Enron Board Members Rapped on Capitol Hill
Tue May 7, 6:44 PM ET
By Susan Cornwell
WASHINGTON (Reuters) - Saying Enron's board of
directors fiddled while its company burned, a Senate
panel castigated five past and present board members
on Tuesday for not acting to stop the energy trader's
collapse.
Brushing aside excuses from board
members that they learned too
little, too late about the company's
problems, the Senate Permanent
Subcommittee on Investigations
charged the directors had
facilitated Enron Corp.'s financial
shenanigans while enjoying the
lucrative rewards of board
membership.
Subcommittee chairman Sen. Carl
Levin, a Michigan Democrat, said
the board was "obsequious" to
Enron management while failing
shareholders. He produced
documents that said some directors
were told over three years ago that
Enron's high-risk accounting
pushed the limits of accepted
practice.
The company filed the largest
bankruptcy ever on Dec. 2 amid
revelations about off-balance-sheet partnerships that
were used to hide debt and inflate profits.
"The board of directors didn't just fiddle while Enron
burned, some of them toasted marshmallows over the
flames," said Sen. Joseph Lieberman, a Connecticut
Democrat who chairs the main Senate Governmental
Affairs Committee (news - web sites).
"To me, the directors' lack of diligence is even more
troubling in light of the fact that they profited so much
from their positions as board members," Lieberman
said. In stock sales alone, some made hundreds of
thousands of dollars, and a few netted over a million
dollars, he added.
The committee produced a chart showing the average
board member's compensation in the year 2000,
including cash, stock and options, was $329,465.
Levin is proposing legislation to direct the Securities
and Exchange Commission (news - web sites) to issue
stricter rules governing board- member conduct and
compensation.
BOARD SAYS LEARNED TOO LATE
At a table facing the committee, the two current and
three former board members countered with a
now-familiar line from other witnesses called to Capitol
Hill over the Enron debacle -- that they had depended
on Enron's senior management and its auditor
Andersen to tell them the truth about the company.
"We had no cause for suspicion until it was too late,"
said Robert Jaedicke, who chaired the Enron board's
audit committee and is a former dean of Stanford
University Business school.
Directors said they were shocked and angered by the
behavior of some of Enron's senior managers -- such
as when they learned that former Enron chairman
Kenneth Lay had repaid $77 million in loans from the
company with Enron stock.
"It would be impossible to feel anything other than
outrage," current board member Herbert Winokur,
chair of the finance committee, said of Lay's loan
repayments.
Andersen [ANDR.UL], fired by Enron in January, is on
trial in federal court in Houston for destruction of
documents sought by federal investigators in
connection with their Enron probe.
But the Senate panel said the directors had ignored a
number of warning signs about Enron over the years.
Senators were especially contemptuous of the way the
board had allowed Enron former Chief Financial
Officer Andrew Fastow to engage in business deals
with the company through a complex series of
transactions -- and then had no idea how much money
he made from them until reading estimates in the
newspaper.
"Rather than raising a red flag, the board gave a green
light to Mr. Fastow," Lieberman said.
Charles LeMaistre, who chaired the compensation
committee, said the board would have never approved
Fastow's participation in partnerships had it known
how much he would make from them.
He said he was angry when Fastow told him last year
he had made $45 million from transactions known as
the LJM partnerships, and said Fastow was fired the
next day, Oct. 24.
But LeMaistre also revealed that the board decided to
ask Fastow about his LJM earnings only after an
article appeared in the Wall Street Journal reporting
that the CFO had raked in at least $7 million from the
enterprise.
PUSHING THE LIMITS
Levin held up one February 1999 document presented to the board's audit
committee and carrying the handwriting of David Duncan, Andersen's lead
Enron auditor. It said many Enron transactions "push limits" of accepted
accounting practices.
David Duncan has pleaded guilty to obstruction of justice in the Enron case
and agreed to cooperate with prosecutors.
Former audit committee chairman Jaedicke did not remember verbal
warnings from David Duncan, but acknowledged he had been aware that
some Enron's accounting practices were high-risk.
"I don't remember the words, 'push limits,"' he said.
Levin's subcommittee has interviewed 13 former and current members of
Enron's board and gone through over 300 boxes of documents obtained with
50 congressional subpoenas.
In addition to Jaedicke, Winokur and LeMaistre, the panel heard testimony
from current Enron board member Norman Blake, a member of the finance
and compensation committees; and John Duncan, who formerly chaired the
executive committee.
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