Gramm snared in collapse fallout
As ex-regulator, Enron director should have seen signals, critics say
01/18/2002
By JIM LANDERS / The Dallas Morning News
WASHINGTON – Wendy Lee Gramm's official profile begins with a bouquet from The Wall Street Journal, which in 1999 called her "the Margaret Thatcher of financial regulation."
"The best judges of how to run a business are the people who depend on that business for their livelihood," Dr. Gramm said in a 1992 speech, echoing the bureaucracy-cutting zeal of the former British prime minister.
Dr. Gramm followed that philosophy in one of her last acts as a government regulator, moving to speed up the exemption of energy trades from federal oversight. Not long afterward in 1993, she joined the board of one of the companies seeking the exemption: Enron Corp.
That service brought her more than $276,000 in stock profits before she cashed out in 1998, and hundreds of thousands more in compensation since then. And it also has ensnared her in the fallout from Enron's spectacular collapse into the largest bankruptcy case in U.S. history.
The wife of Texas Sen. Phil Gramm has declined to comment on the scores of shareholder and retiree lawsuits naming her as a defendant among other directors, managers and accountants.
Independent experts, though, note that the former government watchdog had a special watchdog role at Enron, too: As a member of Enron's audit committee, Dr. Gramm carried the burden of helping keep the company's books clean.
"This is not an honorary position that doesn't require work," said corporate-governance expert Curtis Verschoor.
"An audit committee director has a hard-working responsibility, and if you don't take it seriously you could get your company – or get yourself – in trouble," said Dr. Verschoor, a senior research professor with DePaul University's school of accounting and author of a book on corporate director responsibilities.
Indeed, the Securities and Exchange Commission is so strict that it requires a corporation's outside auditors to work directly for the board of directors' audit committee.
Tyson Slocum, author of a Public Citizen report on Enron's ties to the Gramms, said recent disclosures about the Enron board's actions put Dr. Gramm on the spot.
'Clearly in trouble'
"Wendy Gramm is clearly in trouble," he said. "It has just been discovered that the audit committee not only knew about these ... sham limited partnerships, but they also approved of them."
The roles of Enron's outside auditors, Arthur Andersen LLP, and the board's audit committee have emerged as a key focus for congressional and other investigators dissecting Enron's implosion.
A Senate investigations subcommittee has subpoenaed Dr. Gramm's papers about oversight of Enron's accounts and Andersen. And the audit committee is being investigated by a special panel drawn from Enron's board.
That panel, headed by University of Texas Law School dean William K. Powers Jr., is seeking to learn whether the audit committee met detailed obligations to supervise the corporation's dealings with off-the-books partnerships – the partnerships whose disclosure helped drag Enron down.
The Powers panel has fired two of the top executives who reported to the audit committee on Enron's finances and accounting practices: chief financial officer Andrew Fastow and treasurer Benjamin Glisan.
And Andersen has fired David Duncan, a partner in its Houston office, for ordering the destruction of thousands of e-mails and paper documents on Enron's accounting.
In joining Enron's board in 1993, Dr. Gramm hopped onto a corporate bandwagon that was starting to pick up speed.
Enron was transforming itself during the 1990s from $5.4 billion pipeline company into a $100 billion-a-year behemoth that traded contracts for electricity, natural gas and other commodities.
Its tools included swaps, puts, calls, collars – financial instruments known broadly as derivatives.
Dr. Gramm's financial background prepared her for a directorship at a business that baffled even many on Wall Street. Her deregulation expertise also meshed with the free-market push of Enron and its founder and chairman, Kenneth Lay.
After earning economics degrees from Wellesley College and Northwestern University, Dr. Gramm spent eight years on the economics faculty at Texas A&M University, where she met fellow professor Phil Gramm. They were married in 1970.
Mr. Gramm embarked on his Washington career in 1978 – winning a House seat as a Democrat, switching to the Republican Party in 1983 and then being elected to the Senate in 1984.
Dr. Gramm, meanwhile, joined the Federal Trade Commission in 1983, as director of the bureau of economics. She headed a division of President Ronald Reagan's Office of Management and Budget, chaired a Reagan-era task force on regulatory relief and was appointed to head the Commodity Futures Trading Commission in 1988.
Before she left the commission in 1993 after Bill Clinton's election, one of her final actions was to jump-start a vote exempting energy trades from the agency's oversight. Enron was among the companies that petitioned for the exemption.
She joined four other corporate boards besides Enron's: State Farm Insurance, Invesco, Longitude and IBP Inc. Gov. Rick Perry appointed her to the board of regents of Texas A&M University last year.
Since 1998, Dr. Gramm has been director of the regulatory studies program at the Mercatus Center, a research arm of George Mason University in Arlington, Va. (The center has an Enron connection of its own: Since 1996, Enron and the Ken and Linda Lay Family Foundation have contributed $50,000.)
Attacking regulations
From her academic perch, Dr. Gramm continues to attack federal regulations as undue interference in the market.
"She has worked on or studied regulation for two decades or more," said center director Tyler Cowen. "She has a national reputation as being an expert on regulation. Wendy is very smart, and she has added great value to our organization."
But where some see government as meddler, others see it as savior, and Dr. Gramm has been controversial in the latter camp.
The Clean Air Trust, a national environmental group, dubbed her "villain of the month" for January after she persuaded the Bush administration's regulatory affairs office to look at rolling back 44 rules on such things as air and water pollution.
Because of the special responsibilities borne by corporate audit committees, some outside experts question how Enron's panel – and the board – could have been in the dark about so many questionable dealings.
"If you've asked the right questions, why then you're protected," governance expert Dr. Verschoor said of the audit committee. "It seems hard to believe that if they did their job they wouldn't have known more and been able to prevent what happened – but it's possible."
Some critics have wondered whether the three foreigners on Enron's six-member audit committee have the knowledge of U.S. accounting and securities rules to qualify for that duty.
But there are no such doubts about Dr. Gramm's credentials.
"Somebody who headed up the CFTC would know something about the commodities industry and understand something about how complex these derivatives can be, and could sit down and study them," said Duke University Law School professor James D. Cox, who specializes in securities law.
"The real question is did she, or did she take just a glossy summary?"
Last year, the Securities and Exchange Commission changed the rules for corporate audit committees to crack down on "glossy summaries" or otherwise cursory reviews.
Dr. Verschoor noted: "There is a very specific directive in the listing regulations of the New York Stock Exchange that the audit committee is to be considered the client of the auditing firm. Not management – the audit committee."
Andersen's work
The audit committee's work last year included vouching for Andersen's audit work to the full board for Enron's 2000 financial results, and publication of a charter outlining the committee's responsibilities.
An in-house investigation by Enron's law firm last fall found no activities previously unknown to the board of diectors and Enron's executives. It noted that the full board had suspended the company's code of ethics to allow Mr. Fastow, the former chief financial officer, to participate in the off-the-books partnerships.
Dr. Gramm is sensitive to ethical appearances. Enron committees and top employees have been major contributors to her husband's Texas political campaigns – with $97,350 in donations – and the company has had an active interest in several legislative matters Mr. Gramm has pursued.
In 1998, when the senator headed the Banking Committee, he co-sponsored a bill to deregulate national electricity markets.
Dr. Gramm presented the Enron board with a report from her lawyer suggesting that continued payment in Enron shares would be a conflict of interest. With the board's consent, Dr. Gramm exercised her Enron stock options and sold all 10,256 shares in November 1998.
The sales gained her $276,912.
Since then, Dr. Gramm's compensation from Enron has been a mix of cash and deferred compensation payments placed in a mutual fund by Enron. Mr. Gramm's financial disclosure forms last year listed the value of Dr. Gramm's Enron mutal funds between $250,000 and $500,000.
When Enron filed for bankruptcy protection Dec. 2, Dr. Gramm apparently became one of thousands of Enron creditors no longer able to collect.
dallasnews.com |
