Enron's Chief Sold Shares After Receiving Warning Letter
January 18, 2002
THE AUDITOR
The New York Times
By RICHARD A. OPPEL Jr. and JONATHAN D. GLATER
Documents disclosed yesterday
indicate that Kenneth L. Lay, the
chairman and chief executive of Enron
disposed of stock within
days of receiving a letter warning of
accounting problems at the company.
That letter, from Sherron S. Watkins, a
senior employee, ignited an
investigation by Enron's outside law
firm, which concluded that the accounting issues could be embarrassing. As part of
that inquiry, Mr. Lay met with Ms. Watkins.
The documents released yesterday by Congressional investigators were internal
memos from Arthur Andersen, Enron's auditor, which the company fired yesterday.
The documents not only put Mr. Lay's stock transactions and the Watkins letter on a
timeline, but also provide the best map to date of what Andersen officials considered
doing about Enron's accounting.
In Houston, investigators continued to interview Enron executives and to press for
more information on Enron's collapse and Andersen's role, including the destruction of
documents.
One memo released by investigators revealed that as long ago as February, Andersen
workers considered dropping Enron as a client because of concerns about the
disclosure of off-balance-sheet debts.
Enron's sudden collapse last fall and the resulting criminal and civil investigations
revolve around Enron's transactions with partnerships formed by Andrew S. Fastow,
Enron's former chief financial officer. Mr. Fastow was ousted in late October as
investors grew concerned about the partnerships, among them LJM1 and LJM2. Enron
subsequently disclosed that Mr. Fastow made more than $30 million off the deals.
An e-mail message dated Feb. 6, 2001, released by
investigators, showed that Andersen partners discussed
whether to consolidate one of the partnership's financial
results with Enron's, and it discussed potential conflicts of
interest confronting Mr. Fastow.
Yesterday, Andersen issued a statement saying that the
deliberations described by the memo were routine and that
nothing "indicated that any illegal actions or improper
accounting was suspected."
The firm also acknowledged that senior partners with
Andersen in Chicago, where the accounting firm has its
headquarters, were involved in the February discussions and
held conference calls with the firm's Houston office, which
oversaw the Enron account. An Andersen spokesman said it
was not unusual for senior partners to be involved in such
meetings about clients of Enron's size and complexity.
Meanwhile, Congressional investigators have also been told
that by September, officials from the Chicago office had
joined a review team of Andersen auditors in Houston
analyzing Enron's dealings with the partnerships in the wake
of Ms. Watkins's letter.
On "Moneyline" on CNN last night, Andersen's chief
executive, Joseph F. Berardino, said he had been meeting
with the firm's partners, other employees and clients to try
to reassure them about the firm's prospects. "We will do what
great companies have done: learn from this experience," he
said. "Our people are very, very confident that we will move
forward."
Until yesterday, it had not been clear just when Ms. Watkins
wrote her letter warning of accounting problems or when Mr.
Lay received it. But her lawyer, Philip Hilder, said in an
interview yesterday that the letter was written on Aug. 15,
and one of the newly disclosed Andersen memos obtained by
Congressional investigators indicates that her meeting with
Mr. Lay had been scheduled for Aug. 22 and the scheduling
had been done by Aug. 20.
It was on Aug. 20 and Aug. 21 that Mr. Lay exercised options
on 93,620 shares of stock for $2 million. At the time, the
shares were worth $3.5 million. Mr. Lay did not report selling
the stock, but a lawyer for Enron disclosed earlier this week
that some shares had been used to repay a previously
undisclosed loan from Enron. Enron has declined to discuss
details of the repayment, but it seems likely that the shares
purchased then were used to repay the loan. Had Mr. Lay not
planned to use the shares for that purpose, there would have been no apparent reason
to exercise the options then.
Under rules of the Securities and Exchange Commission, corporate officials are
required to disclose sales of their company's stock by the tenth day of the month after
the sale. But there is an exception when the shares are surrendered to the company
to repay a loan. Disclosures of such transactions can be delayed until 45 days after the
company's fiscal year ends. For Enron, that will be Feb. 14.
As Mr. Lay was apparently reducing his own stake in Enron, he was sounding
optimistic in public. "As I mentioned at the employee meeting, one of my highest
priorities is to restore investor confidence in Enron," Mr. Lay wrote in an e-mail
message to employees dated Aug. 21. "This should result in a significantly higher stock
price."
An Enron spokesman said last night that Mr. Lay "exercised the options to hold those
shares," but that he did not know whether those "particular" shares had then been
used to repay a company loan.
Congressional investigators have learned this week that some Enron executives,
concerned about the company's finances, sought legal counsel on their own from
lawyers outside the company before the financial disclosures last fall that ultimately
led to Enron's bankruptcy in December.
Last night, Salon.com reported that an Enron corporate lawyer, Jordan
Mintz, last summer hired a New York law firm, Fried Frank Harris Shriver & Jacobson,
to take another look at the company's financial structure. Fried Frank, where the
S.E.C. chairman, Harvey L. Pitt, worked until last fall, recommended that Enron end
its deals with the partnerships. There was no response to a message left last night at
Mr. Mintz's home in Houston.
The investigation by the Houston law firm of Vinson & Elkins, a result of Ms. Watkins's
letter, concluded that Enron had done nothing wrong in setting up the partnerships but
also said that there was a serious risk of adverse publicity and litigation for the
company.
In Houston yesterday, investigators of the House Energy and Commerce Committee
interviewed Richard Buy, Enron's chief risk officer, among other executives. On Friday
they plan to interview Richard Causey, the company's chief accounting officer.
Investigators then plan to conduct interviews across the country about document
destruction at Andersen. Investigators have also started to receive reconstructed
versions of some of the e-mail messages and electronic documents that were destroyed
by the accounting firm from September to November.
On Wednesday, investigators from the committee spent more than four hours
interviewing David B. Duncan, the lead Andersen partner in charge of auditing Enron,
who was fired earlier this week after the firm said he oversaw document destruction
at Andersen's Houston office despite a regulatory investigation.
Mr. Duncan maintained that he was only following a document-destruction policy
re-emphasized in an Oct. 12 memo from an Andersen lawyer, according to a person
close to the case. He was asked by investigators whether "it was usual in your career
for people to talk to you about the document-retention policy," this person said. "He
said it's not something happens all the time."
Mr. Duncan also stated that by September, Andersen executives in Chicago were
having frequent phone calls with auditors in Houston re-examining Enron's
transactions with the partnerships, this person said.
The internal Andersen documents paint a complicated picture of a firm where
accountants were struggling to evaluate the risks posed by Enron's aggressive approach
to accounting. The Andersen executives also worried that the fees received from Enron
could appear to compromise their objectivity.
"We arbitrarily discussed that it would not be unforeseeable that fees could reach a
$100 million per-year amount considering the multidisciplinary services being
provided," wrote Michael D. Jones, in Andersen's Houston office. "Such amount did not
trouble the participants so long as the nature of the services was not an issue."
In a statement yesterday, Andersen said that "discussion about the potential that fees
could rise to as much as $100 million was not in the context of the firm's desire to
grow revenues."
"Rather," it continued, "the discussion related to concerns about the possibility that
the size of the fees could be misperceived as affecting independence."
But Mr. Jones's e-mail message also suggested that Andersen's accountants consider
whether the LJM partnerships should be treated as a separate entity for accounting
purposes. That suggestion makes clear that nearly a year ago Enron's auditors
questioned whether unreported transactions between the company and entities like
LJM might be improperly characterized in its financial statements.
Mr. Jones's e-mail message also proposed that a special committee of Enron's board be
created to "review the fairness of LJM transactions."
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