January 10, 2002
U.S. Launches a Criminal Probe of Enron
Inquiry: A Justice Department task force will investigate potential illegal acts by the
firm and its officers.
By JOSH MEYER and NANCY RIVERA BROOKS, Times Staff Writers
WASHINGTON -- The Justice Department said
Wednesday that it is launching a wide-ranging
criminal investigation of Enron Corp., whose
sudden collapse shredded billions of investor
dollars and cost thousands of jobs.
Justice officials took the rare step of disclosing the
existence of the criminal investigation, saying they
will create a task force at department headquarters
that will bring in federal prosecutors from Houston,
New York, San Francisco "and probably other
places" to work with senior administrators in
Washington, one department official said.
"We usually don't discuss investigations, but this is a
case of national significance," said the Justice
Department official, speaking on condition of
anonymity.
"It is like the Microsoft case in that regard--a
national case," added the official, referring to the
high-profile civil antitrust probe of the Redmond,
Wash.-based software giant. "Because of the
diversity of [Enron's corporate] offices, we wanted
to centralize the investigation in order to coordinate
efforts on all fronts."
The investigation signals further trouble for
Houston-based Enron, once the world's largest energy trading firm. Enron, a
darling of Wall Street, saw its value plummet in just a few weeks last year,
culminating Dec. 2 in the largest bankruptcy filing in U.S. history.
Enron's collapse threw thousands of people out of work and cost them--and
investors--billions of dollars. Employees were blocked from selling shares in
their retirement accounts because Enron was in the middle of switching plan
administrators. But top company executives previously had sold their company
shares at hefty profits.
Justice Department officials said they want to know whether there is any
criminal culpability on the part of corporate officers and others. The points of
inquiry will include whether the company knew about problems but never
disclosed them and whether key financial records were altered, as well as other
potentially illegal acts, the department official said.
The head of accounting firm Arthur Andersen, Enron's auditor, testified last
month before a congressional panel that Andersen warned Enron directors that
the energy company might be guilty of "possible illegal acts" for withholding key
financial information from Andersen auditors. Enron sharply disputed the
claims.
Illegal insider trading by Enron executives and directors was alleged in a lawsuit
filed last month by a bank that manages union retirement funds. Amalgamated
Bank accused company executives of using inside information to sell stock and
reap $1.1 billion in profits.
The Justice Department investigation could take years to conclude and involve
hundreds of subpoenas, depositions, interviews and a complete scouring of the
firm's financial records, authorities said Wednesday night.
Course of Inquiry Garners Approval
White House spokeswoman Jeanie Mamo said President Bush had been
briefed on the investigation Wednesday and supported it.
"The president is concerned about Enron's bankruptcy and thinks it's important
and appropriate for relevant government agencies to investigate as they see fit,"
Mamo said.
Enron referred inquiries to its Washington lawyer, Robert S. Bennett, whose
clients have included former President Clinton. Bennett said he is glad the
Justice Department has consolidated what appeared to be separate inquiries
from various offices.
"We are going to fully comply with this investigation," Bennett said. "It's
important that the Washington scandal machine not take over, which would
have as a consequence that every move would be politicized and the facts
would be trivialized."
The probe will be headed by the Justice Department's criminal division with
assistance from its civil fraud unit and investigators from the FBI, other federal
law enforcement agencies and perhaps the Securities and Exchange
Commission, Justice Department officials said.
Already, Enron is embroiled in several lawsuits and is the subject of
congressional investigations as well as probes by the SEC and the Labor
Department.
Current and former Justice Department officials characterized the investigation
as significant and somewhat unprecedented in that "main Justice" task force
probes are usually saved for national issues such as the rash of church arson
fires in recent years and the flurry of failures of savings and loans in the 1980s.
"It's unusual. In the recent past, I am hard pressed to come up with another
task force looking into a single entity or individual," said Eric H. Holder Jr.,
deputy attorney general in the Clinton administration. "It is clearly an indication
that the department is taking this very seriously."
"One of things you can certainly draw from this is that some threshold has been
crossed and clearly there is some belief that there is a predicate for a
wide-ranging investigation," Holder said. "It is a reflection of, and an indication
of, the complexity and breadth of the case."
Another former senior Justice Department official familiar with such task force
investigations said that "running this out of 'main Justice' suggests that it is
something that is so large and so wide-ranging that they know they are going to
have a hard time getting their arms around it."
Dramatic Rise, Fall of Power Firm
For weeks, Justice Department investigators have been involved in preliminary
inquiries into the Enron collapse, asking questions, conducting interviews and
deliberating over whether a full-scale investigation was warranted.
Justice Department officials would not say when the decision was made to
launch the full-scale probe, or whether Atty. Gen. John Ashcroft was involved
in those deliberations. And they said such an investigation does not necessarily
indicate a belief that criminal wrongdoing was committed, only that the issue
merits a thorough review.
Authorities said it is likely that a federal grand jury will be used to issue
subpoenas and, later, to hear testimony.
One former Justice Department official said all actions of the company's
executives will come under scrutiny.
"What did senior officials know about the downfall of the company in advance
that led to them divest themselves when the rest of the company was locked
in?" asked the official. "What kind of cooking of the books was done, if any?
Did they mislead employees, investors and Wall Street about how solid the
company was financially?"
Enron's fall was even more dramatic than its aggressive push to the top of the
energy industry. Its stock traded for $90 a share in late 2000 but on
Wednesday sold for a mere 79 cents on the New York Stock Exchange.
From its roots as a small natural gas pipeline operator, Enron grew to become
the world's largest energy-trading operation. Until a few months ago, it was
handling one of four wholesale deals for electricity, gas and other energy
products.
Enron championed the deregulation of energy markets and tried to influence the
way California structured its energy markets and then steered through its
electricity crisis. Enron and its chairman, Kenneth L. Lay, wielded enormous
political influence, pushing to successfully replace the head of the Federal
Energy Regulatory Commission and aiding in shaping the Bush administration's
energy policy.
Vice President Dick Cheney or members of his energy task force met with
Enron executives six times last year, according to a White House letter released
Tuesday. Enron's financial problems were not discussed, the White House said.
Enron began to crumble in mid-October when it revealed surprise losses from
bad investments in telecommunications and water ventures as well as a
$1.2-billion drop in shareholder equity associated with partnerships run by
company employees.
Enron then admitted that, after accounting for losses in other off-balance-sheet
partnerships, it had overstated its financial strength and that investors should no
longer rely on more than four years of income and other financial data.
Investors fled Enron, and the company ran into a massive cash crunch that led
it to seek a rescue from its smaller rival and Houston neighbor Dynegy Inc.
Dynegy later pulled the plug on its $9-billion merger with Enron, saying the
company had not revealed the depth of its financial problems. Enron then filed
for protection from its creditors under Chapter 11 of the U.S. Bankruptcy
Code, citing more than $31 billion in debt.
Chapter 11 allows a company to continue operating while it works out a plan
to pay its creditors. Enron is expected to auction its core energy-trading
business this week and has agreed to let Dynegy buy a valuable natural gas
pipeline. |
