Lay Cancels Congressional Testimony, Citing Reaction to Report
By Jeff St.Onge and Susan Decker
New York, Feb. 3 (Bloomberg) -- -- Former Enron Corp. Chairman Kenneth Lay canceled tomorrow's congressional testimony, saying lawmakers' ``inflammatory'' comments about an internal company report had prejudged the outcome.
Members were reacting to yesterday's report by a team headed by University of Texas Law School Dean William Powers. It said Enron executives enriched themselves while hiding at least $1 billion in losses in an estimated 3,000 partnerships.
Democratic Senator Byron Dorgan, who was in charge of the Senate Commerce Committee hearing, told NBC the ``devastating'' 203-page report shows ``a culture of corporate corruption.'' Republican Senator Peter Fizgerald, a panel member, said the report depicts `` a giant pyramid scheme.'' House Energy and Commerce Committee chairman Billy Tauzin spoke of ``security fraud'' in an appearance on NBC's ``Today'' show.
``These inflammatory statements show that judgments have been reached and the tenor of the hearing will be prosecutorial,'' Lay's attorney, Earl J. Silbert, said in a letter to the Senate Commerce Committee.
Lay's withdrawal will put the spotlight on Powers, who is scheduled to appear tomorrow at the House Financial Services Committee with Securities and Exchange Commissioner Harvey Pitt. It also shifts attention to former Chief Executive Officer Jeffrey Skilling, who is also blamed in the report. Skilling has agreed to answer questions before a House subcommittee on Thursday, according to Tauzin.
The report said the board's audit committee shared in the blame for inadequate disclosures in Enron's public filings, along with management, Andersen and the company's longtime Houston law firm, Vinson & Elkins.
Enron lawyer Robert Bennett said the report, commissioned by Enron's board, was ``thorough and honorable,'' showing a resolve to get to the facts and proving that earlier ``the board was not provided a great deal of information that it should have had.''
Andersen's Response
Andersen spokesman Patrick Dorton called the report ``self- serving'' in playing down the board's responsibility. ``The authors, whose independence is already in question, were handpicked by Enron's board,'' Dorton said. ``The authors failed to consult with Andersen in any substantial way.''
The report said investigators were told ``by more than one person that the company spent considerable time and effort working to say as little as possible about the LJM transactions in the disclosure documents.''
``That impulse to avoid public exposure, coupled with the significance of the transactions for Enron's income statements and balance sheets, should have raised red flags for senior management, as well as for Enron's outside auditors and lawyers. Unfortunately, it apparently did not.''
Bush Supporter
Lay, a major contributor to President George W. Bush, ``bears significant responsibility'' for ``flawed decisions'' in approving some transactions, the report said.
Enron employees involved with affiliated partnerships, known as special purpose entities, enriched themselves ``by tens of millions of dollars they should never have received,'' the report said. Former Chief Financial Officer Andrew Fastow made at least $30 million, former General Manager Michael Kopper got at least $10 million, and two other employees made at least $1 million each, the report said.
``This personal enrichment of Enron employees, however, was merely one aspect of a deeper and more serious problem,'' the report said. ``These partnerships -- Chewco, LJM1 and LJM2 -- were used by Enron management to enter into transactions that it could not, or would not, do with unrelated commercial entities.''
Transactions used to hide debts and offset losses didn't follow accounting rules and were implemented ``improperly,'' the report said. The transactions resulted in Enron overstating earnings from the third quarter of 2000 through the third quarter of 2001 by about $1 billion, the report said.
Favorable Results
``Many of the most significant transactions apparently were designed to accomplish favorable financial statement results, not to achieve bona fide economic objectives or to transfer risk,'' the report said. ``They allowed Enron to conceal from the market very large losses resulting from Enron's merchant investments by creating an appearance that these investments were hedged.''
``They have basically agreed that Fastow had gone beyond his authority,'' said Robert McCullough, a consultant and adjunct professor at Portland State University who is helping draft questions for the Enron hearings. ``They've thrown him to the wolves.''
Fastow set up dozens of private partnerships to reshuffle Enron assets. Kopper worked with Fastow at Enron to help market some of the partnerships to investors and left the company to run LJM2, according to company filings and court records.
Fastow formed LJM2 in 1999, and the partnership acquired energy and telecommunications assets from Enron, including an 18,000-mile fiber-optic network it bought in June 2000 in a transaction that resulted in a $67 million profit for Enron.
Early Complaint
Jeffrey McMahon, then Enron's treasurer, said he told then- Chief Executive Officer Jeffrey Skilling in March 2000 ``that Fastow was pressuring Enron employees who were negotiating with LJM,'' according to the report.
McMahon told Skilling that Fastow was wearing ``2 hats'' and that ``upside comp is so great creates a conflict I am right in the middle of. I find myself negotiating with Andy (Fastow) on Enron matters and am pressured to do a deal that I do not believe is in the best interests of the shareholders. Bonuses do get affected,'' according to McMahon's notes of the conversation.
McMahon's complaint, almost two years ago, was the earliest known alert about the conflicts of interest involved in the partnership transactions. Based on McMahon's version of the talk, Skilling took no action. The report said McMahon, who is now Enron's president, didn't approach Lay or the board.
Enron lawyer Bennett said the report shows the board wasn't showed details of the partnerships. Tauzin, a Louisiana Republican, blamed the board. ``I think it goes all the way to the top,'' he said.
Tauzin said the report raises questions about Skilling, whose signature, the report says, was missing on some deals. ``What does that say about his knowledge about whether these deals were dishonest or corrupt?'' Tauzin said. Skilling will testify before the House Oversight and Investigations Subcommittee on Thursday, Tauzin said; Fastow and Kopper will appear but will plead the Fifth Amendment.
In August 2001, Enron Vice President Sherron Watkins sent an anonymous letter to Lay raising questions about the partnership and saying ``I am incredibly nervous that we will implode in a wave of accounting scandals.'' Lay told the report's authors ``he viewed the letter as thoughtfully written and alarming.''
Andersen's Role
Enron, once the seventh-largest U.S. corporation, began to unravel in October after it said shareholder equity was reduced by around $1 billion because it used stock to pay off debt of a partnership run by Fastow. The writedown also raised questions about how Enron accounted for debt and losses of similar affiliated partnerships. On Nov. 8, it restated earnings back to 1997, lowering them by $586 million.
The company filed for bankruptcy Dec. 2 as its stock slid below $1 from more than $80 a year ago, and the company was unable to finance its business.
The report said the accounting treatment for the partnerships ``was determined with extensive participation and structuring advice from Andersen, which management reported to the board. Enron's records show that Andersen billed Enron $5.7 million for advice in connection with the LJM and Chewco transactions alone, above and beyond its regular audit fees,'' the report said.
Democratic lawmakers on Friday said Enron may have compromised its investigation by appointing Herbert Winokur, one of its board members, to the panel. As a board member, Winokur approved many of the partnerships in which Enron hid debt, House Democrats said.
The third member of the panel is Raymond Troubh, a New York financial consultant. William McLucas, former enforcement chief with the SEC and now a Washington attorney, was an adviser. |
