and sold had declined. Indeed, the report said, there are suggestions that Enron guaranteed the partnerships involved against loss. 
Ultimately, certain transactions were simply bogus, the report concluded. For example, the most complex series of transactions involve a group of four partnerships known as Raptor I-IV. Purportedly, the transactions were designed to allow Enron to hedge certain investments it made -- transactions in which the risk of an investment is shared with another party for the purpose of minimizing potential losses. But in truth, the report said, the Raptor transactions were simply a complex group of partnerships controlled by Enron, used as a secret dumpsite where troubled Enron businesses -- and the poor financials that accompanied them -- could be hidden. 
Even worse, the report concluded, is the potential that, since Enron was essentially on both sides of each deal, the transactions were merely an illusion. 
''The fundamental flaw in these transactions is not that the price was too low, the report said. ''Instead, as a matter of economic substance, it is not clear that anything was really being bought or sold.''

Chart: ''Raising Red Flags'' Enron engaged in over 20 transactions from September 1999 to July 2001 with LJM partnerships created and managed by Andrew S. Fastow, Enron's chief financial officer at the time. The board's special investigation committee found several reasons many of these transactions raised red flags: Enron often sold the partnership assets at the end of accounting periods, only to buy them back later; LJM made a profit even when the asset's value had declined; and true ownership of certain partnership stakes was sometimes disguised. Chart shows companies sold or bought back by Enron from 2000 2001. Cuiaba Brazilian power plant Enron sold its stake in a Brazilian power plant that was under construction to LJM1 for $11.3 million, allowing it to book $65 million of income related to a gas supply contract in the third and fourth quarters of 1999. Despite serious construction problems, Enron bought back its stake for $14.4 million in August 2001. Enron securities Collaterized loan obligations Enron wanted to sell some securities with low credit ratings but was unable to find a buyer, so it sold them to LJM2 and another partnership. A year and a half later, with their value deteriorating, Enron bought the securities back at cost plus interest, sparing LJM2 a loss. Nowa Sarzyna Polish power plant Enron wanted to sell its interests in a Polish power plant before the end of 1999 to improve its balance sheet. Enron sold the plant to LJM2 as a temporary solution, hoping to find another buyer, and recorded a $16 million gain. Three months later, after the plant malfunctioned during a test, Enron was forced to buy it back under the terms of a credit agreement, giving LJM2 a 25 percent return. MEGS Natural gas gathering After failing to find a buyer, Enron sold a 90 percent equity interest in MEGS to LJM2 for about $26 million, giving Enron an advantage in its year-end accounting. Less than three months later, Enron bought the company back, giving LJM2 a 25 percent return. Later, Enron took a write-off because of diminished performance of the gas wells. Yosemite Trust Enron sold its share of certificates in a trust, Yosemite, to LJM2. The date of the sale was recorded in legal documents as Dec. 29,1999, but the actual sale appeared to occur on Feb. 28, 2000. LJM2 held the certificates for one day before selling them to an affiliate of Enron. LJM2 earned $100,000 plus expenses on the deal. Backbone Fiber optic cable Enron Broadband Services, under pressure to meet quarterly numbers, sold its unactivated dark fiber optic cable to LJM2 on June 30, 2000, recording a $54 million gain. Mr. Fastow was hesitant to invest LJM2's money in the deal, so EBS had to increase the promised return to LJM2 if it was not able to resell the fiber within two years. The fiber was eventually sold to outside companies. (Source: Special investigation committee of Enron's board)(pg. A19) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Financial Desk
THE FALL OF ENRON CFO's Deals Detailed by Enron Probe: Andrew Fastow headed partnerships in which the energy firm's representatives were his own subordinates, panel's report shows.
JEFF LEEDS
TIMES STAFF WRITER

02/04/2002
Los Angeles Times
Home Edition
A-16
Copyright 2002 / The Times Mirror Company

HOUSTON -- At least 13 times in the last three years, private partnerships headed by Enron Corp.'s chief financial officer cut deals with the energy giant in which the executives representing Enron were his own subordinates. 
These arrangements by ousted CFO Andrew S. Fastow created a jungle of conflicts of interest in Enron's executive suites and were a key factor in the financial problems leading to the company's Dec. 2 Chapter 11 bankruptcy filing, according to findings of the special Enron panel that examined the partnerships.
The report, released Saturday, provides a wide-ranging indictment of the company's management and financial practices. Much of the focus is on Fastow, however, as it offers the most detailed account yet of the off-the-books partnerships he oversaw. 
"The transactions between Enron and the [Fastow] partnerships resulted in Enron increasing its reported financial results by more than a billion dollars, and enriching Fastow and his co-investors by tens of millions of dollars at Enron's expense," said the report, released this weekend. 
Enron's internal investigation alleges that Fastow, a former banking executive who became Enron's CFO four years ago at age 36, raided the energy giant from the inside, exposing his employer to deepening risk while orchestrating side deals that paid him at least $30 million. 
"Fastow, as CFO, knew what assets Enron's business units wanted to sell, how badly and how soon they wanted to sell them and whether they had alternate buyers," the report said. "He was in a position to exert great pressure and influence, directly or indirectly, on Enron personnel who were negotiating" with the entities in which he had a personal financial stake. 
Gordon Andrew, a spokesman for Fastow, declined to comment. 
The 203-page report was written by a three-member panel led by William Powers, the University of Texas Law School dean appointed to the Enron board specifically to conduct the inquiry. 
Enron had turned to Fastow in the late 1990s to devise a strategy that would allow the energy giant to keep investing in new businesses while keeping the company's credit ratings strong. 
Fastow responded by increasing Enron's use of so-called special-purpose vehicles--corporate entities that can be used to absorb gains and losses as long as they are controlled and partially owned by outside investors. 
Enron had used such financing at least once before, cutting a joint-venture deal with the California Public Employees' Retirement System. But Fastow added a twist--he proposed that Enron engage in deals with an ostensibly independent entity run by one of Enron's own executives. 
The technique worked for a time. By moving assets and liabilities off its books, Enron was able to inflate its profit and credit rating--fueling its swift ascent on Wall Street and pumping up the value of its executives' stock options. 
But amid increased scrutiny last year, Enron decided that many of the outside entities weren't truly independent. On Oct. 16, it was forced to disclose a $1.2-billion drop in shareholder equity, and the resulting decline in its credit ratings led the company to file for bankruptcy protection. 
Much of the problem arose from three partnerships engineered or partially owned by Fastow. 
Chewco Investments 
Fastow's first such off-the-books design for Enron was Chewco Investments--named for the Chewbacca character in the "Star Wars" films. He planned to use Chewco, financed with bank loans, to buy out the California pension system's share of a joint venture that Enron wanted to keep off its books. 
But the venture was hardly independent, the report found: The bank loans used to fund it were guaranteed by Enron, and initially, Fastow planned to manage it himself while continuing as Enron's CFO. 
Fastow told employees that Enron's then-president and his mentor, Jeffrey K. Skilling, had approved of his participation in Chewco as long as it didn't have to be disclosed in Enron's regulatory filings, the internal probe found. 
When Enron's in-house lawyers told him his involvement would have to be disclosed, Fastow substituted one of his lieutenants, Michael Kopper, to run the partnership. 
Although Chewco "apparently required little management" aside from preparing unaudited financial statements for internal use, Kopper received about $2 million in fees, the report said. During certain periods of Chewco's existence, these management tasks "appear to have been performed by Fastow's wife," the report said. 
LJM Cayman 
Chewco was just the start of Fastow's deal making. In June 1999, he formed a partnership called LJM, with the letters representing the first initials of the names of his wife and two children. 
Fastow formed LJM Cayman to shield Enron from possible losses from its $10-million investment in a start-up Internet service provider called Rhythm NetConnections Inc. 
As part of the plan, Fastow told Enron's board that he would serve as the general partner of LJM Cayman and would invest $1 million of his own money. In return, he would be paid fees including 100% of the proceeds of the sale of any assets until he had reached a rate of return of 25%. But he said he would not receive any gains from increases in the price of Enron stock paid to LJM Cayman. 
The board approved the arrangement, waiving Fastow's potential conflict of interest. 
In a complex swap, Enron moved the risk from the Internet company to LJM Cayman in exchange for more than $170 million in paper increases on Enron stock locked up in a contract with an outside investment bank. 
Enron in early 2000 decided to sell the Rhythm shares and had to unwind the deal with LJM. Fastow negotiated the deal with Enron's chief accounting officer, Richard Causey--another potential conflict. 
An executive who has been interviewed by congressional investigators said Causey "was intimidated by Andy and didn't think it was his role" to haggle with him. 
Causey could not be reached for comment. 
According to the calculations of the board investigators, the final deal resulted in Enron giving up options and cash worth $70 million more than the restricted shares it received. 
The transaction also exposed another potential conflict. In March 2000, Fastow had allowed a handful of Enron executives to participate in LJM Cayman. These executives--who included Fastow and Kopper--signed an agreement to form an entity called Southampton Place, which acquired a stake in LJM Cayman. 
The deal enabled a Fastow family foundation to receive $4.5 million about two months after Fastow made an initial investment of $25,000. Two other employees who each invested about $5,800 received about $1 million each in the same period. 
The special committee found that Fastow's financial stake was inconsistent with his representation to Enron's board that he wouldn't receive any value from Enron stock involved in the LJM Cayman transaction. 
The panel also found that at least two of the executives who received windfalls from LJM Cayman were representing Enron at the time in transactions with another Fastow-created entity. 
LJM2 Co-Investment 
In October 1999, Fastow engineered the creation of another, far larger entity called LJM2 Co-Investment. Again, he would serve as the entity's general partner while maintaining his post as Enron's chief financial officer. The plan was to raise money from outside investors and purchase assets from Enron and enable the energy giant to remove debt from its books. 
To raise funds, LJM2 sent an offering memorandum to potential investors. In an usual move, the document emphasized Fastow's position as Enron CFO, noting that LJM2 would have access to "investment opportunities that would not be available otherwise to outside investors." Critics say it is improper for Fastow to dangle the possibility of using inside information for investors' benefit. 
The report said the deals often took place under terms that were "remarkably favorable" to LJM2 while serving no apparent business purpose for Enron. For example, in one of the deals, Enron agreed that an LJM2 affiliate wouldn't have to start absorbing Enron losses until the Fastow-controlled LJM2 received an initial return of $41 million, or 30%, on its initial $30-million investment. 
The report concluded that the troubles created by Fastow's partnerships would have come to light far sooner if the board itself had exercised closer oversight.

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

A Section
How Chewco Brought Down an Empire
Peter Behr
Washington Post Staff Writer

02/04/2002
The Washington Post
FINAL
A01
Copyright 2002, The Washington Post Co. All Rights Reserved

With its "Star Wars" name, its elusive origin and its central role in the implosion of Enron Corp., the investment partnership named Chewco has been one of the mysteries of the unfolding scandal. 
Now it stands exposed in 27 detailed pages of a special investigative report.
In the Chewco story are examples of huge profits improperly claimed by Enron and individual enrichment by Enron insiders. In three years, a $125,000 investment by a second-level financial executive and his domestic partner ballooned into a $10.5 million payoff, plus other lucrative fees. 
On paper Chewco appeared independent; control was shared by Enron and outside investors in an arrangement that would permit Enron to keep some of its energy projects and debts off its books. Enron executives created Chewco in 1997 as part of a complex investment in another Enron partnership that owned stakes in natural gas projects. 
But personal motives dominated Chewco's history, according to the report by a special investigating committee of Enron's board of directors. 
First, then-chief financial officer Andrew S. Fastow proposed that he be allowed to manage Chewco, the report said. Jeffrey Skilling, then Enron's president, told the committee that Fastow also wanted to have members of his wife's family as Chewco's investors, but Skilling said he told Fastow no. 
Because of his senior executive position, Fastow could not run Chewco without publicly disclosing his role, which Skilling did not want, the investigators said. So Fastow turned Chewco over to a friend, Michael J. Kopper, then-managing director of Enron Global Finance, whom Fastow supervised. Kopper's role did not have to be disclosed because of his lower rank. 
To remove any public appearance that Kopper might be seen as controlling Chewco, several more pieces were tacked on. An entity, Big River Funding, became Chewco's limited partner. Little River Funding was set up as the owner of Big River. 
In December 1997, as Chewco was being created, Kopper transferred his ownership in both Big River and Little River to his domestic partner, William D. Dodson, an employee of an airline. That left Kopper with no formal ownership interest in Chewco. 
Kopper invested $115,000, and Dodson invested $10,000. Before Enron bought out their interests in March 2001, Fastow stepped in and pressured Enron to pay more. Kopper and Dodson ultimately shared a $10.5 million windfall from their $125,000 investment, according to the committee and former Enron employees. 
Kopper, in addition to collecting his regular Enron salary, was paid about $2 million in questionable management fees relating to Chewco from 1997 to 2000, the report said. According to the committee, Chewco required little management -- mainly clerical work involving transferring funds. Much of that was done by another Enron employee on company time and occasionally by Fastow's wife, although the report said it wasn't known if she was paid. 
Kopper and Dodson have an unlisted phone number and could not be reached yesterday. 
The outlines of Chewco's role in Enron's collapse emerged recently in newspaper reports and in investigations by lawyers representing shareholders. Enron, the report said, violated accounting standards when it created Chewco, enabling the company to claim $405 million of profits from 1997 through 2000 that it was not entitled to have, while also concealing more than $600 million in debt. Enron executives broke the rules a second time, the report said, using Chewco to report a profit on the increased value of Enron common stock held by a related partnership, Jedi. 
When Enron owned up to its accounting violations concerning Chewco and yet another partnership, LJM, last November, the disclosures stunned investors and pushed Enron toward a death spiral that ended with its Dec. 2 bankruptcy court filing. 
Chewco was an early example of the Byzantine investment structures that were Fastow's specialty. Its roots go back to 1993, when Enron formed the Jedi partnership with the giant California Public Employees' Retirement System (Calpers) to invest in natural gas projects. By 1997, company executives were eager to expand Jedi, but Calpers was reluctant. 
So Fastow and Kopper decided to buy out Calpers's share, which was then worth $383 million, and replaced it with their new creation, Chewco Investments LP. 
Jedi was operating off Enron's books. To keep it there, Chewco, as Jedi's new half-owner, would have to meet certain accounting standards. It would have to be independent of Enron's control, and its owners had to put in a small but specific amount of real money. 
That investment requirement came to 3 percent of Chewco's capital, or about $11 million. Kopper was a successful executive, former associates say, but he didn't have $11 million. The solution was to borrow most of the money from a willing lender -- in this case, Barclays Bank PLC. 
The remaining 97 percent included a loan from Jedi and another from Barclays. In another questionable part of the transaction, Enron guaranteed the Barclays' loans. 
But the creation of Chewco was hurriedly done, and there was a fateful slip. 
At the last minute, key details of the transaction changed, primarily because Barclays wanted more collateral for its loans. Accordingly, the size of Barclays' loan to Kopper and Dodson was trimmed by $6.6 million, making their investment less than 3 percent. If Fastow or Kopper had found another investor to make up the difference, Chewco would have met the standard. That was not done. 
From its beginning then, Chewco -- and thus Jedi -- didn't meet accounting requirements, so Enron should not have kept Jedi's debt off its books or have segregated Jedi's profits and losses from Enron's results, the committee said. Belatedly, the company corrected the error last November, with the devastating revision of its revenue and profits. 
"We do not know whether this mistake resulted from bad judgment or carelessness" by Enron employees or their auditor, Arthur Andersen, "or whether it was caused by Kopper or other Enron employees putting their own interests ahead of their obligations to Enron," the committee said. It noted: "the consequences were enormous."

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

Business/Financial Desk; Section A
ENRON'S MANY STRANDS: THE BOOKKEEPING
Too Clever by Half: Enron's Doomed 'Triumph of Accounting'
By FLOYD NORRIS

02/04/2002
The New York Times
Page 18, Column 1
c. 2002 New York Times Company

The original raptors were fierce creatures that hunted in packs and managed to bring down larger dinosaurs, which they then devoured. 
Now the special report of the Enron board committee has clarified just how four entities known as Raptors played an essential role in destroying Enron. It is a tale of how accounting rules can be abused and insiders enriched.
The report traces the delicate machinery that was used by Enron's accountants. There appears to have been, at least for a time, a tortured interpretation of accounting rules that could be used to justify the hiding of $1 billion in losses. 
But that smokescreen would have been completely unsuccessful had auditors from Arthur Andersen forced the company to disclose what was happening, as they should have done. Those disclosures would have made it clear that there was no economic rationale for the transactions, and thus no reason to think that Enron had earned nearly as much money as it said it did. 
Over 15 months, from the beginning of the third quarter of 2000 through the third quarter of 2001, Enron reported pretax profits of $1.5 billion. Had Enron not used the Raptor artifices, the figure would have been 72 percent lower: $429 million. 
The accounting rationale was that the risks of some truly bad investments had been transferred from Enron to the Raptors, which were created in conjunction with partnerships run by Andrew S. Fastow, then Enron's chief financial officer. 
In fact, as the report makes clear, there was no real transfer of risk, and Enron eventually had to shoulder the losses. But there was a large transfer of wealth to the Fastow partnerships, which were guaranteed huge profits while taking no risks. Those transactions helped provide $30 million for Mr. Fastow and millions for other Enron insiders. 
When it became clear that the Raptor enterprises were failing, Enron desperately restructured them, first at the end of 2000 and again three months later. Those reorganizations, which the committee denounces in the strongest terms, allowed the truth about Enron to stay largely hidden for many months -- a period when top Enron officials sold large quantities of stock. 
''The creation, and especially the subsequent restructuring, of the Raptors was perceived by many within Enron as a triumph of accounting ingenuity by a group of innovative accountants,'' the committee report stated. ''We believe that perception was mistaken. Especially after the restructuring, the Raptors were little more than a highly complex accounting construct that was destined to collapse.'' 
When it did collapse last fall, Enron was forced to take a large loss, which it painted as extraordinary. It was also forced to take a $1.2 billion reduction in shareholder equity -- the amount a company's balance sheet shows the company is worth. As questions about that intensified, Enron's collapse began. The Raptors lived up to their name, bringing down a giant. 
As with any disaster, there seem to be differing recollections. Jeffrey K. Skilling, Enron's president and chief executive during the March 2001 scramble to avoid having to report a half-billion dollars in losses, told the committee that he had known little of what happened. 
Other Enron employees, not named by the committee, recalled that Mr. Skilling had taken an intense interest, saying that fixing the Raptors was of the highest priority and then calling an accountant to congratulate him after the problem was finessed. 
There also seems to have been a bit of historical revisionism at Arthur Andersen, the auditing firm that repeatedly signed off on accounting that the committee characterized as dubious or clearly incorrect. 
In a Dec. 28, 2000, memorandum, Andersen partners in Houston reported that they had consulted with officials at the accounting firm's Chicago headquarters before approving a temporary Raptor restructuring that kept Enron from having to report a loss that year. 
But on Oct. 12, 2001, days before Enron reported the big loss related to Raptor -- the loss that led to the company's collapse -- an amended version of the December memorandum was put in the files. In that version, the Chicago partners advised that Enron's accounting in December had been wrong. 
What happened? Patrick Dorton, an Andersen spokesman, explained that there had been no need for the original memorandum to mention that the Chicago experts thought the accounting was wrong. That was because the Houston partners believed that the issue in question was not critical to the accounting. 
The accounting fiction of the Raptor enterprises stemmed from having the partnerships agree to assume the losses if some Enron investments lost value, as they did. The Raptors could stand the losses only because they had profits on investments in Enron stock, which was transferred by the company to them at a discount. 
It was an accounting hall of mirrors, and those involved knew it. Enron's corporate secretary, taking notes at a board committee meeting where a Raptor transaction was explained, wrote, ''Does not transfer economic risk, but transfers P&L volatility,'' referring to the profit and loss statement. In other words, there was no purpose for the deals save to hide the losses. If any directors were bothered by this sleight of hand, they do not appear to have spoken up. 
If the Raptor accounting was correct, the committee concluded, then ''a company with access to its outstanding stock could place itself on an ascending spiral: an increasing stock price would enable it to keep losses on its investments from public view; which, in turn, would spur further increases in its stock price; which, in turn, would increase its capacity to keep losses from its investments from public view.'' 
Arthur Andersen says its auditors acted properly, and it says the board report ''overlooks the fundamental problem: that poor business decisions on the part of Enron executives and its board ultimately brought the company down.'' 
In fact, the board committee's report makes clear that bad investments played an important role in Enron's demise. But it also provides evidence that if Andersen had done its job well, investors would have known the reality of those bad investments long before they did.

Chart: ''Raptors, a Step-by-Step Guide'' Through complex derivatives tranactions, enterprises called Raptors were used by Enron to hedge the risk that stock investments it held might decline. Here are how the Raptors worked, according to a recent report by an investigative committee of Enron's board. RAPTOR LJM2 1 Creating a Raptor Partnership Each Raptor needed capital to operate. Enron provided its stock to the Raptor in exchange for a promissory note. LJM2, a partnership run by senior Enron executives and financed by outside investors, invested $30 million in the Raptor. In return, LJM2 was promised at least a 30 percent return. 2 Recouping LJM2's Investment The Raptor could not operate until LJM2 had recouped its investment and made a profit. Enron paid the Raptor $41 milion for a contract that allowed Enron to sell the Raptor a certain amount of its stock at a fixed price sometime in the future. The Raptor gave the $41 million to LJM2, thereby repaying LJM2's investment and giving it a profit of $11 million -- enough to satisfy its investors. 3 Putting the Raptor to Work With LJM2 paid off, Enron made a contract with the Raptor in which the Raptor agreed to cover any losses from certain Enron investments if those investments declined in value. In return, the Raptor was promised any gains if the investments appreciated in value. The Problem -- The agreement between Enron and the Raptor protected Enron from a decline in the value of its investments only if the Raptor was able to cover those losses. That was possible only if the Raptor's principal asset -- Enron's stock -- rose in value. If the stock fell, it would be unable to meet its obligations and Enron would be stuck with the losses. 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business/Financial Desk; Section A
ENRON'S MANY STRANDS: THE BOARD
Shareholder Advocates Press For Actions Against Directors
By REED ABELSON

02/04/2002
The New York Times
Page 20, Column 1
c. 2002 New York Times Company

Shareholder activists said yesterday that they would use the sharply critical report by a special committee of Enron's board to take a much closer look at the board's own responsibility for the company's collapse. 
''Nothing could be more conclusive on the substantial unfitness of the Enron board,'' said William Patterson, the director of the office of investment for the A.F.L.-C.I.O. His federation plans to ask the Securities and Exchange Commission today to start an investigation into whether the Enron directors should be barred from serving on boards of other public companies. The federation is urging companies to remove any Enron director from their own boards.
The directors have maintained, through one of their lawyers, that they were misled by some Enron executives and were never told about critical transactions. They also say they relied on the guidance of outside accountants and lawyers. 
The report portrays a board, despite the prominence and financial sophistication of some members, as all too willing to go along with the numerous maneuvers that kept investors in the dark about Enron's true financial health. Instead of asking pointed questions, the report indicated, the directors appeared to rely too heavily on assurances from Enron executives and outside advisers. The report found that the board never probed deeply enough to understand what was going on and stop the financial abuses and self-dealing that the report said took place. 
The board, the report said, ''failed, in our judgment, in its oversight duties.'' If the board had ''been more aggressive and vigilant,'' it continued, the abuses that allowed Enron to inflate profits by at least $1 billion might never have happened. 
The report, however, does not distinguish among members of the board or hold individual directors accountable for specific actions, Mr. Patterson said. It offers little insight into why the board was not more skeptical and does not examine some of the potential threats to their independence that might have contributed to their laxity, he said. 
The directors have been sharply criticized by advocates for shareholders and by others for their lack of independence and their coziness with management. One director, Lord Wakeham, a former British cabinet member, for example, was also paid by Enron as a consultant, while another, Herbert S. Winokur Jr., an investment manager, was involved with a company that did business with Enron. Others, including Wendy L. Gramm, a former federal regulator and wife of Senator Phil Gramm, Republican of Texas, work for organizations that received charitable contributions from Enron. 
The committee that prepared the report was made up of three directors: Mr. Winokur, William C. Powers Jr. and Raymond S. Troubh. Mr. Powers, who leads the committee, and Mr. Troubh joined Enron after the company's collapse and were responsible for evaluating the board's own behavior. 
Whatever the reasons for the directors' behavior, they are sharply criticized by Mr. Powers and Mr. Troubh for their lack of oversight even when there were clear indications of significant potential problems at Enron. 
In particular, the report said, the board was aware of the potential conflicts involving the creation of partnerships with Enron's chief financial officer, Andrew S. Fastow. But the directors apparently never bothered to find out how much Mr. Fastow might have personally benefited, and they made only a cursory review of transactions between the partnerships and the company. Even when they should have known some of the transactions were devised primarily to improve Enron's financial results, the report said, they did not probe deeply enough to find the basic problems with the deals. 
''You can't accept stuff like that at face value when it deviates so much from business norms,'' said Robert E. Mittelstaedt Jr., a business professor at the Wharton School of the University of Pennsylvania. Enron's audit committee ''has a responsibility for risk management in the broadest sense,'' he said. 
In particular, Mr. Mittelstaedt faults the board for choosing to suspend Enron's own code of ethics to create the partnerships. 
Because the board commissioned the report, it has already been criticized by some, including Arthur Andersen, Enron's former accounting firm, as being self-serving. 
The report specifically says there is no evidence to suggest that the directors, unlike some Enron executives, had a financial interest in any of partnerships. 
But the report does not address other concerns involving the board, like the significant sales of stock by some directors, including Norman P. Blake Jr., chief executive of Comdisco. 
To Enron's critics, the board's real offense may have been its willingness to listen to the company management when there were indications that they should have taken a closer look. Many of the directors, including Robert K. Jaedicke, who headed the audit committee, and Mr. Winokur, who headed the finance committee, had served on the Enron board since the company was created in 1985 through a merger. 
''The board was asleep,'' said one person close to the board. ''It was mesmerized by the price of the stock and the apparent success of the company.''

Photo: Some Enron directors have been criticized as lacking in independence. Lord Wakeham, a director, was also paid as a consultant. (Reuters) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business/Financial Desk; Section A
ENRON'S MANY STRANDS: LITIGATION
Lawyers Say Board Report Has Limited Value for Them
By BARNABY J. FEDER

02/04/2002
The New York Times
Page 19, Column 5
c. 2002 New York Times Company

The Enron-sponsored report detailing the company's manipulation of numerous investment partnerships will provide only limited support to lawsuits by Enron investors and former employees, lawyers who filed the suits say. 
''It confirms many of the allegations in our complaints,'' said Steve W. Berman, a Seattle lawyer whose firm has filed four lawsuits seeking compensation for Enron employees who lost pensions, jobs or both when the company collapsed last fall.
But plaintiffs and their lawyers say any benefit from the report will be modest because the investigators, who were chosen by Enron's board, did not cover a range of Enron activities that will figure in many lawsuits. In the report, released Saturday, investigators ignored foreign operations, accusations of insider trading, Enron's role in the California energy crisis last year and possible mishandling of employee pensions. 
Nor did the investigators have access to several crucial Enron managers and members of the Enron audit team at the accounting firm Arthur Andersen, or enough time to delve deeply into the investment partnerships that were the focus of the inquiry. Some lawyers were also disappointed to see no mention of investment bankers and consultants that they suspect played a role in constructing what turned out to be a financial house of cards. 
''It only scratches the surface,'' said Trey Davis, a spokesman for the University of California Board of Regents, which is a plaintiff in a lawsuit. The university has estimated that it lost $145 million on its Enron investments, second only to the State of Florida among public investors. 
Lawyers not involved in any lawsuits said the report appeared to support an argument that Enron's directors did not recklessly or willfully participate in fraud. That is the conclusion the board, which appointed the investigators, might want a bankruptcy court to reach in deciding whether to leave the company under its control instead of naming a special trustee, said Seth T. Taube, head of the securities and business crimes practice at the law firm of McCarter & English in Newark. 
''You always want a report that says your people were negligent, not venal,'' Mr. Taube said. 
Despite the report's limited scope, plaintiffs and their lawyers said that the publicity it generated could encourage witnesses to come forward. The report also provided some new information about the roles of various parties in Enron's collapse, including some that have not yet been named in lawsuits. Many hoped that the report would encourage judges overseeing the suits to throw out motions to quash them. That, in turn, could allow the plaintiffs to move ahead sooner with the pretrial gathering of evidence, a process known as discovery. 
''A report like this is amazingly helpful in laying out who was involved and what went on,'' said James M. Finberg, a lawyer at Lieff Cabraser Heimann & Bernstein in San Francisco, which has filed a suit for investors against Enron directors, many of its executives and Arthur Andersen. The suit seeks class-action status. (Suits against Enron have been put on hold by the company's bankruptcy court filing.) 
Mr. Berman said that the report had made it more likely that his firm would add Enron's outside law firm, Vinson & Elkins, to the list of defendants in two of the four suits it has filed. One suit is based on federal antiracketeering statutes. The other, filed in a Texas state court, seeks damages for former employees who chose stock rather than cash as part of their compensation on the basis of Enron's statements about its financial condition. 
The report singled out Vinson & Elkins for playing a significant role in developing Enron's annual proxy statements to shareholders, which the investigators described as ''fundamentally inadequate.'' It also criticized the law firm for its role in an investigation last year of complaints about Enron's accounting. 
Evidence of active misconduct by parties like Vinson & Elkins and Arthur Andersen would be crucial to the lawsuits. In 1994, the Supreme Court ruled that a business could not be sued under federal law for providing advice or services that a client uses illegally in selling or buying stocks or other securities. 
Higher barriers went up in 1995 when Congress barred courts from allowing pretrial discovery in securities suits until all motions to dismiss the litigation had been dealt with. That has discouraged lawyers from dragging law firms, bankers and accountants into lawsuits before they have strong evidence against them. 
The same law also said defendants were liable for damages only in proportion to their role in securities violations. That further reduced the incentive for plaintiffs to sue a defendant's outside advisers. 
Most of the Enron lawsuits have been assigned to Federal District Court Judge Melinda Harmon in Houston. Three groups of lawyers are vying to be chosen by Judge Harmon as the lead representatives of investors. That decision is expected within two weeks. Lawyers representing employees, meanwhile, have been negotiating among themselves to form a committee to carry the cases forward. Judge Harmon has set a hearing for Feb. 25 to review where the lawsuits are headed.

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

Internal Probe of Enron Finds Wide-Ranging Abuses --- Former CEO Kenneth Lay Won't Testify This Week At Hearings in Congress
By Greg Hitt and Kathryn Kranhold
Staff Reporters of The Wall Street Journal

02/04/2002
The Wall Street Journal
A3
(Copyright (c) 2002, Dow Jones & Company, Inc.)

WASHINGTON -- Kenneth Lay, the embattled former chairman of Enron Corp., and two other former top company executives told lawmakers they won't testify this week as Congress begins much-anticipated hearings probing the company's collapse. 
In a letter sent late yesterday to the Senate Commerce Committee, where Mr. Lay was scheduled to appear today, his attorney, Earl Silbert, said the atmosphere surrounding the hearing had become "prosecutorial." Following receipt of the letter, the committee's chairman, Sen. Ernest Hollings (D., S.C.) canceled the hearing, saying that the panel won't proceed without Mr. Lay.
The letter followed an appearance by Sen. Byron Dorgan, a senior member of the Commerce Committee, on NBC's "Meet the Press," in which the North Dakota Democrat voiced sharp concerns about the company. "Once you start peeling away the layers of this onion, it gets pretty ugly," Mr. Dorgan said. On the same NBC news show, Rep. W.J. "Billy" Tauzin (R., La.) said investigators for the House Commerce Committee had found what may "end up being securities fraud." 
Mr. Silbert said Mr. Lay had intended to testify until it became clear from the Sunday news shows that "judgments have been reached and the tenor of the hearing will be prosecutorial." 
Mr. Lay had stayed out of the public eye since the company's spectacular collapse, and Mr. Silbert wrote that his client's silence amid public allegations of misconduct has been "construed as acquiescence" by some. "They are wrong," Mr. Silbert wrote. "Mr. Lay firmly rejects any allegations that he engaged in wrongful or criminal conduct." 
Mr. Silbert also wrote Ohio Rep. Michael Oxley, chairman of the House Financial Services Committee, canceling Mr. Lay's scheduled appearance before that committee Tuesday. 
Even before the Sunday shows, it was clear Mr. Lay would face stiff questioning from lawmakers on issues ranging from the controversial web of partnerships that let Enron hide debt to his handling of "whistle-blowers" who raised concerns inside the company. 
Robert Bennett, Enron's outside counsel, said the company is cooperating with Congress, but he "understands" the concerns raised by Mr. Silbert. "It was unfortunate," Mr. Bennett said. "Mr. Lay was going to testify." 
Mr. Lay's expected testimony had been the centerpiece of several congressional hearings planned on Capitol Hill this week probing Enron's collapse. Before Mr. Lay backed out of his appearance, the company's former chief financial officer, who organized many of the questionable off-balance sheet deals that led to the company's collapse, had indicated he wouldn't cooperate with the congressional probe. 
Former Enron CFO Andrew Fastow and an aide, Michael Kopper, plan to invoke their Fifth Amendment rights against self-incrimination when called to appear before the House Energy and Commerce Committee Thursday, the committee's chairman said. 
A spokesman for Mr. Fastow declined comment on whether he will appear this week, and an attorney for Mr. Kopper didn't return calls. However, a spokesperson for Jeffrey Skilling, Enron's former chief executive, said he intends to appear before Congress and will testify freely. 
With his deep personal and political ties to the White House, Mr. Lay's role in Enron's collapse underscores how the matter has become a political liability for President Bush. On Friday, the Justice Department asked the White House to preserve any Enron-related documents, drawing the administration directly into the probe. 
Despite heavy financial support by Enron to Bush campaigns, however, the Justice Department's demand doesn't suggest that it is focusing on possible influence-peddling. Instead, the letter to White House Counsel Alberto Gonzales hints that the focus may be on whether company executives took actions or made private statements about Enron's condition that were at odds with their public statements -- a signal the criminal investigation may be focusing on building a case alleging securities fraud. The Commerce, Energy and Treasury departments were also ordered to retain documents. 
The department's demand also could raise pressure on the White House to relent in a showdown with Congress over access to White House records. Lawmakers are seeking notes of meetings between Vice President Dick Cheney and Enron executives and other energy industry officials as a new national energy policy was being drafted. 
Several congressional hearings this week will air various aspects of Enron's failure, providing what lawmakers hope will be a detailed accounting of events that led to the firm's decline into bankruptcy. Several current and former Enron executives have been called to appear Thursday before the Energy and Commerce Committee, of which Mr. Tauzin is chairman. 
The House Financial Services Committee and the Energy and Commerce Committee this week also will hear from William Powers Jr., the University of Texas law school dean and an Enron director. Mr. Powers leads a special, board-appointed team investigating possible malfeasance at the company. A report on his findings, released over the weekend, raises serious questions about the ethics and judgment of executives who created the maze of partnerships that allowed Enron to report strong profits while sweeping debt off its balance sheet. 
--- 
John R. Wilke and Michael Schroeder contributed to this article. 
--- 
Journal Link: Listen in as former Enron Chairman Kenneth Lay goes before a Senate panel probing the company's fall, in the Online Journal at WSJ.com/JournalLinks, by arrangement with Hearings.com. 
(See related article: "Unanswered in Board Report Are Some Big Questions Regarding Legal Liability" -- WSJ Feb. 4, 2002)

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

Business/Financial Desk; Section A
ENRON'S MANY STRANDS: THE POLITICS
At 11th Hour, Lay Refuses to Testify as Congressional Criticism Grows More Pointed
By STEPHEN LABATON and RICHARD A. OPPEL Jr.

02/04/2002
The New York Times
Page 20, Column 1
c. 2002 New York Times Company

WASHINGTON, Feb. 3 -- After a weekend of sharp criticism for his stewardship of Enron, Kenneth L. Lay, the company's former chief executive, abruptly reversed course this evening and told Congress he would refuse to testify before two committees preparing to hear his testimony, starting on Monday. 
Earl J. Silbert, the lawyer for Mr. Lay, said he had decided to withdraw because ''judgments have been reached and the tenor of the hearings will be prosecutorial.'' But Congressional aides said that they had never expected that Mr. Lay would appear and that he was looking for a convenient excuse to miss the hearings.
His appearance on Monday morning before a Senate committee and the next day before a House committee had been eagerly awaited. He had repeatedly declined to comment publicly. On Saturday evening, however, a special committee of Enron's board provided new details of the self-dealing and financial sleight-of-hand that had substantially overstated earnings. 
The report characterized Mr. Lay as responsible in an overall sense for Enron's problems because he was the ''captain of the ship'' who ''had the ultimate responsibility for taking reasonable steps to ensure that the officers reporting to him performed their oversight duties properly.'' But he is also described as largely oblivious to a wide range of inside-dealing and corporate malfeasance. 
Some lawmakers raised questions about that characterization, and, in appearances on talk programs today, suggested, without directly pointing to Mr. Lay, that crimes might have been committed at Enron. 
''It is hard to imagine how the C.E.O. of a company of this size that was engaged in moving hundreds and hundreds of millions of dollars of obligation off its books, enriching members of its hierarchy to the tunes of tens of millions of dollars, could be so oblivious,'' Representative James C. Greenwood, Republican of Pennsylvania, said on ''Late Edition'' on CNN. 
Mr. Lay has refused to respond to questions about the collapse. His wife, Linda, and their children, however, appeared on television last week, maintaining that he was largely ignorant of the events that led to Enron's collapse and that the family was struggling to avoid bankruptcy. 
For days, Mr. Lay's lawyers had promised Congressional investigators that he would testify, despite the suggestions by many defense lawyers in Washington that it would be unwise for him to testify under oath while he was a subject of a sprawling criminal inquiry into securities fraud and illegal insider trading. 
Today, Mr. Silbert said that Mr. Lay had been preparing as late as this morning to testify but reversed course after lawmakers on the morning talk programs suggested that Enron had been rife with fraud. In letters to the two committee chairmen this evening, Mr. Silbert recounted some of the criticism, including a reference to an article in The New York Times today that said ''Mr. Lay will face a panel eager to pulverize him.'' 
''I have instructed Mr. Lay to withdraw from his prior acceptance of your invitation,'' Mr. Silbert added. ''He cannot be expected to participate in a proceeding in which conclusions have been reached.'' 
''Many allegations have been publicized in the news media accusing Mr. Lay and others of wrongful, even criminal conduct,'' Mr. Silbert wrote in his letters to Senator Ernest F. Hollings, Democrat of South Carolina, and Representative Michael G. Oxley, Republican of Ohio, whose committees were to hear testimony from him. ''Some have construed his silence as acquiescence. They are wrong. Mr. Lay firmly rejects any allegations that he engaged in wrongful or criminal conduct.'' 
But Congressional aides said Mr. Lay had been looking for an excuse to avoid testifying. 
''In all honesty, we never expected him to appear,'' said Ken Johnson, an aide to Representative Billy Tauzin, the Louisiana Republican who leads the House Energy and Commerce Committee. Mr. Tauzin said earlier in the day that he expected, based on what had been uncovered so far, that ''maybe somebody ought to go to the pokey for this.'' 
Mr. Johnson said: ''I can only tell you that if Mr. Lay spurns our committee, Mr. Lay will be subpoenaed. And if he ignores the subpoena, we'll pursue all our options, including the possibility of a contempt of Congress'' citation. 
Senator Byron L. Dorgan, Democrat of North Dakota and head of one of the subcommittees investigating Enron, said that he had been informed on Friday and Saturday that Mr. Lay would testify. He said he believed that the report was a ''pretty tough indictment of what was happening at that corporation'' and had probably persuaded Mr. Lay to change his mind. 
Democratic and Republican lawmakers praised the company's internal report today, although Congressional investigators cautioned that it failed to resolve crucial issues about the roles senior executives played in establishing the questionable partnerships at the heart of the scandal. 
The members of Congress said that while the report presented strong evidence of corporate crimes, most notably securities fraud, it did not reduce the need for a significant overhaul of the accounting and corporate governance rules. 
''The report presents a pretty straightforward case of fraud,'' said Senator Jon S. Corzine, Democrat of New Jersey, and a former senior executive on Wall Street at Goldman, Sachs. ''If the facts of it are accurate, it's quite despicable and damning.'' 
''There is still no less of a need for reform of 401(k) rules and corporate governance rules,'' he added. 
Mr. Tauzin said the report closely tracked what was being uncovered by Congressional investigators. 
''I think we're finding what may clearly end up being securities fraud,'' Mr. Tauzin said on the NBC News program ''Meet the Press.'' Mr. Tauzin said he had been told that Andrew S. Fastow, Enron's former chief financial officer and the engineer of many of the partnerships, would refuse to testify later this week and invoke his Fifth Amendment right against self-incrimination. He added that he had also been told that Jeffrey K. Skilling, the former chief executive, would testify later this week and that he had refused to sign the approval sheets for some of the partnerships after being warned they were questionable. 
''What does that say about his knowledge about whether these deals were honest or corrupt?'' Mr. Tauzin said. 
Bruce Hiler, a lawyer for Mr. Skilling, said his client would testify before Congress on Thursday and not exercise his Fifth Amendment right. Mr. Hiler declined to comment on Mr. Tauzin's remarks.

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

Financial Desk
THE FALL OF ENRON Enron's Ex-Chief Won't Testify Hearings: Kenneth L. Lay pulls out of scheduled appearance before Senate Commerce Committee, evoking harsh reaction from congressional leaders.
RICHARD SIMON; ELIZABETH SHOGREN
TIMES STAFF WRITERS

02/04/2002
Los Angeles Times
Home Edition
A-1
Copyright 2002 / The Times Mirror Company

WASHINGTON -- Former Enron Chairman Kenneth L. Lay on Sunday abruptly canceled his much-anticipated appearance before Congress, contending he would not receive a fair hearing. 
Lay changed his mind about testifying before the Senate Commerce Committee today, after comments by congressional leaders on Sunday television news shows suggested that "judgments have been reached and the tenor of the hearing will be prosecutorial," said his attorney, Earl J. Silbert.
Lay had agreed to appear voluntarily at the hearing, though other committees have issued subpoenas in the Enron investigation. Committee sources said no decision had been reached as of Sunday night on whether the members will subpoena Lay to appear in the future. 
His client "cannot be expected to participate in a proceeding in which conclusions have been reached before Mr. Lay has been given an opportunity to be heard," Silbert said in a letter to Sen. Ernest F. Hollings (D-S.C.), the committee chairman, and Rep. Michael G. Oxley (R-Ohio). 
Until Jan. 23, Lay was chairman and chief executive of Enron Corp., once the country's seventh-largest corporation. The energy company filed for Chapter 11 bankruptcy protection Dec. 2 after questions about its financial health and questionable accounting practices sent its stock plummeting. 
The Senate Commerce Committee hearing--at which Lay was to be the only witness--was canceled. The House Financial Services subcommittee on capital markets will hear this afternoon from Securities and Exchange Commission Chairman Harvey L. Pitt and from William Powers, the University of Texas law professor who led an internal inquiry into the company's collapse. The report of that inquiry--a scathing rebuke to the company, its directors and its accounting firm, Andersen--was released late Saturday. 
Lay also had been scheduled to appear Tuesday before the House Financial Services subcommittee, along with Andersen Chairman and CEO Joseph F. Berardino, but will not attend that hearing either. 
Meanwhile on Sunday, Berardino, whose firm also faces several federal and congressional probes, said Andersen hired former Federal Reserve Chairman Paul A. Volcker to head a panel to help overhaul the way the firm operates. "It's obvious the public has been let down more than once," Berardino said. "We will be very tough on ourselves." 
Lay's decision evoked a harsh reaction from congressional leaders. 
"I am disappointed," said Sen. Byron Dorgan (D-N.D.), chairman of the Senate Commerce subcommittee on consumer affairs, the panel before which Lay was scheduled to testify. "I believe the American people, the Congress and his own employees have a right to hear a public explanation of what happened at the Enron Corp." 
"I doubt they ever thought appearing before a congressional committee would be a walk in the park," Dorgan added, "because there are tough and difficult questions that need answers. . . . Eventually, Mr. Lay and others will have to provide those answers, and sooner rather than later." 
Lay, who reportedly accepted the committee's invitation to appear against his attorney's advice and without any offer of immunity, was in Washington on Sunday preparing for his appearance. But while listening to lawmakers on the talk shows, he heard "inflammatory statements" suggesting that "judgments have been reached and the tenor of the hearing will be prosecutorial," Silbert said. 
The lawyer cited a comment by Rep. W.J. "Billy" Tauzin (R-La.), chairman of the House Energy and Commerce Committee, predicting that some senior company executives will end up "in the pokey." 
Silbert also cited a remark by Dorgan on NBC's "Meet the Press" that the largest bankruptcy filing in corporate history put some people in "real jeopardy." 
Rep. Henry A. Waxman (D-Los Angeles), a senior Democrat on the House Energy and Commerce Committee--one of a dozen congressional committees investigating the Enron collapse--said, "It's a real setback for those of us who want some accountability from this man." 
Waxman said Congress should subpoena Lay because he will not testify voluntarily. 
"It looks like statements that he made that he was willing to be cooperative were not sincere," Waxman added. 
Sen. Peter Fitzgerald (R-Ill.), top Republican on the Senate Commerce subcommittee on consumer affairs, said: "In my judgment, Mr. Lay is again taking a dive." 
"It's that lack of accountability and responsibility that led to the Enron debacle in the first place. He will eventually have to answer questions--perhaps not before the Commerce Committee but possibly in a forum where his testimony can be compelled." 
Lay's appearance was to kick off a week of hearings on Capitol Hill probing Enron's collapse and featuring a notable list of witnesses. Andrew S. Fastow, the company's former chief financial officer, is scheduled to appear before the House Energy and Commerce subcommittee Thursday but is expected to invoke the 5th Amendment. 
Former Enron CEO Jeffrey K. Skilling, who left the company in August, also is scheduled to appear before the panel. 
Fitzgerald noted that the Powers report was critical of many parties, including Lay. 
Congress will use the information it unearths to determine what laws may have been broken and whether any laws or regulations should be changed to prevent such corporate misdeeds. The information also may be used by the Justice Department as it investigates possible criminal wrongdoing by the company, whose downfall left more than 6,000 people without jobs and shattered the savings of thousands of employees and investors. 
Enron attorney Robert S. Bennett said Sunday: "The company is fully cooperating with Congress, and we are encouraging people who are requested to testify to testify. But I have read Mr. Silbert's, letter and I understand his concerns and the sound basis for them." 
Earlier Sunday, Waxman said in an interview that Lay should reveal the identities of investors in more than 3,000 controversial off-the-books partnerships that led to the company's collapse. The names were left out of the Powers report. 
"These entities became the basis for looting the corporation," Waxman said. "If we want to know where the money went, we need to know who these partners were." 
PHOTO: House Energy and Commerce Committee Chairman Rep. W.J. "Billy" Tauzin talks about Enron probe on "Meet the Press."; ; PHOTOGRAPHER: "Meet the Press"; PHOTO: Sen. Byron Dorgan heads the Senate subcommittee on consumer affairs, which was set for Kenneth L. Lay's testimony.; ; PHOTOGRAPHER: "Meet the Press" 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

A Section
Ex-Chairman of Enron Cancels Hill Testimony; Lawyer Warns Of Accusatory Atmosphere
Susan Schmidt
Washington Post Staff Writer

02/04/2002
The Washington Post
FINAL
A01
Copyright 2002, The Washington Post Co. All Rights Reserved

Former Enron chairman Kenneth L. Lay last night abruptly canceled a much-anticipated appearance today before a Senate panel in the wake of a scathing report on the management failures and self-dealing that led to his company's spectacular collapse. 
Key members of Congress, reacting to the report released this weekend, said yesterday that top officials of the bankrupt energy trader may have engaged in securities fraud in booking $1 billion in non-existent profits over the past 15 months.
"Clearly some things have happened that are going to put some people into real jeopardy and trouble," said Sen. Byron L. Dorgan (D-N.D.), a member of the Senate panel that was to question Lay, in comments on NBC's "Meet the Press." "This is almost a culture of corporate corruption." 
House Energy and Commerce Chairman W.J. "Billy" Tauzin (R-La.), appearing on the same program, agreed, saying "maybe somebody ought to go to the pokey for this." 
Lay's lawyer, Earl Silbert, seized on the comments, telling Congress in a letter yesterday evening that he advised Lay not to testify. Silbert said Lay was prepared to answer critics about his stewardship of Enron, but, he said, "these inflammatory statements show that judgments have been reached and the tenor of the hearing will be prosecutorial." 
But Dorgan said in an interview last night he believes the report itself "tipped the balance" and led Lay and his legal team to conclude that Lay could place himself in greater legal jeopardy by testifying. "I can't believe he ever thought it would be a walk in the park to testify before Congress," Dorgan said. 
The Justice Department is conducting an investigation into Enron's collapse. Witnesses called before Congress amid a criminal investigation are often advised by lawyers not to testify because they may open themselves to charges of perjury or false statements. 
Experts in securities law said the findings in the 218-page report suggest that former Enron chief financial officer Andrew Fastow, who received $30 million from partnerships he organized, is most vulnerable to possible criminal charges. But they said the legal consequences of Enron's financial machinations are not as clear-cut for Lay, former chief executive Jeffrey Skilling and Enron's board of directors. 
Lawyers for Fastow have told House investigators he would appear voluntarily before the House Energy and Commerce Committee Thursday, but investigators are not certain that he will testify. Michael J. Kopper, a former Enron managing partner who worked for Fastow, was subpoenaed by the committee, but he has told investigators that he would decline to testify citing his Fifth Amendment right against self-incrimination. 
Skilling, one of the architects of the company's off-the-books partnerships that concealed massive debts from investors, sold $100 million in Enron stock since 1998. His profit from the sales is not known. He is scheduled to testify Thursday, and his lawyers have told the House panel that he intends to appear. Lay's family and his lawyers have said he was eager to answer questions, though he has so far declined to personally respond to the allegations swirling about Enron's mismanagement. Lay continues to believe "the appropriate place to explore these allegations and related policy issues was before the Congress," Silbert wrote. 
"Some have construed his silence as acquiescence. They are wrong," he said. "Mr. Lay firmly rejects any allegations that he engaged in wrongful or criminal conduct." 
Lay associates said in interviews last week that he was being advised by lawyers to keep silent. "He wants to talk so bad," said his daughter, Elizabeth Lay, 31, a lawyer who has been advising her father. She and other sources said that Lay was anxiously awaiting the report from the special investigating committee before testifying. 
Lay was to testify voluntarily, but now that he has refused, lawmakers may subpoena him. He could then invoke his Fifth Amendment right to keep silent. Another family member said that "his lawyers are telling him to shut up. They were very angry Linda was talking," referring to Lay's wife, who defended her husband in two televised interviews last week. This source said last week that Lay would take the risk of testifying before Congress if "he is convinced he has a preponderance of the facts" surrounding the demise of his company. "But the basic strategy always is, if there's a possibility of criminal charges [in the case], you shut up," the family member said. "It's a no-win situation for him." 
The assessments of Lay's leadership and the Enron corporate culture were withering yesterday, one day after the release of a report for the Enron board of directors prepared under the direction of William Powers Jr., dean of the University of Texas School of Law. Powers joined the Enron board on Oct. 31, after the company reported its third-quarter loss and appointed a special investigating committee. 
The committee investigated only a handful of the more than 1,000 partnerships Enron established and found that Enron executives manipulated the company's financial condition in several transactions with these partnerships. The committee said some partnerships hid losses from troubled Enron deals, including investments at power plants in Brazil and Poland, and in companies such as Internet service provider Rhythms NetConnections Inc. and networking equipment maker Avici Systems. Deals were done to make the company appear profitable when it was actually losing money and heavily in debt. At the same time, insiders made hundreds of millions of dollars in the sale of Enron stock, at the expense of employees and shareholders. 
Lay was portrayed in the report as a lax manager who "bears significant responsibility for those flawed decisions" to create off-the-books partnerships and let others run them. He would have faced a firestorm of questions today, members predicted. 
"They were doing almost no business, but they manufacture income from a bank loan," Dorgan said. "That's the kind of thing that went on over and over and over again. We want to know what Ken Lay knew." 
Sen. Peter Fitzgerald (R-Ill.), in a broadcast interview on NBC's "Today," said: "Ken Lay obviously had to know this was a giant pyramid scheme, a giant shell game." 
Under criticism for its role in the Enron collapse, accounting firm Arthur Andersen announced yesterday that it would conduct a sweeping review of its business practices under the direction of former Federal Reserve Board chairman Paul A. Volcker. Andersen was paid $5.7 million to scrutinize the partnerships, in addition to its fees for auditing Enron's books. 
"Not only were there corrupt practices, not only was there a hiding of the fact that debt was being put off the balance sheets and profits were reported that didn't exist, but we found more than that," Tauzin said. "I think we're finding what may clearly be securities fraud, attempts -- not to hedge or put debt out of the company, which many companies do -- but literally fraudulent, phony attempts to do so." 
Tauzin noted yesterday that the report found that Skilling held back from signing his name on approval forms for several off-the-books partnership deals. "What does that say about his knowledge of whether these deals were honest or corrupt?" he said. 
Lawyers for Skilling and Fastow were unavailable for comment yesterday. 
Nowhere in the report is there any mention of former Enron vice chairman J. Clifford Baxter, who committed suicide Jan. 25, anguished, associates said, over the Enron scandal. Baxter made millions from the sale of Enron stock but left the company last spring after complaining about the propriety of the partnerships to colleagues. Authorities have not disclosed the contents of his suicide note. 
Among the questions the report was not able to answer are the identities of the outside investors in more than 1,000 partnerships and related investment groups linked to Enron. Major Wall Street firms sold partnership interests to outside investors. Dorgan said Congress wants to know who was invited into the partnerships. 
A few Enron employees tried to bring the self-dealing and dangerous financial machinations to the attention of Lay and other top managers, the report also found. Lawyer Jordan Mintz, who worked for Fastow, sought advice from Washington law firm Fried Frank Harris Shriver & Jacobson as to what needed to be disclosed about the partnerships, including whether Fastow's $30 million compensation for managing the partnerships had to be revealed. 
Fried Frank suggested more disclosure of some partnership information, the report said. Mintz is scheduled to testify this week about the disclosure issues. Columbia University law professor John C. Coffee said the report lays the groundwork for "an old-fashioned, plain-vanilla fraud case against Kopper and Fastow." 
"I think this is going to significantly enhance the prospect of criminal indictments in their cases," Coffee said. If the facts stated in the report are true, "this is into the zone of active fraud," he said. 
Donald Langevoort, a securities law professor at Georgetown, said of the report: "It certainly adds to the evidence we've already seen that there were deliberate falsifications that led to fraudulent accounting. The question becomes not so much were the financial reports accurate, but were they doctored -- and if so, by whom." 
But Langevoort noted that the "language of the report is very measured with respect to its senior executives, in questioning what Lay and Skilling knew or should have known. There is a mile of difference between 'known' and 'should have known' that amounts to whether you can stick someone with securities fraud." 
"The report talks about a failure of management; it says Lay acted more like a director than a senior executive. That is not terribly unusual in a large corporation and certainly not the basis for liability," Langevoort said. 
The report was prepared for the board of directors, and while it criticizes the board, those criticisms are mainly directed at its failure to live up to its responsibility to monitor management decisions and internal controls. The board could face negligence lawsuits, lawyers said, but on the basis of the report's findings, members would not likely be vulnerable to civil or criminal fraud charges. 
The report found that the board should have sought more information about the partnerships and should not have allowed Fastow to run them while he was simultaneously Enron's chief financial officer because it created a conflict of interest. The board's attorney, Neil Eggleston, focused on the report's assessment that some information was withheld from directors. 
"The board and its committees were repeatedly assured that the controls the board had ordered were adequate and being implemented, but the board was misled," he said. 
Staff writers David S. Hilzenrath, Lois Romano and Jackie Spinner contributed to this report.

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

Lay cancels date with Congress 
Ex-Enron leader won't testify 
By JOHN C. HENRY 
Copyright 2002 Houston Chronicle Washington Bureau 
Feb. 4, 2002, 6:13AM
WASHINGTON -- Questioning whether he could get a fair hearing before Congress, former Enron Corp. Chairman Ken Lay notified lawmakers Sunday that he would not appear this week before committees examining the company's collapse. 
Lay's decision, outlined in letters delivered to Capitol Hill by his lawyer, came hours after House and Senate members heading the inquiries suggested that some top Enron executives engaged in illegal activity and "ought to go to the pokey." 
Attorney Earl J. Silbert wrote that Lay "cannot be expected to participate in a proceeding in which conclusions have been reached before (he) has been given an opportunity to be heard." 
Citing remarks by three lawmakers Sunday on television news programs, Silbert wrote: "These inflammatory statements show that judgments have been reached and the tenor of the hearing will be prosecutorial." 
Silbert's letter said Lay rejects "any allegations that he engaged in wrongful or criminal conduct." 
Lay was to have led off the first of seven congressional hearings this week into the Houston-based company and its bankruptcy, the largest in U.S. history. In addition to at least 10 congressional inquiries, Enron and its executives face federal criminal investigations and several civil class-action lawsuits filed by employees and stockholders. 
Lay, who in December accepted an invitation to testify today before the Senate Commerce Committee, also was to have appeared Tuesday at a House Financial Services Committee hearing. The committee plans to proceed without the former Enron chairman. 
"To back out at this stage of the game is a breach of trust," said Rep. Ken Bentsen, a Houston Democrat who sits on the House panel. "This has all the appearances that he was stringing us along and in the 11th hour has pulled the plug. I'm profoundly disappointed." 
There was no indication late Sunday whether either the Senate Commerce Committee or the House Financial Services Committee would try to compel Lay to appear later. The Senate hearing -- which was to have been chaired by Sen. Byron Dorgan, D-N.D., and broadcast live on seven television networks -- was canceled. 
"We're going to meet with the committee members and have a discussion about what we do next," Dorgan said, dismissing Silbert's assertion that the hearing would have had a "prosecutorial" tone. 
Meanwhile, a spokesman for the House Energy and Commerce Committee -- which is holding three hearings into Enron this week but was not scheduled to hear from Lay -- said a subpoena would be issued if he turns down an invitation to appear. 
"If he thumbs his nose at us like he did the Senate Commerce Committee, we'll subpoena him," said Ken Johnson, whose boss, Rep. Billy Tauzin, D-La., chairs the House Energy and Commerce Committee. "Mr. Lay has some tough questions to answer, and sooner or later he's going to have to answer them." 
Enron's former chief financial officer Andrew Fastow, who has been subpoenaed to appear before Tauzin's panel later this week, has notified congressional investigators that he will not testify unless he is granted immunity from prosecution. 
"We're not granting immunity to anybody," Johnson said. "We're not in a dealing mood. Too many people have lost their jobs and lost their pensions." 
Lay's decision not to appear came the day after a special committee of Enron's board of directors released a 218-page report that criticizes Enron's executives, auditors, lawyers and board members for allowing improperly created partnerships to inflate the company's earnings, hide its debt and wrongfully enrich a handful of insiders. 
The report spent more time criticizing Fastow and accounting firm Arthur Andersen than it did Lay. At the same time, the report by University of Texas law school Dean William Powers cited Lay as ultimately responsible for making sure his officers performed their oversight duties properly. 
"For much of the period in question, Lay was the Chief Executive Officer of Enron and, in effect, the captain of the ship," the report said. "He does not appear to have directed their attention, or his own, to the oversight of the LJM partnerships. Ultimately, a large measure of the responsibility rests with the CEO." 
Also singled out for criticism in the report were former Chief Executive Officer Jeff Skilling, Chief Accounting Officer Rick Causey and Chief Risk Officer Richard Buy. The report says former employee Michael Kopper violated Enron's code of ethics for having managed one of the partnerships without the board of directors' approval. 
Skilling is scheduled to appear later this week before the House Energy and Commerce Committee and, Tauzin says, has agreed to testify. Kopper, who also has been subpoenaed, has notified the committee's investigators that he will decline to testify and cite his Fifth Amendment right to avoid self-incrimination. 
Robert Bennett, a Washington attorney representing the Enron board, said the company had hoped Lay would testify but cannot blame him for backing down after seeing the Sunday morning television performances by Tauzin and other lawmakers. 
"I understand his (Lay's) position and the sound basis for it," Bennett said. "The remarks on television today were very troubling." 
Appearing early Sunday on NBC's Meet the Press, Tauzin referred to the Powers report and weeks of investigation by Energy Committee staff members when he said: "We're finding what may clearly end up being securities fraud" by Enron executives. 
Tauzin said his panel -- which began investigating Enron's collapse in December -- wants to find whether "there really (was) wrongdoing and maybe somebody ought to go to the pokey for this? And I think we're going to find out `yes' to that question." 
On the same program, Dorgan said: "Some things have happened here that are going to put some people in real jeopardy, in trouble." 
On NBC's Today, Sen. Peter Fitzgerald, R-Ill., said: "Ken Lay obviously had to know that this was a giant pyramid scheme -- a giant shell game." 
Chronicle reporter Tom Fowler contributed to this story. 

Text of withdrawal letter 
Feb. 3, 2002, 9:43PM
Houston Chronicle
WASHINGTON -- Text of letters sent Sunday by a lawyer for Ken Lay to the chairmen of the House Financial Services Committee and the Senate Committee on Commerce, Science and Transportation. 
The letters from Earl J. Silbert were identical except the one to the Senate chairman referred to Lay having accepted an invitation to appear before the full committee and a subcommittee, while the letter to the House chairman referred only to a hearing scheduled by the full committee. 
Dear Mr. Chairman: 
About one month ago, Kenneth Lay accepted your invitation to appear before this committee (and subcommittee) to testify about the collapse of Enron. He was looking forward to a meaningful, reasoned question and answer session to provide his understanding of the events and to discuss with you a number of related policy, legal, and regulatory issues. This tragedy for the company, its current and prior employees, retirees, and shareholders has been devastating and heartbreaking to him. 
Many allegations have been publicized in the news media accusing Mr. Lay and others of wrongful, even criminal conduct. He has not personally responded to them. Some have construed his silence as acquiescence. They are wrong. Mr. Lay firmly rejects any allegations that he engaged in wrongful or criminal conduct. He did and still does believe that the most appropriate place to explore these allegations and related policy issues was before the Congress. 
Mr. Lay, with counsel, has been spending extensive time preparing both for written and oral testimony. As of this morning, Mr. Lay intended to testify tomorrow. In the midst of our preparation, particularly disturbing statements have been made by members of Congress, even today, on the eve of Mr. Lay's scheduled appearance. These inflammatory statements show that judgments have been reached and the tenor of the hearing will be prosecutorial. 
For example, on NBC's Today Show and MSNBC, Senator Peter Fitzgerald charged: 
"Ken Lay obviously had to know that this was a giant pyramid scheme -- a giant shell game. ... They grafted a pyramid onto an old-fashioned utility. ... There was blatant fraudulent activity going on for years, and in my opinion he had to have known. ... " 
On Meet the Press today, Senator Byron Dorgan concluded: 
"(T)his is almost a culture of corporate corruption. ... " 
"Clearly some things have happened here that are going to put some real people in real jeopardy and trouble." 
On the same TV program, Congressman Billy Tauzin, the chair of one of the committees conducting one of the principal investigations of the Enron collapse, claimed: 
"Secondly: were they really wrongdoing, and maybe somebody ought to go to the pokey for this? I think we are going to find out yes to that question." 
Congressman Tauzin also charged: 
"(N)ot only were there corrupt practices, not only was there a hiding of the fact that debt was being put off the balance sheets and profits were reported that didn't exist, but we've found more than that. I think we're finding what may clearly end up being securities fraud, attempts not to hedge or put debt out of the company, which many companies do, but literally fraudulent, phony attempts to do so. ... " 
These are a few examples, from among many others. Indeed, as The New York Times reported today, in appearing before the subcommittee, "Mr. Lay will face a panel eager to pulverize him." As a consequence, I have instructed Mr. Lay to withdraw his prior acceptance of your invitation. He does so, but only with the greatest reluctance and regret. He also wishes to express, as do I, our sincerest apologies for any inconvenience caused by this decision, but he cannot be expected to participate in a proceeding in which conclusions have been reached before Mr. Lay has been given an opportunity to be heard. 
Sincerely, 
Earl J. Silbert 

Ex-workers let down as Lay alters his plans 
By STEVE BREWER 
Copyright 2002 Houston Chronicle 
Feb. 3, 2002, 9:49PM
For former Enron employees in Houston, Ken Lay's televised testimony before Congress was going to be the equivalent of Sunday's Super Bowl. They had made plans to gather in bars, restaurants and homes today to hear what their ex-boss had to say. 
But when the former Enron CEO backed out of testifying on Sunday, they were left with more questions, anger and a lot of disappointment. They said they felt robbed. 
"We kind of thought at least he will take the Fifth Amendment and ask for immunity. At least then, we would have had a good laugh," said Anthony Huang, a former Enron contractor who is part of Enronx.org. "But he didn't even let us do that." 
Enronx.org, an Internet-based resource for former employees of the fallen corporate giant, was expecting more than 60 ex-Enron workers to show up and watch Lay's testimony in a local restaurant. Television networks had arranged for the testimony to be fed straight into the restaurant, and the group had even sent an invitation to Lay's family. 
By 8 p.m. Sunday night, the gathering had been called off. 
"We're disappointed and slightly upset," Huang said. "A lot of people were anticipating hearing from him, so he could at least defend himself, and to see if he knew about certain transactions occurring." 
Charles Weiss, a former manager for Enron's long-haul network, said he had planned on watching the testimony at home, like he was doing with the Super Bowl on Sunday. 
News of Lay's cancellation made him mad. 
"How can he continue to dodge the inevitable?" Weiss asked. "Does he plan just to say anything and plead total ignorance? ... It's insane that he's being allowed to not own up and answer all the questions on the table." 
Weiss also said he thought it was odd that Lay's decision not to testify came the day after a review of the company's activities by University of Texas School of Law Dean William Powers concluded that the company's management concealed financial information. 
Gloria Alvarez worked as an administrative coordinator for Enron for 13 years. She said she had planned to go to a friend's house to watch the testimony and that groups of her former co-workers had planned gatherings throughout town to do the same thing. 
Many of those groups were going to be joined by national news outlets, hoping to get their on-the-spot reaction to Lay's words. 
Late Sunday, she got the call informing her that the meeting had been canceled. 
"I just don't understand," she said. "I suppose this is something his lawyer told him to do." 
For people like Jackie Jackson, who worked for Enron four years as a contract administrator, Lay's decision not to testify only makes them more bitter about the company executives they once worked for. 
"It's unfortunate that we were working for a bunch of cowards that we all looked up to," Jackson said. "And now, it turns out those people we held as superior are looking very inferior to us now." 
Former Enron workers also weren't too impressed with the reason Lay's lawyer gave for his deciding not to appear -- that judgments had been reached prior to the hearing that remarks by various members of Congress on Sunday morning news talk shows showed that the hearing would be "prosecutorial" in tenor. 

Business/Financial Desk; Section C
As Enron Purged Its Ranks, Dissent Was Swept Away
By JOHN SCHWARTZ

02/04/2002
The New York Times
Page 1, Column 2
c. 2002 New York Times Company

HOUSTON, Feb. 3 -- Linda Richardson was in her office at Enron one day in February 1999 when her secretary, Marie Thibaut, came in with an open interoffice envelope and a look of concern on her face. ''Linda, are you quitting?'' she asked. 
The envelope contained a severance agreement. As Ms. Richardson, a vice president for information technology, looked at the papers, the realization dawned. ''Marie, they're firing me!'' she exclaimed.
By that point, Enron, which had once prided itself on its intense team spirit, had become the kind of place where someone could be dismissed in such an impersonal way -- a company so bent on success that it did not always observe the basic human niceties. Many former employees and executives say the atmosphere became so intensely competitive that people often did not feel secure enough in their jobs to question irregularities, if they were aware of them at all. 
In recent years, a steady stream of Enron employees made their way to the exits, whether by choice or by force. Some, including J. Clifford Baxter, who was a vice chairman, left after it became known within the company that they were troubled by the network of partnerships that concealed a flood of red ink on Enron's balance sheet. Others, like Rebecca Mark-Jusbasche, a prominent executive who signed deals to build and buy power plants around the world, lost internal corporate battles and moved on. Indeed, of the 34 senior executives listed in the company's 1999 annual report, only 11 remain. 
But departures occurred on all rungs of Enron's ladder. Many of those who left -- whether voluntarily or not -- say part of the reason was that Enron had metastasized into a more ruthless, less humane place. 
Many who left say that much of the change in Enron's culture coincided with the rise of Jeffrey K. Skilling, whom many called a brilliant visionary; he was promoted to president and chief operating officer in 1996. It was Mr. Skilling -- the company's chief executive when he resigned last summer -- who was largely responsible for Enron's transformation. He helped turn Enron from a large but unglamorous natural gas company in the mid-1980's into a kind of hedge fund that created and ran markets in energy and a dizzying array of commodities, including high-speed Internet access and even weather risk. Ultimately, the company gambled away its own future. 
Mr. Skilling was singled out for criticism in the internal investigation that was released by Enron on Saturday. The report said of the partnerships that he ''certainly knew or should have known of the magnitude and the risks associated with these transactions.'' It concluded that Mr. Skilling ''bears substantial responsibility for the failure of the system of internal controls'' to reduce the risks in the partnerships. Through a spokeswoman, Mr. Skilling declined requests for an interview. 
Whatever Mr. Skilling's eventual failings as a chief executive, a zealous approach to business was there from the start. 
Professors at Harvard Business School recalled that even in that rich pool of future business titans, Mr. Skilling stood out as a student at the school in the late 1970's. Jeffrey A. Sonnenfeld, an expert in corporate leadership, recalled an argument he had with Mr. Skilling one day at the Galley, a student grill in the school's Gallatin Hall. 
''I had the foolish temerity to argue with him about energy deregulation,'' the hot business topic of the day, Mr. Sonnenfeld recalled, and he was soon overwhelmed by the student's passionate and relentless arguments on behalf of free markets. 
Mr. Sonnenfeld recently asked his Harvard Business School colleagues about Mr. Skilling and found that ''everybody remembered him, and I don't think anybody remembered an unpleasant thing about him.'' 
Once out of business school, Mr. Skilling rose quickly in the energy world and made his way to the consulting firm McKinsey & Company, where he ultimately became head of its energy and chemical practices. In 1982, he began advising Enron; seven years later, he helped the company devise a complex transaction that offered the customer the equivalent of a safe, fixed-price contract in a deregulated natural gas market, where prices fluctuated. 
It was a defining moment for Mr. Skilling and for Enron. At the time, the old-line gas companies were being hammered by deregulation. The deal proved that Enron could surf the waves of change instead of drowning in them. In 1990 Mr. Skilling joined Enron as head of trading. 
The Enron that Mr. Skilling joined was very different from the one that he would eventually run. Under the chairmanship of Kenneth L. Lay, the company's divisions had enjoyed so much autonomy that they were referred to as stand-alone silos. Each had its own system for determining salaries and bonuses and its own culture. But despite their differences, all the units were big on risk and reward. And they were arrogant, thinking themselves invincible. 
''There were no grown-ups at Enron,'' a former executive said. 
At Enron International, which built power plants around the world, the culture was especially freewheeling. Ms. Mark-Jusbasche and Joseph W. Sutton, another top executive at the unit, once made a grand entrance on roaring Harley-Davidson motorcycles at a meeting for the group's thousands of employees. One presentation included a live elephant. 
''It was a hoot,'' said Connie Castillo, a former legal assistant with the group. But it was fun with a purpose, Ms. Castillo recalled. ''It made everybody a part of something.'' 
Mr. Skilling's trading operation, however, had a more cutthroat reputation, and it was suffused with Mr. Skilling's particular buzzwords -- like ''loose-tight,'' which he used to describe his management style. 
The tight side was managing risk in every transaction. The company was loose when it came to managing creativity, Mr. Skilling told researchers from the Darden Graduate School of Business Administration at the University of Virginia. ''You wanted to have an environment that weird people liked operating in,'' he said, adding, ''It's the weird ideas that create new businesses.'' 
More and more, Mr. Lay and Mr. Skilling saw the company's future in the lucrative world of trading -- not in hard assets like power plants and pipelines. By the time Mr. Skilling became president and chief operating officer of the entire company in early 1996, his traders were the in-crowd. 
He quickly started shaking things up. In an videotaped interview with the Virginia researchers, Mr. Skilling's eyes danced as he recalled a confrontation with the managers of the office tower that is Enron's headquarters. The managers bore detailed manuals describing the number of square feet allotted to a senior vice president, a vice president and so on, Mr. Skilling said. 
''I want to get rid of all the walls,'' he recalled telling a person he referred to as the ''building Gestapo.'' He wanted a big open room where ''people will talk and throw things at each other and get all excited and creative.'' The ''building Gestapo,'' he said, ''didn't get it.'' 
After a big struggle, Mr. Skilling said, he simply ''hired contractors and had them start ripping the walls out.'' Under Mr. Skilling, the old rules no longer applied. Literally and figuratively, the walls were coming down. 
A former Enron lobbyist said employees could could see the differences between Mr. Lay and Mr. Skilling in how the men walked through the company's crowded lobby. Mr. Lay worked the room, shaking hands, patting backs and pulling out photographs of his grandchildren to share with secretaries. 
Mr. Skilling, by contrast, exuded an intensity, marching through with his eyes straight ahead, his body language radiating importance and urgency and making clear that few should dare to take a moment of his time. 
As Mr. Skilling brought the silos under a more unified management, functions like accounting and compensation were made more consistent. But the most troubling part of Mr. Skilling's rise for many at Enron could be expressed in a buzz phrase: ''rank and yank.'' That was the informal name for a performance review process in which employees were evaluated at regular intervals by management groups and the lowest-ranked were purged. 
''If you were ranked high and well thought of, you made a beaucoup amount of money,'' recalled Ms. Richardson, the ousted technology executive. ''If you disagreed with anything, if you spoke what you thought was the truth, you didn't fare too well.'' 
Ms. Richardson said she had been fired because she had spoken out against a decision to invest tens of millions of dollars in new software and had ridiculed the cost-benefit analysis. ''If this is the kind of process that we use to justify projects, then we're in trouble,'' she recalled saying. She now works as an independent software consultant. 
Rank-and-yank cast a pall over the company, said Ms. Castillo, the legal assistant, who said she had gone from the top of the scale to the bottom after she filed a harassment complaint, accusing another woman on the staff of hostile actions. She was fired in mid-2001. 
Prof. Robert F. Bruner, a co-author of the University of Virginia study of Enron, said that while that kind of performance review could help build a company, ''if it's just a front for cronyism, rank-and-yank can be extremely destructive.'' 
Over time, the culture that Mr. Skilling cultivated ''just swamped the other parts of the business,'' said a former executive from the international side, who added, ''We became an open target.'' Many began to see rank-and-yank as a tactic in Mr. Skilling's fight for supremacy. 
Members of the international team, while acknowledging a number of very expensive mistakes, argue that most of the financial drag on the company from projects like the $3 billion Dabhol power plant in India could be corrected with further investment. But they say the Skilling team wanted to get out of capital-intensive assets as quickly as possible. 
Prof. Samuel E. Bodily, the other author of the Virginia study, said that although the environment at Enron had been genteel, compared with that at a New York investment bank, the review process had accelerated a trend toward shortsightedness. Employees gravitated toward projects that could show results within the six-month review cycle, an attitude that he described as ''if it's not going to happen by then, don't talk to me about it.'' 
Or, as Michael J. Miller, a manager in the company's ill-starred venture to provide high-speed Internet services, put it: ''Get it done. Get it done now. Reap the rewards.'' Whether the deal made money, or even made sense, was somebody else's problem, he said. 
A clear plastic block from 1998 -- one of a seemingly endless series of commemorative objects that the legal department handed out -- testified to the company's hang-10, toes-over-the-edge attitude. It gave the department's mission statement this way: ''To provide prompt and first-rate legal service to Enron on a proactive and cost-effective basis.'' 
Underneath was a tongue-in-cheek addendum. ''Translation: We do big, complex and risky deals without blowing up Enron.'' 
And then, in 2001, it all did blow up. Mr. Skilling resigned in August, and before long the series of devastating financial restatements and revelations about Enron's hidden debt crushed the once highflying company. 
The Virginia professors warn against looking for simplistic reasons for the collapse. They quote a passage from the novelist Victor Hugo, translating it as, ''Great blunders, like large ropes, have many fibers.'' 
The question has often been asked lately: Why didn't more people speak up about the problems they saw at Enron? Some say that they heard rumors of irregularities but that the company was so vast that they had no firsthand evidence. Some said they feared that spreading rumors might cause the damage they would have hoped to avert by blowing the whistle. 
It was clear, too, that Enron had become a company where dissent was tolerated less and less over the years. 
When people came to Mr. Sutton to complain about unfairness they perceived in the company's compensation system, they would be rebuffed, according to a former employee who was present for one such dressing- down. ''He'd scowl and say, 'Are you making more money than you ever expected to make in your whole entire life?' '' the former employee said. '' 'If you keep whining about everything else and everybody else in this company,' he would warn, 'You're never going to succeed.' '' 
Most important, said another departed senior executive, employees tended to trust Mr. Lay. If they heard of a problem that seemed to flunk the ''smell test,'' the former executive said, ''I think they questioned their own nostrils more than they questioned the company.'' 
Now many former employees feel betrayed. ''The core values of the company were 'Respect. Integrity. Communication. Excellence,' '' said Sue Vasan, reciting the much repeated list from memory. She worked in the company's corporate risk assessment department but was laid off in December, the day after Enron filed for bankruptcy. ''The people preaching those values were the ones most violating them,'' she said. ''I think it's appalling.''

Photos: Many executives who left in recent years, like Linda Richardson, above with her daughter Lucy, say Enron's culture became less welcoming with the rise of Jeffrey K. Skilling, right. He became president and chief operating officer in 1996. (Paul Hosefros/The New York Times); (James Estrin/The New York Times) Chart: ''Exiting Early'' Enron's 1999 annual report listed 34 senior executives. Many are identified informally; for example, Lawrence G. Whalley is listed as Greg Whalley. Most departed last year as the company began to collapse. When the executives left 2000 Harrison Hirko Huneke Mark-Jusbasche Sutton 2001 Izzo Bhatnagar Christodoulou White Bannantine Baxter Haug Pai Skilling Rice Hannon McDonald Fastow Sherriff Enron files for bankruptcy McConnell Kean Frevert 2002 Whalley Lay* *Still a director (Source: Enron)(pg. C2) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business/Financial Desk; Section A
ENRON'S MANY STRANDS: THE BUZZ
World Economic Forum Plays Down the Scandal
By LOUIS UCHITELLE

02/04/2002
The New York Times
Page 20, Column 5
c. 2002 New York Times Company

More than a thousand corporate chief executives are gathered in New York for the World Economic Forum, their voices ringing out in almost all the panel discussions. 
But in four days of nonstop talking, the Enron scandal has hardly been mentioned; when it has been, the emphasis has been on lax business practices and how every recession brings down some big company, rather than on the apparent fraud at the heart of Enron's collapse.
Only one hastily organized panel specifically dealt with the scandal, and its principal speaker, Richard H. Murray, director of legal and regulatory affairs at Deloitte & Touche, quickly set the tone. Enron, he told a less-than-packed audience in one of the smallest conference rooms, should not be viewed as a morality play -- there are too many nuanced issues and no clear answers. 
Gail D. Fosler, chief economist at the Conference Board, argued that ''Enron happened as part of the change in corporate value systems between 1989 and today.'' 
Ms. Fosler, appearing with Mr. Murray, said she had not been recruited until Wednesday for the Saturday panel, long after most planning for the conference was done. 
No one gives more support to the World Economic Forum than those leading American corporations that each pay $26,000 a year in dues and fees to cover much of the cost of the elaborate annual gathering held, until this year, in Davos, the Swiss ski resort. Enron was a prominent supporter, and when the first list of probable participants for this gathering went out in late September, Kenneth L. Lay, Enron's chairman, was still on it, although his company had begun to unravel in public. 
''I don't think we have ever had a more sudden demise,'' Charles McLean, the forum's chief spokesman, said. Or seen a company more quickly dismissed. ''Enron is not important to us,'' Mr. McLean said. ''They are bankrupt.'' 
But if the forum's participants -- not only chief executives, but entertainers, heads of state, writers, religious leaders and union officials -- winced at dealing with Enron head on, there were references to it in the panel discussions and the hallways. 
Many cited Enron as a symptom of the times, a point of view offered by Stanley Fischer, the former second in command at the International Monetary Fund who is now a vice chairman at Citigroup. ''Enron is something that happens at the end of a boom,'' he said in a panel on the economic outlook, ''so I think we are in for a period of slow growth.'' 
But mostly there was minimizing. Joseph F. Berardino, chief executive of Arthur Andersen, also under fire as Enron's auditor, canceled a scheduled appearance. And in interviews, half a dozen chief executives, made less rather than more of the scandal. 
''It will raise the diligence of boards,'' said Michael D. Capellas, chairman of Compaq Computer. ''I don't think there is a C.E.O. out there who is not paying attention. But I don't think they are drawing the conclusion that because Enron failed, the system is flawed.'' 
The resistance to linking Enron to corporate fraud and political connections came out at a session on a supposedly loftier matter attended by John J. Sweeney, president of the A.F.L.-C.I.O. ''Someone raised the issue of corporate corruption,'' Mr. Sweeney said, ''and the consensus on the panel was that this was not an issue of globalization.''

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

Bentsen heads roundtable session 
Congressman gathers hearing questions from ex-Enron employees 
By LORI RODRIGUEZ 
Copyright 2002 Houston Chronicle Minority Affairs Writer 
Feb. 4, 2002, 12:05AM
On the eve of a congressional hearing today that was to feature former Enron Chairman Ken Lay, Houston Congressman Ken Bentsen met with former company employees Sunday to hammer out questions for the ex-CEO about the collapse of the company and the subsequent plight of its workforce. 
In an abrupt move a few hours later, however, Lay announced he would not appear at the hearing as requested. 
"What we are trying to find out is one, what happened, what went wrong, were there things that were done incorrectly, were there bad business decisions, was there mismanagement or were there things that were even worse, perhaps bordering on fraud," said Bentsen Sunday. 
"Were there problems in existing law that need to be affected and were there things done by senior management that resulted in the decisions by employees to hold the stock that they might not have otherwise done." 
Following the private discussion with former Enron employees, Bentsen, a candidate for the seat being vacating by retiring U.S. Sen. Phil Gramm, said he had introduced two bills aimed at helping workers who lost their jobs and life savings when the company failed. 
One bill would prohibit employers from preventing their workers from selling company stock contained in a 401(k) or retirement savings account. Another would give employees a seat at the bankruptcy court table, requiring that they be granted the same rights to compensation as fully secured investors in the company. 
Lay was scheduled to appear before the Senate Commerce, Science and Transportation Committee beginning at 8:30 a.m. today. The hearing was to be viewed in Houston on all the major networks. Bentsen is a senior member of the House Financial Services Committee, which will conduct another hearing at 1 p.m. probing the company's fall. 
When he arrived in Washington late Sunday, Bentsen was told of Lay's decision to pull out of the hearings. "I'm profoundly disappointed, and I know the former employees of Enron I met with are not too pleased," the congressman said. 
Primed with questions of his own and several from the former Enron workers, Bentsen said Lay was "making a terrible mistake" by not testifying. "We will get the answers at some point," Bentsen said. 
Earlier Sunday at Bentsen's Houston office, Enron ex-employees said they harbor no malice toward Lay personally. But they told harrowing tales of what they called "Black Monday", Dec. 3, the day they got their marching orders. 
"We had 30 minutes to get out of the building and that was not fair," said Louis Allen, who served as supervisor of parking and transportation for nine years. "We were treated like criminals." 
Although Allen lost $50,000 in savings made during his nine years with the company, he and the other employees had kind words for their former top boss. 
"Mr. Lay is a very generous man, and I think he needs to come forth," said Allen. But Allen noted the former chairman would not have left the company and returned "if he wasn't concerned." 
"He didn't want any of this to happen. If he could have done anything, I believe that he would have tried to save the company. He was a people's person. 
"I'm not angry. I just want relief." 
Debbie Perrotta, a former senior executive assistant for five years who lost $40,000 in savings, similarly said she held no anger toward Lay. 
"I just want the truth to come out," said Perrota, when asked what questions she wants Lay and other executives to answer. 
If employees had been forewarned of the looming trouble, said Perrota, instead of being constantly reassured of the company's solvency, they might have pulled back from further savings and investments. 
"Nobody knew. It was a complete surprise. It was a shock." 
Allen said he is convinced top Enron officials knew well before the company's public failure that it teetered on bankruptcy. As the person in charge of executive parking, Allen said he watched numerous officials turn in their garage keys and bail out months before the collapse. 
Allen called a scathing report by a three-member team from Enron's board of directors released Saturday "internal damage control." The report concluded the company overstated profits by $1 billion in the last two years while some executives pocketed more than $50 million from poorly monitored partnerships. 

Business; Business Desk
Meltdown Is Deja Vu for Some at Enron Energy: Executives who warned about practices had similar experiences at MG Corp. in the 1990s.
LEE ROMNEY and WALTER HAMILTON
TIMES STAFF WRITERS

02/04/2002
Los Angeles Times
Home Edition
C-1
Copyright 2002 / The Times Mirror Company

There were massive financial losses and ousted executives. Finger-pointing at the company's auditor, Andersen, for not ringing alarm bells. An executive who warned of what could lie ahead but was unheeded. 
And ultimately, a corporate collapse.
The story is Enron Corp.'s. But it is also that of MG Corp., a German conglomerate's U.S. subsidiary that suffered its own high-profile meltdown in the early 1990s. 
And in a tale of intertwining fates, Enron executives who warned about Enron's practices last year had worked at MG and seen it all before. 
Jeffrey McMahon, promoted last week to Enron president and chief operating officer, was MG's internal auditor. In 1993, he warned his bosses of poor internal controls in the months before MG began to fall, copies of the audits obtained by The Times show. 
Sherron S. Watkins, the Enron vice president whose memo to former Enron Chairman and Chief Executive Kenneth L. Lay last summer predicted the company would "implode in a wave of accounting scandals"--and pointed to McMahon as equally concerned--also had worked at MG. 
That experience, according to one friend and former colleague of Watkins, helped her foresee how fast and hard Enron could fall. 
The crises that battered both companies are far from identical. MG--which is still alive, but no longer owns any operating businesses--was done in by an ill-fated bet on oil futures. Enron's slide was triggered in part when losses hidden in off-balance-sheet partnerships suddenly were disclosed. 
* 
Both Turned to Derivatives 
But among the striking similarities is that both companies took risky forays into so-called derivatives that pushed the envelope of conventional finance, economists familiar with the companies said. 
Derivatives are financial contracts whose value is derived from the price of an underlying stock, commodity or index. They can be used to make high-octane market bets or to hedge against market moves. 
Both firms also used aggressive "mark-to-market" accounting. The goal of mark-to-market accounting is for companies to list the true value of their assets at prevailing market prices. But experts say the technique can be abused in thinly traded markets where companies can arbitrarily assign high values to their assets. 
In addition, both companies displayed a hubris during their peak years that stood out against their humbling descents, one source said. 
For those who were in both workplaces, the parallels are all too strong. 
"I can see anyone who had been at MG saying, 'Hey, I've been here before,'" said Philip K. Verleger Jr., an energy economist who served as an expert witness for MG's parent company in the subsequent litigation. "It must have become increasingly uncomfortable." 
MG unraveled in late 1993, when a sudden plunge in world oil prices left it with gaping losses in energy derivatives. 
Until that time, MG had been aggressively signing long-term contracts with energy distributors and marketers to supply them with gasoline and other oil products. Because it promised deliveries at fixed prices, MG sought to guard against a sudden rise in oil prices. 
To do that, MG invested in oil futures contracts and other derivatives that would increase in value if oil prices rose. Theoretically, the gains in derivatives would offset any losses on the energy contracts. But rather than rising, oil prices sank abruptly. MG incurred steep losses on its large derivatives holdings. 
* 
Hypothetical Profit on Books 
Meanwhile, the cash flow from the long-term contracts MG signed to supply gasoline to energy firms was dwarfed by the short-term losses on the derivatives. And in some cases, MG had structured the contracts so customers didn't have to take any supply, or make any payments, for a decade. Yet MG already had recorded expected long-term profit from the energy-supply contracts on its books. 
MG's losses eventually reached $2.7billion. The bankruptcy of its parent, Metallgesellschaft, once Germany's 14th-largest company, was averted only by a bailout by German banks. 
The parent company underwent an aggressive restructuring and eventually liquidated its U.S. oil trading unit. 
Neither Watkins nor her attorney returned calls for comment on her three-year stint at New York-based MG Corp.'s financing arm--MG Trade Finance Group--which she left in 1993 to join Enron. 
Watkins was not at the center of the MG storm, which involved MG Refining & Marketing Inc. But one friend said she had mentioned her experience with that company's debacle when sounding alarms at Enron. 
McMahon was closer to the crisis. As internal auditor of MG, he issued several internal audits that raised concerns about the oil trading unit. 
An August 1993 report concluded that the unit's risk-management procedure "requires improvement" and that the overall risk-management system was "somewhat informal." 
* 
Warning Ignored by Executives 
Apparently referring to the increasingly large and risky derivatives positions that the unit was taking on, McMahon wrote that the exposure to losses was "much larger than anticipated in the original business plan." 
McMahon said through Enron spokesman Mark Palmer that he had attempted to alert his superiors to potential problems at the trading unit. 
McMahon "found a lot of problems," Palmer said. "They just didn't have the governance structure to manage the trading positions." 
The audits "fell on deaf ears" until the losses mounted in late 1993, said New York attorney Bob Bernstein, who represents Metallgesellschaft, now known as MG Technologies. 
"Jeff's reports ... were quite prescient," Bernstein said. "Was he the most important person? No. Was Jeff McMahon an important person? Yes.... He's a person of honor and integrity who saw things that were wrong and alerted people to that." 
At Enron, McMahon has emerged as one of a handful of executives who allegedly was concerned by off-balance-sheet partnerships headed by former Chief Financial Officer Andrew S. Fastow. 
According to Watkins' memo, McMahon was "highly vexed over the inherent conflicts of [the partnerships]. He complained mightily to Jeff Skilling." 
Days later, Watkins wrote, Skilling offered McMahon a different job heading another Enron unit. With Skilling and Fastow both gone by fall, McMahon became CFO. 
* 
Finger-Pointing Followed Collapse 
As with Enron, MG's collapse was held forth as having broad implications for corporate governance, financial controls and derivatives trading. 
There were allegations that German board members--who claimed they were kept in the dark about the U.S. trading unit's problems--were too close to the company. Similar concerns swirl around Enron's board. 
There also were questions about accounting firm Andersen. According to published reports, the German parent pointed a finger at the firm for supporting MG's interpretation of its numbers and replaced Andersen by 1994. 
Patrick Dorton, an Andersen spokesman, said MG's problems were due to the big swing in oil prices. 
"This is simply the case of a company caught on the wrong side of a dramatic slide in oil prices, like many other companies were at that time," Dorton said, refusing to comment further. 
In Enron's case, Andersen is under investigation for shredding Enron-related documents after the Securities and Exchange Commission had launched an investigation of the energy trader. The firm has denied that it authorized shredding. 
The companies' financial practices also bear similarities. MG has been described in academic papers as a derivatives "horror story." Now, there are signs that in Enron's hands derivatives evolved into tools of fiscal concealment and manipulation, some experts say, allowing Enron to inflate the value of assets while understating the risks involved. 
Palmer rejected the notion that the company's problems are tied in any way to derivatives. Enron's trading operation suffered when the company's credit rating was cut, not by the trading itself, which he said was profitable. 
Nonetheless, both MG and Enron entered long-term contracts whose ultimate values were difficult to predict and booked the hypothetical long-term profit from those contracts in the present. That mark-to-market accounting has emerged as a trouble spot in both cases, said John Parsons, a financial economist at Charles River Associates in Boston. 
"People are marking to what their own opinion is of the value," Parsons said. If those opinions are wrong, the financial consequences can be severe. 
As it turned out, Enron and MG became directly linked: Eighteen months ago, Enron bought the company's London-based metals trading operation, and the Enron and MG logos are side by side in Madison Avenue office space. 
That relationship is now ending. Sempra Energy last week announced its purchase of the metals business. 
The similar fates of MG and Enron strike some observers as eerie. 
"It's almost identical," economist Verleger said. "I think that Enron inadvertently blundered into the same corporate model that caused the collapse of MG."

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

White House Is Expected to Recommend Only a Slight Boost in Funding for SEC
By Greg Ip
Staff Reporter of The Wall Street Journal

02/04/2002
The Wall Street Journal
A5
(Copyright (c) 2002, Dow Jones & Company, Inc.)

WASHINGTON -- Despite widespread demands for increased scrutiny of corporate accounting following Enron Corp.'s collapse, the White House is expected to recommend only a slight increase in funding for the lead regulator on such matters when its budget is unveiled today. 
What's more, the Securities and Exchange Commission's operating budget wouldn't include money to back up a recent commitment from both Congress and the Bush administration to raise SEC salaries to stem an exodus of experienced staff, people familiar with the matter said.
Just three weeks ago, the agency appeared to score an important victory when President Bush signed legislation that would raise SEC staff pay to the levels of their counterparts at federal banking-regulation agencies, who earn an estimated 24% to 39% more. Funding the increase was to be handled later. 
But just a week after the bill was signed, Chairman Harvey Pitt told staff in an e-mail, "Unfortunately, the Office of Management and Budget has advised us that funding for pay parity will not be included in the president's proposed budget for fiscal year 2003, which starts in October. While I am enormously disappointed by this, we are part of one government, and must abide by government-wide budget decisions." 
The SEC originally requested more than $500 million for 2003, including $76 million to implement pay parity for its lawyers and investigators, according to people familiar with the request. As it is, the White House is expected to recommend a rise of about 4% from the agency's overall budget of $438 million this year, with the increase allotted mostly to additional technology rather than beefed-up salaries, these people said. In his e-mail, Mr. Pitt said the administration has agreed to let the SEC use some of this year's budget to partially implement pay parity in the current year. 
The SEC experienced a major exodus of experienced staff in recent years, as the bull market drove up the salaries they could earn in the private sector. During one two-year period in the late 1990s, the SEC's New York regional office lost more than half of its 137-member enforcement staff. Critics say that hampered both the level of scrutiny the agency could bring to the markets and its ability to pursue cases. 
For example, the SEC tries to review annual reports from large companies at least once every three years, but in the late 1990s its staff was so inundated with reviewing initial public offerings they were unable to scrutinize the usual number of annual reports. Last month, The Wall Street Journal reported that Enron Corp.'s 2000 annual report was scheduled for SEC review, but staffers delayed the process for another year, not only to await newly required derivatives disclosures but also, a person with knowledge of the process said, because they didn't want to take the time to wrestle with Enron's complicated filings. 
The SEC could face fresh demands on its resources, as better policing of corporate reports and accountants is sought in the aftermath of Enron's collapse. SEC spokeswoman Christi Harlan said Mr. Pitt "has said that we have the staff and the resources to do the job we need to investigate Enron. What we will be interested in seeing is what additional duties Congress might ask the SEC to take on." 
White House budget director Mitchell Daniels Jr. said in an interview Friday that the administration doesn't consider the SEC's request for pay parity "justified." He added, "I think the SEC is amply provided for. . . . If they need more money, it might be for more investigations, as opposed to doing the same investigations and pay everybody more."

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

Questioning the Books: In Spoof Video, Former CEO Steers Enron To Places No Firm Has Gone Before
By Jonathan Friedland
Staff Reporter of The Wall Street Journal

02/04/2002
The Wall Street Journal
A8
(Copyright (c) 2002, Dow Jones & Company, Inc.)

If former Enron Corp. Chairman Kenneth Lay testifies before Congress this week, he won't be showing up dressed as Captain Kirk. 
But in an in-house spoof video made four years ago for a sales event of Enron's retail energy-services unit, Mr. Lay was shown piloting the Starship Enterprise as part of Enron's quest to expand its influence to every corner of the universe.
The 10-minute tape -- made at a time when Enron's stock price was soaring and the company was lauded by many as the nation's most innovative firm -- takes the form of a mock segment from ABC's "20/20" newsmagazine. In it, voices impersonating Barbara Walters and Hugh Downs, dubbed over their images, recount how in the year 2020 Enron was elected "the world's first global governing body." A voice impersonating ABC correspondent Sam Donaldson says, there "isn't a person who is alive today who doesn't know and revere Enron." 
Featuring cameos by former Enron President Jeffrey Skilling and the former Vice Chairman of Enron Energy Services and now Secretary of the Army Thomas White, the tape tells the story of how Enron righted many of the world's wrongs, essentially by being smarter than anyone else. 
Enron officials figure out ways to vanquish earthquakes in Japan, tidal waves in Asia and drought in India. Mr. White averts nuclear war with Russia. He is depicted at one point suggesting to Russia's president that the best way to prevent tensions from rising anew is for Moscow to outsource management of its nuclear arsenal to Enron. The next segment shows Red Square full of Enron logos. 
The tape, which mixes in footage from such movies as "Naked Gun" and "Deep Impact," also recounts how Mr. Lay received the Nobel Prize for economics for theories that forestall a stock market crash in 1999. 
Mr. Lay had been scheduled to testify before Congress today, but his lawyers said he wouldn't because the hearings have become "prosecutorial." 
For his part, Mr. Skilling, who is expected to testify this week, is shown in the video talking about how he is retiring to a remote island near islands owned by Bill Gates and Warren Buffett because he has done everything he set out to do at Enron. "It's time for me to go fishing with Warren and Bill," he tells the interviewer.

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

Economy
O'Neill Wants Stiffer Penalties for CEOs --- Under Proposal, Executives Who Mislead Holders Couldn't Use Insurance
By Bob Davis
Staff Reporter of The Wall Street Journal

02/04/2002
The Wall Street Journal
A2
(Copyright (c) 2002, Dow Jones & Company, Inc.)

NEW YORK -- Treasury Secretary Paul O'Neill said he favors strengthening penalties for chief executives who release misleading financial statements, including barring them from using insurance to cover the costs of some shareholder lawsuits. 
Responding to the gale of criticism over the collapse of Enron Corp., whose disclosure statements were seen as inadequate or misleading, Mr. O'Neill said rules governing corporations should be changed to make clearer the responsibility of corporate executives.
"It would be helpful to strengthen the certification [of financial results] that a chief executive officer makes on behalf of the company," he said during an interview at the World Economic Forum meeting in New York. One way to accomplish that, he said, would be to bar the CEO, other senior executives and directors from having insurance that pays for legal costs and judgments arising from situations where a firm doesn't release adequate financial information. 
Mr. O'Neill said such an insurance ban would apply "to all cases, whether there is wrongdoing or whether there is a wrongful statement." A total ban is important "so there is no ambiguity about the responsibility of executive officers -- that they have the responsibility to know and a responsibility to share" information. 
Insurance policies covering directors and officers liability typically state that deliberate misrepresentations or violations of securities laws are grounds for denying a claim. 
Other types of policies often are less clear in spelling out when an insurer must pay. In the Enron situation, insurers who wrote surety bonds are disputing some claims because the insurers say Enron misled them about how the bonds were to be used. Surety bonds are issued by insurers to companies that want to guarantee performance or payment in a business transaction. 
In the wake of the Enron collapse, President Bush named Mr. O'Neill to head a panel to look at changes in rules governing corporate behavior, which is expected to make recommendations by mid-February. He said it was "worth looking into" the insurance proposal, but the plan wasn't final. Mr. O'Neill also heads a separate panel to look at changes in pension laws, such as recommending that workers have more flexibility to diversify retirement accounts, and that senior executives be held to the same blackout periods on stock sales as rank-and-file employees. 
By focusing on the actions of CEOs, Mr. O'Neill said it should be possible to avoid wholesale changes in rules governing corporate disclosure. "It's not possible to devise a detailed regulatory scheme that anticipates everything that one ought to know," he argued. "Therefore, it's probably going to be more beneficial to put the duty on the executives because they should know everything that's necessary to know and they should provide everything that's necessary to know." 
Stephen Kaufman, chairman and CEO of Arrow Electronics, a Melville, N.Y., semiconductor supplier, who was also attending the WEF meeting, said he was concerned that a broad denial of insurance would make it hard to fill top corporate jobs and directorships. "As a CEO of a large company, it's impossible to know everything going on," he said. "Am I supposed to be sued because someone did something wrong? I'd have to think twice about taking the job if that were the situation." 
So long as an officer or director exercised "reasonable" care in producing financial reports, Mr. Kaufman said, he thought they ought to be able to qualify for insurance. 
Mr. O'Neill said he also would review the recommendations of a task force headed by former Federal Reserve Chairman Paul Volcker, who is examining international accounting standards. More and more of the world is one from a financial standpoint, Mr. O'Neill said, "I think there's no reason to have multiple standards." 
Separately, Mr. O'Neill said he expected pace of U.S. economic growth to pick up during the year, and forecast fourth-quarter growth at an annual rate of 3% to 3.5%. He anticipated that the government would run a surplus, including revenue from Social Security taxes, again in "a couple of years." He dismissed criticism that the government should measure its surplus or deficit, without including Social Security taxes. 
"Tell me why I should do that?" he said. "What does that have to do with anything." 
When the government runs a surplus, each dollar is used to retire debt, whether or not that revenue comes from Social Security taxes. That improves the fiscal condition of the government and makes it easier for it to borrow again in the future to pay for retirement of baby boomers. The proper level of government surplus is a subject for debate, Mr. O'Neill said, but the level shouldn't be determined by the amount of Social Security taxes coming into the Treasury now. 
"It's not a relevant thing," he said.

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

Business/Financial Desk; Section A
ENRON'S MANY STRANDS: THE AUDITORS
FORMER FED CHIEF PICKED TO OVERSEE AUDITOR OF ENRON
By JONATHAN D. GLATER

02/04/2002
The New York Times
Page 1, Column 6
c. 2002 New York Times Company

A day after a committee of the Enron board issued a damning report on the company's collapse, Arthur Andersen, the accounting firm that certified Enron's financial statements, gave extraordinary authority to a new oversight panel to be led by Paul A. Volcker, the former Federal Reserve Board chairman. 
But Enron's former chief executive, Kenneth L. Lay, abruptly pulled out of two promised appearances before Congress beginning today, saying that lawmakers had already decided on his guilt.
Mr. Lay's lawyer, Earl J. Silbert, said, ''Judgments have been reached and the tenor of the hearings will be prosecutorial.'' 
Lawmakers generally praised the Enron report yesterday, saying, without pointing directly to Mr. Lay, that it contained strong evidence of corporate crimes. 
''The report presents a pretty straightforward case of fraud,'' said Senator Jon S. Corzine, Democrat of New Jersey and a former executive at the investment firm Goldman, Sachs. ''If the facts of it are accurate, it's quite despicable and damning.'' 
The report, issued Saturday, concluded that Enron executives intentionally manipulated profits, inflating them by almost $1 billion in the year before the company's collapse through byzantine dealings with a group of partnerships. It described across-the-board failures of controls at almost every level, as a culture of self-enrichment at the expense of shareholders emerged. 
The report said that Arthur Andersen signed off on flawed and improper decisions every step of the way and deserved much of the blame for Enron's collapse. Andersen responded on Saturday by attacking the report as an effort to shift blame to others. 
Yesterday, Andersen executives said that their reforms were already planned and in no way a reaction to the report. While this is not the first time that an accounting firm has created an oversight body, the amount of power that Mr. Volcker's committee will have is remarkable, said Arthur W. Bowman, editor of Bowman's Accounting Report. 
''What they've done now is almost hard to believe,'' Mr. Bowman said. ''They're going to give this committee carte blanche to make recommendations, and they'll follow them without question.'' 
Mr. Volcker will lead a committee of at least three people with the power to change Andersen's policies and fire or reassign personnel, the firm announced. The new board is one of several steps Andersen will take to restore its credibility, the firm's chief executive, Joseph F. Berardino, said. 
In its efforts to reassure clients and investors, Andersen has already said that it will stop serving as both internal accountants and external auditors for the same company. It will no longer sell certain technology consulting services to clients whom it audits, a dual role that critics say creates conflicts of interest. Enron paid Andersen about $27 million for consulting and $25 million for auditing in 2000. 
Mr. Berardino, who sought out Mr. Volcker, said other changes are in the works. ''We're taking a first step forward, and I emphasize it's a first step,'' Mr. Berardino said. ''We are serious about being the strongest firm in quality, as soon as possible.'' 
The oversight board, whose other members have yet to be named, will have at least one paid full-time staff member. Mr. Volcker will not be paid for his services. 
While it is unclear just how far the power of the committee will extend, Mr. Volcker said that he expected to be able to effect ''substantial'' changes. Otherwise, he said, ''I could not possibly invite other people to join this board.'' 
As the leader of efforts to persuade Swiss banks to return deposits to families of Holocaust victims, Mr. Volcker has already established himself as a powerful moral voice. 
Andersen's announcement comes as accounting firms that audit the nation's largest companies find themselves under intense pressure to change practices that have undermined the credibility of the financial statements they approve. Last week, four of the Big Five accounting firms, including Arthur Andersen, announced support for new restrictions on the services they could sell to companies they audit. 
Andersen's role in Enron's fall, coming after previous scandals over financial statements it approved at the Sunbeam Corporation and Waste Management, has made it the focus of industry critics. Beyond missing Enron's accounting errors and omissions, the Enron report said, the firm also ''participated in the structuring and accounting treatment'' of some of Enron's transactions with partnerships, run by Enron executives, that hid company debt. 
At the news conference yesterday, Mr. Berardino and Mr. Volcker would not answer questions about the Enron report -- though Mr. Berardino is likely to face such questions when he testifies before Congress tomorrow. They tried instead to focus on broader accounting issues. 
''Accounting and auditing in this country is in a state of crisis,'' Mr. Volcker said at yesterday's news conference, at the offices of Andersen's New York law firm, Davis Polk & Wardwell. 
''Auditing is crucial to protection of the investor'' and to the functioning of efficient markets, Mr. Volcker said. ''If you can't trust the numbers, how can you allocate capital correctly?'' 
Accounting firms, hoping to head off tougher regulation or legislation, are rushing to make themselves more open and accountable. PricewaterhouseCoopers last week announced steps similar to Andersen's, including the addition of 3 outside directors to its 18-member board. In the future, the firm will put out an annual report detailing its revenues, compensation policies and other practices to ensure the quality of audits, its chief executive, Samuel A. DiPiazza Jr., said at the time. 
''There needs to be a proactive response by the profession to the Enron situation,'' Mr. DiPiazza said. ''It is important for us, as we take steps, that we emphasize that we don't think our system is broken. We think our quality is very high; we think our focus is on the interests of the public and public investors. But there's a perception issue.'' 
Ernst & Young, another Big Five firm, is expected to announce its own proposals for changing the profession early this week. According to an executive close to the matter, the heads of all five firms met more than a week ago and at that time Mr. Berardino informed them of Andersen's plans. 
The adoption of an independent board is a measure that experts in corporate governance and former regulators have long called for as a way to make up for the lack of oversight given the private partnership structure of accounting firms. 
Such oversight might have led Andersen to drop Enron as a client, said Richard C. Breeden, a former chairman of the S.E.C. ''If Andersen's quandary over whether to resign had been brought to a board, what would have happened?'' he said. ''When conscience questions come up, you need to have a board with public representatives dealing with them.'' 
Andersen's measures probably will not head off regulatory or legislative action, Mr. Bowman said, but may help preserve what is left of the firm's reputation and keep some clients from leaving. ''It takes a step in restoring confidence in the firm's ability to do the best work with the best people,'' he said. ''But this does not do a thing for what's happened to them to this point.'' 
Accounting experts and some former regulators said the reforms that the firms now support would not necessarily have prevented the kind of accounting that concealed Enron's true condition. 
But for accounting firms to take the steps they are proposing is radical for an industry that seldom receives, or wants, much outside attention. The actions indicate the sense of crisis that accountants acknowledge they now feel. 
No previous accounting scandals have led the firms to propose such reforms. Last summer, Andersen paid $7 million to settle a lawsuit brought by the S.E.C. after it had certified statements that vastly overstated earnings at Waste Management. In 1998, Waste Management adjusted its previous earnings downward by $1.43 billion. 
But Andersen did not discipline three partners who were involved in the audit, who paid fines of $30,000 to $50,000 each and were temporarily barred from auditing public companies. 
Asked whether in light of Andersen's role in Enron, Andersen should have responded differently to the S.E.C.'s Waste Management charges, Mr. Berardino offered an answer he may have to use repeatedly in the future: ''In hindsight, I guess we all might do things differently.''

Photos: Joseph F. Berardino of Arthur Andersen, right, with Paul A. Volcker, who will lead a review of the firm. (James Estrin/The New York Times)(pg. A1); Joseph F. Berardino, chief executive of Arthur Andersen, left, said yesterday that forming an oversight committee led by Paul A. Volcker, right, was one step the firm was taking to try to restore its credibility. (James Estrin/The New York Times)(pg. A18) 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Questioning the Books: Andersen Retains Volcker in Effort to Boost Its Image --- Former Fed Chairman Is Set To Lead Panel to Help Change Audit Practices
By Jonathan Weil
Staff Reporter of The Wall Street Journal

02/04/2002
The Wall Street Journal
A8
(Copyright (c) 2002, Dow Jones & Company, Inc.)

NEW YORK -- Looking to bolster its damaged image, Arthur Andersen LLP said it has retained former Federal Reserve Board Chairman Paul Volcker to lead an outside panel that will guide Andersen in making "fundamental change" in the accounting firm's audit practice. 
Andersen also announced it will stop accepting assignments for information-technology consulting work or internal-audit work from U.S.-based publicly traded clients for which Andersen also acts as independent auditor. Critics have accused the accounting firm of conflicts of interest because it was Enron Corp.'s internal and external auditor and did extensive consulting work for the energy-trading company before it filed for bankruptcy-court protection late last year.
The announcement that Andersen would limit the scope of services it provides to domestic audit clients is in line with similar announcements made in the past week by other Big Five accounting firms. Joseph Berardino, Andersen's chief executive, called the initiatives an important "first step" toward regaining the public's confidence in the Chicago firm's audits. 
On Saturday, a special committee of Enron's board issued a blistering report that, among other things, accused Andersen of failing to perform its professional duties as the auditor. Andersen promptly issued a statement blaming the Houston company's collapse on poor business decisions. 
But at a news conference here yesterday, Mr. Berardino ducked reporters' questions about the special committee's report. "We've had a major letdown in our whole process," Mr. Berardino said. "It's obvious the public has been let down, and the question is what should their expectations be." Explaining why he wouldn't comment on the Enron board's findings, Mr. Berardino said, "Today's conversation is about going forward." 
In its report released Saturday, a special committee appointed by Enron's board pinned much of the responsibility for Enron's misleading financial reports and eventual collapse on former Enron executives -- and on the company's board for failing to exercise adequate oversight. However, the report also laid blame on Andersen. 
"The evidence available to us suggests that Andersen did not fulfill its professional responsibilities in connection with its audits of Enron's financial statements, or its obligation to bring to the attention of Enron's board . . . concerns about Enron's internal controls," the special committee's report states. The report also says Andersen at times declined to cooperate with Enron's internal review, a contention Andersen denies. Mr. Berardino referred questions about the report to the statement released Saturday by another Andersen executive, global managing partner C.E. Andrews. 
"Nothing more than a self-review, [the Enron board's report] does not reflect an independent credible assessment of the situation, but instead represents an attempt to insulate the company's leadership and the board of directors from criticism by shifting blame to others," Mr. Andrews said. "More importantly, the report overlooks the fundamental problem -- the fact that poor business decisions on the part of Enron executives and its board ultimately brought the company down." 
By appointing Mr. Volcker to Andersen's outside panel, Mr. Berardino said he wants to signal that Andersen is serious about improving its audit policies and procedures. "We want to improve our standing in the public's mind, and we want to improve the quality of our auditing," he said. "Today is a new day." 
It remains to be seen what changes Mr. Volcker might recommend. Mr. Volcker, who is providing his services free of charge, said the new oversight panel will assemble its own staff and will be funded by Andersen. At the news conference, Mr. Berardino said Andersen would abide by any recommendations made by the panel. Under the contract between Andersen and Mr. Volcker, an excerpt of which was released by the firm, the panel would have authority to mandate policy and personnel changes at the firm, which Mr. Berardino described as an unprecedented concession for a large accounting firm. 
Andersen also has retained former U.S. Sen. John Danforth, a Missouri Republican, to conduct a review of the firm's records-management policy and recommend improvements in light of Andersen's disclosure of widespread document destruction at the firm's Houston office.

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

Questioning the Books: Companies Mull Separation of Auditing, Consulting
A Wall Street Journal News Roundup

02/04/2002
The Wall Street Journal
A6
(Copyright (c) 2002, Dow Jones & Company, Inc.)

The accounting scandal at Enron Corp. has prompted other companies to consider following a move by Walt Disney Co. to cease using their external auditors to do consulting work. 
While many companies say they see no need to separate the functions, Corning Inc., Mirant Corp. and New York Times Co. are among those saying they might consider the step.
The collapse of Houston energy trader Enron Corp. brought new scrutiny to the common practice of companies using one accounting firm both to audit the books and to provide lucrative consulting services -- with companies sometimes paying much more for the nonaudit services. 
Some audit firms, facing strong criticism of the practice, aren't waiting for clients to act. Yesterday Arthur Andersen LLP, which audited and did consulting work for Enron, became the latest to react. Andersen said it will no longer accept internal-audit and financial information-systems work from publicly traded clients to which it provides external audit services. 
Disney last week became the first major company to announce it would separate auditing from consulting, saying that though there were no problems with outside auditor PricewaterhouseCoopers LLP, it wanted to be free from concerns about auditor independence. Disney's move rendered moot a shareholder initiative, scheduled for the annual meeting later this month, that questioned the company's use of its auditor for consulting services. 
Many companies try to ensure audit independence through rules that require board members to approve the use of outside accountants for other services. Others place limits on the fees paid to accountants. At the same time, questions about the practice are prompting executives to re-examine their policies, to make sure safeguards are sufficient to prevent conflicts of interest. 
This week, Corning's board-level audit committee will consider adding restrictions to its auditing and consulting-fee policies, said Paul Rogoski, a company spokesman. In light of the Enron situation, "we're going to look at what our current process is and see if it needs to be updated," Mr. Rogoski said. For 2000, the most recent figures available, Corning, a Corning, N.Y., optical-fiber maker, paid $2.5 million in auditing fees to Pricewaterhouse and $13.3 million to the firm in consulting fees. 
Mirant, an Atlanta energy firm, says it probably will study the Disney move as part of a "constant review" of its audit policy, though it typically tries to separate audit work from consulting jobs. "We're making every effort we can to be non-Enron-like," a company spokesman said. In 2000, the company paid Arthur Andersen LLP $2.2 million for auditing services, another $1.2 million for financial information-systems services, and $10.1 million for other services, including help with its initial public offering and tax consulting. 
JDS Uniphase Corp. a maker of fiber-optic components for telecommunications networks, said that last year, under pressure from regulators, it began to reduce the nonaudit services that it purchases from auditors Ernst & Young LLP. For the fiscal year ended June 30, JDS, which maintains dual headquarters in Ottawa and San Jose, Calif., paid Ernst & Young $1.4 million for its audit; $2 million for other audit-related services, including review of JDS's SEC filings; and $3.6 million for other services, including tax consulting and its internal audit. 
Chief Financial Officer Anthony Muller said JDS stopped using Ernst & Young for real-estate consulting and internal auditing because of "loud messages from the SEC" about auditor independence. He said the company continues to use Ernst & Young for tax-related issues because JDS believes there is "considerable value" in having the auditor work on both accounting and tax issues. 
At New York Times Co., Enron-related accounting concerns are prompting the company's audit committee to review whether it will use auditors Deloitte & Touche for consulting work in 2002, spokeswoman Catherine Mathis said. In 2000, the company paid Deloitte $1.3 million for reviewing its financial statements and $3.1 million for other services, principally tax consulting and work revolving around a since-withdrawn plan to create a tracking stock for its New York Times Digital unit. 
Some companies say there is nothing wrong with using auditors for other services if there are safeguards in place. 
Dow Jones & Co., publisher of The Wall Street Journal, paid PricewaterhouseCoopers $1.2 million in audit fees for the year ended Dec. 31, 2000, and another $11 million primarily for tax, technology and management-consulting services. Richard Zannino, Dow Jones's chief financial officer, said a large chunk of the nonaudit expenses were related to computer systems bought through the audit firm. He said Dow Jones isn't considering altering its policy in light of Enron, because the company already has "very conservative practices" in place. 
Even before the Enron debacle, there was pressure on professional-services firms to stop hawking audit and consulting services to the same client. Some firms have taken their consulting units public or gone public themselves in recent years. Ernst & Young sold its consulting business two years ago, while KPMG LLP spun off KPMG Consulting Inc. in an initial public offering one year ago this month. 
Last week, Pricewaterhouse said it will file plans this spring to spin off its management-consulting unit, PwC Consulting, in an IPO. The firm says the timing is due in part to what it sees as a crisis of confidence in the industry. 
Arthur Andersen itself, in 2000, separated from its management-consulting business, now called Accenture, in an acrimonious split. However, Andersen's role as auditor and consultant to Enron is prompting intense scrutiny. Enron paid Andersen $25 million for audit services and $27 million for nonauditing work, including tax consulting, in 2000, the most recent period for which figures are available. After Enron revealed in November that it had overstated its earnings for four years, Andersen officials testified before Congress that the nonauditing fees didn't compromise their independence as auditors. 
Yesterday, Joseph F. Berardino, the firm's managing partner and chief executive, signaled that Andersen wouldn't accept internal-audit and computer-systems work from audit clients as a way "to assure confidence in the quality of our audits in all jurisdictions." Andersen also said it had hired former Federal Reserve chairman Paul Volcker as chairman of an oversight board to help recommend other changes. 
Some accounting firms, however, warn against quick judgments. Deloitte & Touche, in a statement last week, acknowledged that "a perception problem needs to be solved" in the industry. But the firm said "it is premature to accept or reject any single proposal." A spokeswoman for Deloitte had no additional comment.

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

Derivatives Cop Wanted, but Terms Vary
By Michael Schroeder and Jathon Sapsford
Staff Reporters of The Wall Street Journal

02/04/2002
The Wall Street Journal
C1
(Copyright (c) 2002, Dow Jones & Company, Inc.)

In the wake of Enron's colossal fall, the Bush administration and a bipartisan group of lawmakers want to shine a light on derivatives-trading practices. Pressure is building for new regulatory action. 
But the question is: Which regulatory cop will get the derivatives beat?
President Bush, in his State of the Union address, singled out the need for "stricter accounting standards and tougher disclosure requirements." Though Mr. Bush didn't mention Enron Corp. by name or identify derivatives trading specifically, Treasury Secretary Paul O'Neill recently spoke for the administration in calling for modernization of derivatives regulation. 
Lawmakers have their own proposals. Some Democrats are using Enron to revive a debate about whether derivatives should be regulated by a merged Securities and Exchange Commission and Commodity Futures Trading Commission. Some derivatives -- investment contracts whose value is derived from underlying assets such as commodities or currencies -- aren't traded on exchanges and fall through the regulatory cracks. 
Rep. Peter DeFazio, a Democrat from Oregon, is drafting legislation that would create a merged superregulator to address "gaping holes in the federal oversight of financial markets," specifically with regard to over-the-counter derivatives. Sen. Jon Corzine (D., N.J.), former co-chairman of Goldman Sachs Group Inc., says he believes both agencies should share increased oversight of these risky transactions. 
Everyone agrees that it is a huge market. The nominal value of derivatives on the books of commercial banks soared to $51.3 trillion at the end of September from $6.8 trillion in 1990, with nearly $20 trillion of that growth coming since 1998, according to the Office of the Comptroller of the Currency. Of course, these numbers considerably overstate the actual money at risk because the aggregate dollars are based on the theoretical value on which each transaction is based. For example, it is highly unlikely that the value of most derivative contracts would ever go to zero. 
Financial regulators hew to decades-old divisions of authority. They have continued to keep a close watch on banks, brokerage firms and conventional exchanges, while leaving new entrants such as Enron to police themselves. The CFTC regulates futures contracts and, along with the SEC, options traded on exchanges, but not derivatives traded off-exchange, or "over the counter." These over-the-counter trades are negotiated privately between large financial institutions or corporations. 
The way such derivatives are regulated depends on what kind of firm sells them. For example, bank regulators such as the Federal Reserve can scrutinize commercial banks' activity, while the SEC can examine brokers who conduct business in the U.S. 
Enron -- which started by trading natural gas, then expanded to electricity, metals and more exotic derivatives -- fell through the gaps of this regulatory framework. During 2000 alone, Enron's derivatives-related assets increased to $12 billion from $2.2 billion, with most of the growth coming from increased trading through its EnronOnline unit, according to Enron's financial reports. To ensure that Enron met Wall Street quarterly earnings estimates, it used derivatives and off-balance-sheet partnerships, known as special-purpose vehicles, to hide losses on technology stocks and debts incurred in financing unprofitable businesses, some specialists say. In addition, some traders apparently hid losses and understated profits, which had the effect of making derivatives trading appear less volatile than it was. 
Throughout the 1990s, there have been calls for expanded regulation and more disclosure after a number of high-profile financial disasters involving derivatives, including investigations of Bankers Trust New York Corp., Orange County, Calif., and Long-Term Capital Management, the investment fund whose fall in 1998 threatened the entire financial system. 
In the past, however, proposals to merge the SEC and CFTC have run into a buzzsaw from lawmakers unwilling to give up jurisdiction over the agencies. The agriculture committees fought to preserve oversight of the CFTC, while the banking and financial-services committees wouldn't consider relinquishing their SEC authority. 
Giving financial institutions the option of selecting a derivatives regulator from among the SEC, CFTC or banking regulators, including the Federal Reserve Board, is one approach being considered. That arrangement would give regulators confidential access to books and records, which wouldn't be made public. Lawmakers also are discussing giving a designated regulator the authority to do a yearly, unscheduled audit of each derivatives dealer -- an approach used in Japan. 
To address problems posed by companies such as Enron, some specialists have said nonfinancial public companies should be required to split derivatives-trading operations into separate affiliates subject to strict capital requirements, much as banks as well as brokerages do. 
Derivatives have been around since the ancient Greeks hedged the price of their crops. But early in the 1980s, U.S. corporations such as International Business Machines Corp. or institutions such as the World Bank began using derivatives to hedge against the volatility of currency or interest rates. By 1990, use of derivatives by U.S. corporations had become the rule rather than the exception. 
Any effort to increase wholesale regulation of derivatives dealers will meet fierce opposition from powerful banks and Wall Street firms, which successfully have championed the near-complete absence of oversight of over-the-counter derivatives. 
For their part, bankers say financial institutions are subjected to much more scrutiny than other public companies. Not only do banks have regulators like the Federal Reserve monitoring the way they carry the risk of derivatives, but banks also must pass muster with entire industry of analysts, credit-rating agencies and competitors who constantly measure their risk as counterparties. Some bankers concede their own disclosure provides investors and counterparties little insight into the full scope of the risks involved. 
In late 2000, Congress exempted over-the-counter derivatives from nearly any regulation. Enron led the massive lobbying effort on Capitol Hill and, with the exemption, escaped federal oversight of its trading activities. Sen. Diane Feinstein (D., Calif.) plans legislation to repeal the part of the 2000 Commodity Futures Modernization Act that exempts energy trading from regulation. 
As a publicly traded company, Enron and other big energy-derivatives traders routinely provide the SEC with general information about finances. They aren't obliged to divulge detailed information to any agency about over-the-counter trading activities. 
The Financial Accounting Standards Board has required since last year that companies report broad aggregate derivatives numbers to the SEC each quarter, but regulators concede that companies can do last-minute transactions to dress up portfolios. In December, FASB issued extensive guidance on derivatives reporting, which is covered in more than 800 pages. Specialists say the sheer complexity of the rule could muddy the waters. 
The investing community -- and Congress -- probably will compel companies to disclose information about corporate use of derivatives. "If companies are going to indicate to investors that they are managing risk with derivatives, investors are going to want more information about how they are doing that so they can reach their own judgment about how well its being managed," says Nik Khakee, director of derivatives ratings at credit-rating agency Standard & Poor's.

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

International
Enron's Woes Are Felt by Firms Overseas --- In U.K. and Elsewhere, Accounting Rules Get Newfound Attention
By Steve Liesman and Marc Champion
Staff Reporters of The Wall Street Journal

02/04/2002
The Wall Street Journal
A12
(Copyright (c) 2002, Dow Jones & Company, Inc.)

Two weeks ago, Mohamed Alabbar, the chairman of a public company in the United Arab Emirates, received a hurried visit from his auditors at Ernst & Young. 
The team asked him to declare that his company, Emaar Properties PJSC, had no off-the-books partnerships or off-balance-sheet debts. While Mr. Alabbar was ready to sign a document pledging that was the case right away, the auditors told him to take the document home for a couple of days and think about it first. "All these auditors are sharpening their pencils," says Mr. Alabbar, who has even had his travel expenses questioned recently. "It's like they are coming and sitting with you almost every day."
The collapse of Enron Corp. has led global markets to retrench in fear of widespread accounting irregularities, forced at least one foreign official to resign, and focused attention on local accounting scandals. It also has prompted a rethink of accounting practices from Britain to the UAE to South Africa. In many ways, the Houston company's bankruptcy is being treated like a fault has been found in a critical airplane system, prompting a scramble to effect global repairs. 
In Britain, ripples from the Enron affair claimed a first casualty Friday, when Lord John Wakeham, a former U.K. energy minister and accountant who served on Enron's audit committee, stepped down temporarily from his job as head of Britain's press complaints commission. Lord Wakeham has said he will remain on leave until he has cleared his name in the U.S. investigation into Enron. 
As in the U.S., the question of political donations from Enron has been raised in the U.K., with the opposition Conservative Party charging that GBP 38,000 ($61,000) in Enron donations to the ruling Labour Party in 1997 to 2000 may have influenced the government to end a moratorium on the construction of gas-fired power stations. So far, the Tories have come up with no evidence to support their claim of impropriety and have had to admit that they accepted GBP 25,000 in Enron donations as well. 
While the current political squall over Enron in the U.K. may blow over, there are likely to be lasting effects on British accounting regulations. Howard Davies, the head of Britain's newly consolidated Financial Services Authority, says he has set up an internal inquiry to look into lessons that the U.K. could learn from the collapse of Enron. Interviewed at the World Economic Forum in New York, Mr. Davies said plans for a review of Britain's accounting rules were already in place as a result of an earlier, domestic accountancy scandal. But, he said, "Enron has given that process a big kick." 
While Mr. Davies believes an Enron-style scandal is less likely in the U.K. because of differences in accounting practices, he says it is possible. Reforms in the pipeline would aim primarily to strengthen auditor independence. The FSA will, for example, look into drafting new rules that would require companies to rotate their auditing firms, or at least re-tender the contracts, perhaps every five years. There may also be more formal restrictions on firms providing nonauditing services -- such as consulting -- to clients. Mr. Davies said the Enron scandal likely has given him greater political clout to push through change, using either his own authority or through parliament. 
Worried about the implications of the Enron affair, the U.K.-based global foods and household goods company, Unilever PLC, has already said that it will ban its auditors from consulting contracts with the company. 
Similarly, in South Africa, an earlier accounting scandal has suddenly become a more significant public issue. The collapse of the biggest health-club chain in the country is receiving intense scrutiny because its accounting irregularities mirrored Enron's. The company, Leisurenet, booked upfront membership revenues to be debited monthly from credit cards rather than as they were paid, echoing charges that Enron aggressively booked future profits from derivatives contracts. 
South African Finance Minister Trevor Manuel said the country is examining its accounting legislation, including its accounting oversight board. "This was in process before, but now I think we have to take a very hard look at it."

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

Enron's Rise and Fall Gives Some Scholars A Sense of Deja Vu --- Decades Ago, a Big Power Trust Likewise Pushed Its Luck -- And Earned a Place in Infamy
By Rebecca Smith
Staff Reporter of The Wall Street Journal

02/04/2002
The Wall Street Journal
A1
(Copyright (c) 2002, Dow Jones & Company, Inc.)

As Congress investigated the collapse of a high-profile energy company, it faced a daunting challenge. 
One senator said that to understand the huge company's shocking failure, lawmakers must consider the regulatory and legal missteps that led to its downfall. How, he wondered, could Congress restore investors' confidence in the financial system? By repealing old laws? Enacting new ones?
One of his colleagues answered by recounting an old joke: A man gets a message that his mother-in-law has died. "Shall we embalm, cremate or bury?" it asks. Replies the man, "Embalm, cremate and bury. Take no chances." 
Was this a moment of levity during last week's hearings into the Enron Corp. debacle? 
Actually, it was a scene that played out nearly seven decades ago between Fred Herbert Brown, a New Hampshire Democrat and George Norris, a Nebraska Republican, as they took to the Senate floor to discuss the demise of Middle West Utilities Co. The holding company -- the hub of a vast empire built by energy magnate Samuel L. Insull -- had sunk abruptly into bankruptcy amid allegations of stock fraud and crooked accounting, wiping out thousands of investors. 
Today, many students of corporate history get a sense of deja vu as they watch the Enron saga unfold. "In the 1930s, investors lost confidence in the basic institutions of capitalism -- banks, corporations and accountants," says Richard Hirsh, professor of economics at Virginia Polytechnic Institute and State University in Blacksburg, Va. "To see this happening again with Enron certainly gives one pause." 
Middle West was made up of a host of interconnected companies with interlocking boards -- an arrangement mirrored, in some ways, by the web of off-balance-sheet partnerships that concealed Enron's heavy debt burden. So complicated was Middle West's structure that it took seven years for a team from the newly formed Federal Trade Commission to fully unravel its financial structure. 
Other similarities between Middle West and Enron go straight to the top. Like Kenneth Lay, who resigned last month as Enron's chairman and chief executive, Middle West's Mr. Insull was a big campaign contributor, with powerful friends in Washington. Both men were successful in keeping the government out of their business dealings. Mr. Insull, for one, "was careful to regulate the regulator," Sen. Norris declared in June 1934. 
In its era, Middle West's operations were every bit as groundbreaking as Enron's would be with EnronOnline, its Internet-based energy-trading system. Mr. Insull, for example, pioneered the idea that central power plants should operate 24 hours a day to help defray their high fixed costs. 
To generate enough demand to fulfill this vision, Mr. Insull, who sported a broom mustache, wooed electric streetcar companies, promoted electric elevators and touted the labor-saving advantages of the "all-electric home." He even coined the term "massing production," later shortened by his publicists to "mass production," to describe the benefits of huge power plants supplying electricity to large regions of the country. Some economists credit Mr. Insull with single-handedly driving down power costs, helping American factories to flourish. 
But, also like Enron, Middle West pushed its financial engineering too far. By the early 1930s, it was emblematic of the octopus-like "power trusts" that were suspected of manipulating the nation's energy markets in unseen ways. 
Middle West was born in Chicago in 1912, about 31 years after the London-born Mr. Insull immigrated to the U.S., where he became private secretary to Thomas Alva Edison. While Mr. Edison invented the technology that harnessed electricity, Mr. Insull invented the business model that turned it into a money maker. He rose to manage Mr. Edison's Schenectady, N.Y., operations, later to become General Electric Co. Then, he moved on to Chicago, where he broke free of Mr. Edison in 1892 and formed Commonwealth Edison Co. by merging smaller companies. 
Middle West was the first and most prominent of Mr. Insull's half-dozen or so holding companies. Its myriad affiliates, which included utilities, construction outfits and electrical-equipment makers, hawked stocks tied to other Insull enterprises. "There was tremendous pyramiding and preferential treatment of affiliated companies," says Alfred Kahn, an economics professor at Cornell University in Ithaca, N.Y. 
Middle West withstood the stock-market crash of 1929, and it looked at first like Mr. Insull might emerge relatively unscathed. At one point, he even extended $50 million in credit to the city of Chicago to pay its schoolteachers and police. 
But Middle West had an Achilles' heel. Its companies had taken on an enormous amount of debt during the go-go years of the 1920s, and the company accelerated its borrowings after the crash. By the middle of 1931, creditors and rivals, including financier J.P. Morgan, were circling. In 1932, with presidential hopeful Franklin Roosevelt blasting the "Insull monstrosity" for allegedly inflating the value of its holdings and selling worthless bonds, Middle West and many of its 284 affiliates were placed in receivership. 
Washington quickly got into the act. In rapid order in 1934 and 1935, Congress passed the Securities and Exchange Act, the Public Utility Holding Company Act and the Federal Power Act. Those laws sought to break up the power trusts and guarantee investors the information they needed to make informed decisions. More than a half century later, Enron would figure out ways around parts of those same laws. 
After Middle West went bust, an exhausted Mr. Insull left the country, landing in Greece. Later, at the behest of the U.S., Turkish authorities arrested him on his yacht and shipped him home to stand trial for fraud and embezzlement. 
In a packed Chicago courtroom, the 75-year-old Mr. Insull took the stand, mesmerizing jurors with his Horatio Alger-like tale of how an English dairyman's son rose to become secretary to the Wizard of Menlo Park, as Mr. Edison was known, and head of a vast conglomerate. In all, he stood trial three times; all three trials ended in his acquittal. 
Still, he was far from home free. The politicians whom he had liberally supported now took pains to distance themselves from him. He also lost his personal fortune, estimated in 1930 at $150 million, remained significantly tied up with Middle West -- a notable difference, it seems, from Mr. Lay and other Enron executives who cashed out hundreds of millions of dollars in stock before the company went under. 
"It looks to me like Enron management made beaucoup boatloads of money and jumped ship," says University of Alabama historian Forrest McDonald, an Insull biographer who sees his subject as a tragic figure whose contributions have been largely overlooked. By contrast, Mr. McDonald says, Mr. Insull "went down with the ship. " 
In 1936, Mr. Insull left the U.S. to live in France, trusting his son to defend his interests in lingering lawsuits. Two years later, at age 78, he suffered a massive heart attack while waiting for a Paris subway train. When police arrived, his wallet was missing. The next day, newspapers gloated over his rags-to-riches-to-rags saga, noting that the onetime millionaire had died alone, and with a mere 85 cents in his pocket.

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

BOOM TOWN: Enron's Lessons Can Be Applied To Web Issues
By Kara Swisher

02/04/2002
The Wall Street Journal
B1
(Copyright (c) 2002, Dow Jones & Company, Inc.)

Is the Enron crisis taking Silicon Valley off the hook? Lately, it's been stealing all the tsk-tsk headlines and the blame for Wall Street woes as the prime example of hype and greed. 
"I think people are tending to look back on this era now as a comedy and not a tragedy," says John Cassidy, author of the aptly named new book, "Dot.con: The Greatest Story Ever Sold. "Capitalism has great recuperative powers and there is now a feeling that we let bygones be bygones."
Not so fast. It's critical that we keep a spotlight on the issues that have surfaced since the Internet and tech sector began imploding, especially if the industry is to move forward on stable footing. Here are some continuing concerns: 
Fueled by sky-high stock valuations, bickering managers, indiscriminate deal-making and a spate of service complaints, the bankruptcy of Excite@Home last year was a shocking example of Web-mania run amok. The cable service's users and minority shareholders bore the brunt of the pain. Most of the company's assets have been sold and the rest will be shuttered down. "Basically, after Feb. 28, we will cease to exist," Excite@Home spokeswoman Julie Davidson says. 
So, shareholder lawsuits will be moot and investors will be out of luck, even as many top executives and venture investors sold out big chunks of their shares while urging others to invest. It had a distinct Enronish feel, like many dot-coms, with insiders benefiting over outsiders, even though the share-selling was perfectly legal. 
More, not less, oversight by the media and Wall Street analysts was needed in this case. As most of the company's customers are forced to move onto alternatives, state and federal regulators need to keep an eye on the rollout of broadband access. This is especially important as tech leaders pressure the Bush administration to make high-speed Internet access a priority by offering tax breaks and removing regulation. 
It's a good thing Enron is keeping accounting issues at the forefront of public attention. Dubious, though usually legal, methods of accounting for revenue and income were common in the dot-com sector in its early years. Revenue-enhancing methods, such as mixing barter, investment and other one-time revenues into the mix of ordinary sales performance -- while stripping out costs -- painted a skewed picture of many companies' prospects. 
The travails of Homestore.com, the Westlake Village, Calif., online real-estate company, is a good measuring stick for how well Web firms clean up their balance sheets. Once one of the few survivors with a multibillion dollar market valuation, the company warned of trouble in the form of a huge quarterly loss in November. At that time, executives blamed the ad downturn for their plight against the backdrop of Sept. 11. 
In fact, after new executives took over and an internal audit inquiry was ordered, Homestore.com conceded it had overstated revenue by as much as $95 million for the first three quarters of 2001 by counting a large chunk of questionable barter transactions as ad sales. The company also has ferreted out those responsible and taken disciplinary actions. 
"Clearly, the future of the company relies on its ability to restore confidence with partners, employees and customers," says Homestore.com spokesman Gary Gerdemann. "We definitely have some bridges to mend." 
Companies need such frankness. And investors need to demand increased transparency in a company's financial health. While it isn't clear that Homestore.com will survive, a mea culpa like Mr. Gerdemann's is refreshing to hear, given how little public responsibility many dot-com players have taken. They should take more. 
The recent lawsuit lobbed by AOL Time Warner against Microsoft over the sorry state of AOL's Netscape subsidiary brought a collective yawn from Silicon Valley. It deserved more attention. It's critical this plodding legal drama be played out to the very end for the good of the industry. 
In a nutshell, AOL claims its once-dominant Navigator browser was unable to withstand Microsoft's withering monopolistic assault. Microsoft claims Netscape's products just plain stunk. 
"This is a logical extension of the findings of two federal courts that Microsoft thwarted competition and violated the antitrust laws," says AOL spokeswoman Kathy McKiernan. Microsoft's spokesman Vivek Varma counters that AOL is just using the courts to make business gains it can't achieve via competition. "The last thing our industry and consumers want and need is for two of America's biggest companies suing each other in court," he says. 
Actually, it may be just the thing we need. Even if such battles may seem to drain energy from all-important innovation -- and Microsoft is correct that it often does -- the future development of the industry may depend on them. 
--- 
What are the most troublesome issues of the dot-com heyday that serve as lessons for the future? Write me at kara.swisher@wsj .com and see the debate Friday at WSJ .com/BoomTown.

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

National Desk; Section A
ENRON'S MANY STRANDS
Hearings This Week

02/04/2002
The New York Times
Page 20, Column 1
c. 2002 New York Times Company

Committee: House Committee on Financial Services: Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises 
Chairman: Richard H. Baker 
Republican, Louisiana 
Date: Monday, 2 p.m. Tuesday, 10 a.m. 
Focus: Regulation of accounting industry, impact on commodity markets, reasons for Enron's overstated earnings, possible 401(k) mishandling and potential securities fraud. 
Expected witnesses: 
Monday 
Harvey L. Pitt 
Chairman, Securities and Exchange Commission 
William C. Powers Jr. 
Enron special investigative committee; Enron board; dean, University of Texas School of Law 
Tuesday 
Joseph F. Berardino 
Managing partner and chief executive, Andersen
Committee: Senate Committee on Governmental Affairs 
Chairman: Joseph I. Lieberman 
Democrat, Connecticut 
Date: Tuesday, 9:30 a.m. 
Focus: Impact of Enron's collapse on investors in the 401(k) plan. 
Expected witnesses: Witnesses will include Enron employees, 401(k) plan administrators and public policy experts. 
Committee: House Committee on Energy and Commerce: Subcommittee on Oversight and Investigations 
Chairman: James C. Greenwood 
Republican, Pennsylvania 
Date: Tuesday, 10 a.m. 
Thursday, 9:30 a.m. 
Focus: Findings of Enron's special investigative committee concerning transactions between Enron and several 
of its current and former employees. 
Expected witnesses: 
Tuesday 
William C. Powers Jr. 
Thursday 
Jeffrey K. Skilling 
Former chief executive, Enron 
Andrew S. Fastow 
Former senior vice president. and chief financial officer, Enron 
Michael Kopper 
Former officer, Enron 
Robert K. Jaedicke 
Enron audit committee; Enron board; former dean, Graduate School of Business, Stanford University 
Richard A. Causey 
Executive vice president and 
chief accounting and information officer, Enron 
Richard B. Buy 
Senior vice president and chief risk officer, Enron 
Committee: Senate Committee on the Judiciary 
Chairman: Patrick J. Leahy 
Democrat, Vermont 
Date: Wednesday, 10 a.m. 
Focus: Ways to protect investors and lessons learned. 
Expected witnesses: Christine Gregoire 
Attorney general, Washington State (Washington has filed a class-action suit against Enron) 
Committee: House Committee on Education and the Work Force 
Chairman: John A. Boehner 
Republican, Ohio 
Date: Wednesday, 10 a.m. 
Thursday, 10 a.m. 
Focus: Enron's benefits plan and its compliance with laws on employer-sponsored pension plans. Enron's employee stock-selling rules. 
Expected witnesses: 
Wednesday 
Elaine L. Chao 
U.S. secretary of labor 
Thursday 
Cindy Olson 
Executive vice president for human resources, community relations and building services, Enron 
Chris Rahaim 
Director of benefits, Enron 
Thomas Padgett 
Former Enron employee 
Scott Peterson 
Hewitt Associates (firm hired by Enron for record- keeping for the 401(k) plan) 
Committee: House Committee on Energy and Commerce 
Chairman: Billy Tauzin 
Republican, Louisiana 
Date: Wednesday, 12:30 p.m. 
Focus: Review of S.E.C. oversight and the accounting questions involving Arthur Andersen. 
Expected witnesses: 
James S. Chanos 
President and founder, Kynikos Associates 
Charles M. Elson 
Director, Center for Corporate Governance, University of Delaware 
Brian Rance 
Partner, Freshfields Bruckhaus Deringer 
Roman L. Weil 
Professor, University of Chicago Graduate School of Business 
Bala G. Dharan 
Professor, Graduate School of Management, Rice University 
Baruch Lev 
Professor, Stern School 
of Business, New York University 
Bevis Longstreth 
Debevoise & Plimpton 
Committee: Senate Committee on Health, Education, Labor and Pensions 
Chairman: Edward M. Kennedy 
Democrat, Massachusetts 
Date: Thursday, 10 a.m. 
Focus: Enron's handling of its 401(k) plan and its employee stock-selling rules. Pension law, how to better protect investors. 
Expected witnesses: 
Barbara Boxer 
Senator, Democrat, Calif. 
Jon Corzine 
Senator, Democrat, N.J. 
Jan Fleetham 
Former Enron employee, Bloomington, Minn. 
Steve Lacey 
Former Enron employee, Salem, Ore. 
Betty Moss 
Former Polaroid employee, Smyrna, Ga. 
James Prentice 
Chairman, administrative committee, Enron Corp. savings plan 
Alicia Munnell 
Professor, Peter F. Drucker Chair in Management Sciences, Boston College

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

Southern California Living; Features Desk
As If The Enron Story, With a Plot as Thick as Pea Soup It all started with a deal on carnivals, then snowballed into a carnival of deals.
ROY RIVENBURG
TIMES STAFF WRITER

02/04/2002
Los Angeles Times
Home Edition
E-1
Copyright 2002 / The Times Mirror Company

Although the White House refuses to cough up details on Vice President Dick Cheney's meetings with Enron, we surreptitiously snagged the information through other channels. 
In exchange for a year's supply of Milk-Bones, we had President Bush's dogs slip their master a drugged pretzel, then fetch us the documents when he passed out watching football.
From there, we pieced together this exclusive inside look at the Enron scandal: 
* July 31, 2001: In the first sign of trouble, Enron boss Ken Lay is warned about the company's questionable financial dealings, including the expenditure of $2 billion on those carnival games where you try to knock over a stack of milk bottles with a baseball. "We thought we could win a really cool stuffed animal," a memo explains. "It seemed like a great investment at the time." 
* Aug. 1, 2001: Lay promises to personally investigate and fix the problem, but winds up losing another $750 million on the basketball toss and the pingpong-ball-into-the-goldfish-bowl game. "They looked so easy," he tells a colleague later. "Before I knew it, I'd gone through the employee pension fund." 
* Sept. 18, 2001: Enron's board tries to have accountant Arthur Andersen straighten out the mess, but a mix-up causes Enron to accidentally hire Pea Soup Andersen, a well-known restaurant in Buellton. 
* Oct. 2, 2001: Saddled with enough pea soup to fill Lake Erie (plus $250 million in Saltine crackers), Enron executives hastily arrange a series of meetings with Dick Cheney. For security reasons, the meetings take place at several of the vice president's "undisclosed locations": inside a phone booth in Poughkeepsie, N.Y.; aboard the International Space Station; and posing as a department store Santa in Duluth, Minn. Cheney promises to consider revising U.S. energy policy to list pea soup as a "promising new alternative power source." 
* Nov. 18, 2001: Enron replaces Pea Soup Andersen with actress Loni Anderson, who quickly funnels company money into a byzantine network of dummy corporations, offshore entities and a fictitious Cincinnati radio station. 
* Nov. 22, 2001: As the company's financial picture grows dimmer, Lay urges employees to buy Enron stock. He also advises them to diversify their portfolios with investments in Kmart and Global Crossing. 
* Dec. 2, 2001: Enron files the biggest bankruptcy petition in U.S. history. The Dow index soars, led by companies that make paper shredders. 
* Jan. 29, 2002: Appearing on NBC's "Today" show, Lay's wife, Linda, tearfully says her family is near bankruptcy. "We might have to compete on 'Who Wants to Be a Millionaire' just to get some pocket change," she wails. When asked if she understands the public's anger toward her husband, she says yes, but cautions critics: "Before you judge him, first walk a mile in his custom-fitted, gold-leaf-embroidered Louis Vuitton moccasins." 
* Jan. 30, 2002: Reacting to the plight of the Lay family, the Red Cross delivers emergency rations of caviar, Dom Perignon and steak tartare. 
* Jan. 31, 2002: "Today" show correspondent Lisa Myers, stung by criticism that she wasn't tough enough in her interview with Linda Lay, conducts a follow-up segment in which she ambushes Lay with a barrage of hard-hitting questions, including: "What's your favorite color?" "Who does your hair?" and "Which herbs and spices do you think the Colonel uses in his secret recipe?" 
* Feb. 2, 2002: In the first glimmer of hope for a comeback, Enron officials announce that they have received word from Ed McMahon that the company may already have won the Publishers Clearinghouse Sweepstakes.

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



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