A possible smoking gun -- Mr. Lay and insider trading...
Enron's Chief Sold Shares After Receiving Warning Letter
By RICHARD A. OPPEL Jr. and JONATHAN D. GLATER
The New York Times
January 18, 2002
Documents disclosed yesterday indicate that Kenneth L. Lay, the chairman and chief executive of Enron (news/quote), 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 (news/quote) 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.
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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." |
