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THE FINANCIAL COLLAPSE OF ENRON—Part 1

HEARING

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

FEBRUARY 5, 2002

Serial No. 107–86

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON ENERGY AND COMMERCE

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

TOM DAVIS, Virginia

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

JANE HARMAN, California

DAVID V. MARVENTANO, Staff Director

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

JAMES C. GREENWOOD, Pennsylvania, Chairman

MICHAEL BILIRAKIS, Florida

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

Vice Chairman

CHARLES F. BASS, New Hampshire

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

PETER DEUTSCH, Florida

BART STUPAK, Michigan

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

CHRISTOPHER JOHN, Louisiana

BOBBY L. RUSH, Illinois

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

C O N T E N T S

Page

Testimony of:

Powers, William C., Jr., Chairman, Special Investigative Committee,

Board of Directors, Enron Corporation ....................................................... 15

(III)

(1)

THE FINANCIAL COLLAPSE OF ENRON—Part 1

TUESDAY, FEBRUARY 5, 2002

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,

Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

2322, Rayburn House Office Building, James C. Greenwood (chairman) presiding.

Membes present: Representatives Greenwood, Stearns, Burr,

Whitfield, Bass, Tauzin (ex officio), Deutsch, Stupak, DeGette,

John, Rush, and Dingell (ex officio).

Also present: Representatives Barton and Green.

Staff present: Tom DiLenge, majority counsel; Mark Paoletta,

majority counsel; Michael Geffroy, majority counsel; Jennifer

Safavian, majority counsel; Casey Hemard, majority counsel;

Brendan Williams, legislative clerk; William Carty, legislative

clerk; Peter Kielty, legislative clerk; Chris Knauer, minority counsel; and John Cordone, minority counsel.

Mr. GREENWOOD. This hearing of the Energy and Commerce

Committee, the Subcommittee on Oversight and Investigations will

come to order. The Chair recognizes himself for purposes of an

opening statement.

Today, we engage in the first part of a multi-day hearing into the

financial collapse of the Enron Corporation. The principal focus of

this stage of our investigation will be a series of transactions between Enron and several partnerships created and controlled by

senior Enron officers and employees. By now, some key events that

precipitated Enron’s collapse have become familiar, though not yet

fully understood by the public. These events serve as the point of

entry into our hearing today.

In October, Enron, which until recently was considered to be one

of America’s largest and most profitable corporations, announced an unexpected after-tax charge against earnings of more than $500

million and a reduction in shareholder equity of more than $1 billion. The losses stem from Enron’s transactions with an entity

about which we will hear a great deal over the next few days:

LJM2. It was an entity whose named was formed using the initials

of the spouse and children of its creator, Andy Fastow, who at that

time was Enron’s chief financial officer.

The news of this financial bombshell and the curious role played

by Enron’s CFO in it prompted immediate concern in the market

and in the media and resulted in the SEC opening an inquiry into

the transactions involving LJM2. Enron’s CFO was put on leave

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and subsequently fired, in Ken Lay’s words, quote, ‘‘To restore investor confidence.’’ Already reeling from this management debacle and with its stock

trading at sharply lower levels, Enron suffered an even greater embarrassment when in November of last year the corporation was

obligated to restate its financial statements for the years 1997

through 1999. Now, instead of showing a strong balance sheet, the

company was reporting multibillion dollar losses in earnings and in

equity. The accounting practices, behind which these losses had

until then been hidden, had also been used to mask huge losses in

two other partnerships inspired by Mr. Fastow. These were the

LJM Cayman partnership, also known as LJM1, and yet another

related party entity, known as Chewco Investments.

The second admission by Enron’s corporate team effectively forfeited any remaining market for investor confidence in the company. Enron’s stock took its final plummet, forcing yet more debts

to come due. In a matter of weeks, a firm which had until only recently been hailed as a shining example of American enterprise

was now forced to declare bankruptcy. An astounding $70 billion

in market value evaporated seemingly overnight, bringing financial

ruin to thousands of employees and investors.

In recent weeks, committee investigators have sorted through

Enron’s wreckage, and in particular the Chewco, LJM1, LJM2 and

associated deals, to learn what happened. We have discovered that

while thousands of hardworking employees suffered terribly, there

was a small group at the top who carted away millions from these

very deals that ultimately led to Enron’s collapse. And we have discovered a disturbing pattern of activity that directly contributed to

the demise of this company: a web of apparent misrepresentations,

half truths, deceit and self-dealing in which a significant number

of company leaders became entangled.

You will have an opportunity to hear explanations from some of

those in positions of responsibility at the continuation of this hearing on Thursday, but today we will focus on the findings of Enron’s

Special Investigative Committee. The Special Investigative Committee was set up by Enron’s Board of Directors to conduct an independent examination of the very transactions the committee is now

investigating. Its 200-page report released over the weekend draws

a very disturbing picture of Enron’s activities which, sadly, appears

to confirm our own findings to date.

The report describes a series of highly questionable transactions

that enriched a small number of corporate bigwigs at the expense

of the company and of its shareholders. More disturbing still, it describes a complicated set of transactions by these individuals which

were portrayed at the time as actions designed to guard against

Enron’s future losses. But its own true purpose was to hide large

and increasingly unmanageable amounts of debt and liability.

The report uses the word ‘‘obtuse’’ to describe investor disclosures

that failed miserably to accurately convey the true financial state

of the company or the risks attendant to the off-the-book dealings

with various partnerships. It exposes a troubling lack of governance and management oversight and the failure on the part of outside advisors, the accountants and legal experts responsible for

evaluating these transactions to make clear to investors what indeVerDate 11-MAY-2000 11:33 May 31, 2002 Jkt 010199 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 W:\DISC\77985 pfrm01 PsN: 77985
3

pendent experts now comprehend. Enron’s accounting tactics went

well beyond the aggressive, apparently violating or circumventing

several of the accounting professions most basic rules.

Clearly, there is much troubling information in this report for us

to consider as we move forward. Our sole witness today is William

C. Powers, Dean of the University of Texas Law School. Dean Powers was appointed to Enron’s Board of Directors just this past October to Chair this special committee. He has graciously accepted our

invitation to testify as to the report’s troubling findings. I am certain that Dean Powers’ informed testimony will contribute to the

factual backdrop for subsequent hearings with current and former

Enron and Andersen officials. I thank him for his hard work in preparing this report in such an expedited time schedule and for his

testimony today.

The Chair recognizes the ranking member of this subcommittee,

the gentleman from Florida, Mr. Deutsch.

Mr. DEUTSCH. Thank you, Mr. Chairman, and I want to thank

you for holding this very important hearing, and I also want to

thank our staffs, both the majority and minority, who are working

very closely together. We actually know more than we knew last

week when this subcommittee held the first hearing on the demise

of Enron, and I am sure we will know more by the end of the week

as well.

This is some of the things that we are disclosing—or uncovering

at this point in time. This is from Enron’s documents that our staff

uncovered, and it is a simplified diagram of 1 of the 4,000 partnerships. I mean a simplified diagram is almost comical to try to understand that one partnership.

You know, I have had the opportunity to read through a large

part of the report, as well as the summary, and obviously it is extensive. It is extensive in terms of understanding of what happened, but I am going to quote from something I read this morning

that Arthur Levitt (ph) just wrote: ‘‘Yet for all their excesses, analysts don’t have a fiduciary duty to shareholders; board of directors

do.’’ Enron’s board failed the smell test. Millions lost money and careers were destroyed while the company and its directors began to

question mutual beneficial arrangements.

The SEC and stock exchanges must now revisit the issue of

board and audit committee responsibility. Consulting contracts for

directors should be barred as well as seductions in the form of corporate jet usage and support for directors’ favorite charities. Most

important, at least half of every board must be independent by the

most rigorous definition of the term.

I think what we know at this point is that these partnerships

were used as a deception for people to understand what the status

of the company was. And what this report, Mr. Powers’ report, does

is lays out some of these interlocking relationships between management and people who got direct benefits by these partnerships.

And one of the questions—and it is not just understanding Enron,

but I think the issue for the committee and for the Congress and

really beyond that, for the country as well, is, No. 1, are there

other Enrons out there? Because if Enron and the people involved

in Enron figured out the use of these partnerships as a way to effectively get millions, in fact, collectively, billions of dollars in perVerDate 11-MAY-2000 11:33 May 31, 2002 Jkt 010199 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 W:\DISC\77985 pfrm01 PsN: 77985
4

sonal theft, then the motivation is probably out there for other

companies to be doing the same thing.

But the system should not allow it. I mean I think what is clear

from your report is that both management and the board of directors had to have been knowing what was going on. And, in fact, if

officers claim they don’t know the truth, they are not telling the

truth. No one has ever accused these people of being stupid.

Now, Business Week recently wrote, ‘‘This is corruption on a

massive scale. Tremendous harm has befallen innocent employees

who have seen their retirement savings disappear as a few at the

top cashed out. Terrible things have happened to the way business

is conducted under the scope of deregulation. Serious damage has

been done to ethical codes of conduct held by once trusted business

professionals.’’

It is difficult not to contrast professionalism of modestly paid fire

fighters and police doing their duty on September 11 with the secretive and squirrely behavior of 6- and 7- figure accountants, lawyers, CEOs, bankers, financial analysts who failed at their duty

with Enron. And, again, I emphasize their duty because the system

is set up for this never to have happened in the first place.

Mr. Chairman, after reading this report, I do not believe that

Enron can emerge from bankruptcy until its entire top management has been removed. They all played a role in creating the environment that allowed this debacle, and they cannot be expected to

now change their stripes.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the chairman of the full committee, the gentleman from Louisiana, Mr. Tauzin.

Chairman TAUZIN. Thank you, Mr. Chairman, and my particularly thanks, first, to Mr. Dingell again for the extraordinary corroborative work that our investigative teams are doing in a bipartisan fashion on this issue, and to Dean Powers for taking on this

awesome responsibility and for executing within the limits of his

capabilities. We have noted very carefully you had not the power

to subpoena or to compel testimony of witnesses or documents. You

didn’t have access to all the partnership papers, and you mentioned

that your report is only as good as the information provided to you.

But you have done an excellent job and your report tracks what

our investigators on both sides of the aisle are finding in this case,

and I want to thank you for that.

But what you have basically found, and we will get into it a lot

more tomorrow and Thursday, is an aberration, I hope, in American corporate history, an extraordinary aberration. But it is an old

story. It is a story of insider theft, just using new wrapping and

new forms and procedures to carry it out. It is a story, as you point

out over and over again in your report, of the failure to follow accounting principles, to circumvent the accounting principles, to organize these structures improperly. Time after time you talk about

the fact that had they followed the rules this wouldn’t have happened, that Chewco was improperly constructed and JEDI failed

for the same reason, and all of these structures that were created

to put debt off the balance sheets ended up being shams at the end,

because they didn’t follow the integrity of the accounting principles

5

that everyone else in the country, every other corporation in American tends to follow.

I want to use the rest of my time in opening, Mr. Chairman,

however, to speak directly to Mr. Ken Lay. Mr. Lay, wherever you

are, I am sorry your attorneys were offended by anything Mr. Dorgan and I had to say on Meet the Press this weekend. I have got

a little excuse for being tired. I got rear-ended by a drunk driver

that night and then attended the Washington Mardi Gras until 2

a.m. in the morning before I read your report, Mr. Powers. But Mr.

Dorgan was not tired, and neither he nor I misstated the facts.

Your report, Mr. Powers, points to the high probability of security fraud at Enron. And your report lays the blame for what happened on a host of parties, and you didn’t leave Mr. Lay out. You

reminded him of his responsibility as the head of the organization,

to be a better supervisor, to actually know what was going on if

he didn’t.

And I am sorry if that offended your lawyers, Mr. Lay, but let

me, please, ask you to consider for your own good, if when Sherron

Watkins reported to you in August of 2001 in a lengthy meeting

that Enron was about to implode in an accounting scandal, if

Sherron Watkins was kind enough to tell you in that memo in 2001

in a private meeting with you, Mr. Lay, that your company had

been robbing the bank and for the last 2 years was trying to pay

it back, that is how bad things were, that is how big the cancer was

eating away at the Enron Corporation, its employees and everyone

who counted and trusted in it and invested in it, if that wasn’t

enough for your lawyers to be concerned about your testimony before a congressional committee, get yourself some new lawyers, sir.

If when the SEC announced it was beginning an informal inquiry

and then a formal inquiry into the operations of the security trading at Enron and the sham proceedings that went on there, if your

lawyers weren’t sufficiently concerned about your potential liability

and involvement in this matter, get yourself some new lawyers, sir.

If when the Justice Department announced that it was conducting a formal Justice inquiry into illegalities, potential illegalities at Enron and when the FBI arrived in Houston to look at your

books and at Arthur Andersen books only to find out that Shredco

had been hired by Enron to destroy documents and Enron’s officials—Arthur Andersen officials, rather, had put out a retention

and destruction policy that went right through the SEC subpoena,

if that wasn’t enough to warn you and your attorneys that there

was real problems for all of you, get yourself some new attorneys.

And if when Dean Powers, hired by Enron, by you and the Board

of Directors at Enron to find out what went wrong and who wrote

this report indicating that accounting principles were ignored, circumvented and violated right and left in all these dealings and the

American public was told that you had a billion dollars of income

you didn’t have and debt was hidden from investors who should

have known that the value at Enron wasn’t there, if all of that

wasn’t enough for you to understand you had legal problems, and

testifying in front of Congress was a risky business, then get yourself some new lawyers.

And I have got a suggestion for you. Maybe your family is right,

maybe you are broke, and maybe you can’t afford to hire some lawVerDate 11-MAY-2000 11:33 May 31, 2002 Jkt 010199 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 W:\DISC\77985 pfrm01 PsN: 77985
6

yers, maybe you can sell a house in Aspen and buy yourself some

new lawyers. But if that doesn’t work, maybe you ought to get a

hold of Mr. Fastow and Mr. Skilling and they can put together another little partnership for you and get some investors in and get

yourself some lawyers, sir, because somebody is going to need some

lawyers in this case, somebody needs them desperately. And it took

Mr. Dorgan and I on Meet the Press to say the obvious, that the

Powers report indicates the high probability of security fraud in

this case, this awful aberration in corporate America, that accounting principles were flaunted, ignored and circumvented right and

left to the detriment of every investor and every employee of this

company, if it took that, if took Mr. Dorgan and I saying that on

television for you to understand that you were at some risk coming

to testify in Congress without the benefit of legal counsel or perhaps even the Fifth Amendment, then get yourself some new lawyers, sir.

Mr. Powers, thank you for your contribution. As you point out,

this is just the beginning. Your report would change dramatically

if you had all the facts. We have got the advantage of subpoena

power, we have got the advantage of compelling the production of

documents, those that haven’t been destroyed, and we are going to

find out who owns those partnerships and those special entities,

and we are going to find out what happened, because we have some

powers working with the FBI and the SEC that perhaps you didn’t

have. But you did a heck of a job for us already, and we thank you

for it. Thank you.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes for an opening statement the ranking member of the full committee, Mr. Dingell.

Mr. DINGELL. Mr. Chairman, thank you for the courtesy. I commend you again for this hearing, and it is my hope that this hearing will lead to a complete inquiry into the matters that are now

before us, including legislative and administrative changes that

need to be made in the process.

I wish to begin by thanking you, Mr. Powers, and your counsel

for presenting a very useful report on the related party transactions and other matters. You have done a fine job. I am troubled

that some of those who were involved refuse to cooperate. I believe

that raises questions into which the committee must go. I am also

concerned about the limitations raised by the participation of Mr.

Herbert Winokur, a long-time director. I will note the report is a

devastating document. It outlines an extraordinary web of corporate chicanery and deceit. It provides a very useful starting point

for this committee and a significant road map for this committee’s

efforts to unravel this sorry mess.

I will observe that it reminds me of what used to be said by one

of baseball’s greats, ‘‘This is deja vu all over again.’’ It brings me

back to the days of Mr. Sam Insel and also, perhaps, to Mr. Ponzi

and other people of this kind. For those who don’t remember Mr.

Insel, and I have only vague remembrance of him, he was a fellow

who built enormous pyramids, which he built and milked for the

benefit of himself and his friends. It led to significant changes in

the law, including the creation of the SEC, the passage of the different securities laws, the Public Utility Holding Company Act and

7

a wide array of other statutory changes to protect investors, consumers, employees and pensioners. And it looks like something of

that kind has to be done again to address the efforts of those who

have brought Enron, its investors, its employees, and its pensioners

to such a sorry state today.

Your report, in often numbing detail, describes some of the financial sleights of hand that Enron executives used to hide the result

of either stunningly inept business decisions or outrageously corrupt behavior by themselves and their friends. It also describes the

disgusting self-enrichment by senior executives who sold out their

fiduciary duties to the shareholders. And, it describes an extraordinary laxity, if not worse, of those responsible for keeping such behavior in check.

One must ask, how were senior Enron executives able to use the

company as their personal financial plaything? First, because of a

massive failure of corporate governance. Was the highly paid board

of directors simply asleep, or was it corrupt, or was it both? Second,

because of an extraordinary failure by accounting and legal professionals to provide objective, independent, and forceful advice. Why

were they acting like trained seals to the management? Again,

were they incompetent, were they corrupt? We hope that this proceeding and others will lead us to some intelligent answers. Third,

because of a massive failure by so-called experts in the credit rating agencies, the investment banks and the brokerage houses. Why

didn’t they ask tough questions?

What we learn today will set the stage for a much more extensive inquiry into these matters. For example, we will also need to

learn much more about whether weakness in government regulation of markets for financial instruments and vital commodities

may have allowed this rascality to flourish. And we will need to reexamine the special protections that the Congress provided accountants in the Private Securities Litigation Reform Act of 1995,

which came forth from this committee with the enthusiastic support of some of the people who are still on the committee. I am sure

that they will enjoy explaining their support of that proposal and

also their support of proposals which have constrained the SEC in

its efforts to lead to a more vigorous, truthful, effective, and propublic accounting industry.

In any event, Mr. Powers, we are grateful to you for a very useful report, and for your appearance here today. Mr. Chairman, I

thank you.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentleman from North Carolina, Mr. Burr, for an opening

statement.

Mr. BURR. Thank the chairman. Dean Powers, welcome.

Mr. POWERS. Thank you.

Mr. BURR. This almost makes law school seem fun, doesn’t it?

Clearly, you have gone through some tough changes since October;

so have the employees of Enron and the confidence of the investor

in America. Let me commend you for the work of your committee.

I think there were many that thought that reports that came out

on Enron’s downfall might have a lot to do about the definition of

shredding or the definition of revenues or debt. And in fact what

you found in your investigation, the only 3 months it took, was

8

more than, in fact, the auditors found in 4 years. It took them 4

years to make some of the changes that you identified in 3 months.

It took the Enron management 4 years to fess up to real revenue

and debt numbers that you found accurately in a three-money period. These revisions contributed greatly to the lack of confidence

that the investors had in Enron as a company.

I am convinced that there was one thing that you did uncover:

That at Enron there was a two-headed coin. On both sides of that

coin was Mr. Fastow. No matter how you flipped it he always won.

He won because of his presence at Enron, he won because of his

presence at the partnerships that were created, and Mr. Fastow apparently looked after one person, that person who was on both

sides of that coin. He profited when everybody else lost. Mr. Kopper

profited when everybody else lost. A select few profited when everybody lost.

I am confident that this committee and this Congress will not

quit until we get all the facts. I am confident that the law enforcement that is appropriate will not quit until they find the guilty

parties. I am confident that it is not going to be fun to be a board

member at Enron during that period. But I want to thank you for

your willingness to go through the process that you have just gone

through and to encourage you to be diligent as we complete this

process, however long it takes. Thank you, Dean Powers.

Mr. POWERS. Thank you.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentleman, Mr. Stupak, for an opening statement.

Mr. STUPAK. Thank you, Mr. Chairman. Mr. Chairman, 2 weeks

ago, we heard from Arthur Andersen and their role about shredding documents associated with the collapse of Enron. Today, we

hear from Mr. Powers about many of the questionable and oftentimes repulsive financial dealings that occurred within Enron leading up to their bankruptcy. Mr. Chairman, we have learned

through the media that even Enron has shredded documents. I

hope that this committee will have a hearing on Enron’s shredding

of documents, what documents were shredded?

We have only focused on Enron’s role here in the United States

but what about Enron’s worldwide holdings, corporations, limited

partnerships overseas? Who got bilked overseas, who cooked the

books overseas? I hope this committee will explore these rooms in

Enron’s house of cards through the committee’s jurisdiction under

the Foreign Corrupt Practices Act. We certainly must review these

aspects on Enron’s dealings, not only here in the U.S. but also

overseas.

I appreciate the fact that Mr. Powers has the gumption to come

here before our committee to tell us what he and his colleagues

found in their review of Enron’s accounting schemes. It is no wonder they had so many schemes when we have learned they have

had close to 1,000 accountants working at Enron. While I believe

that Mr. Powers had the best intentions in providing the Enron

Board with a comprehensive picture of Enron’s business practices

over the last 5 years, I am troubled by the fact that the report does

not include full disclosure, input from Mr. Fastow and Mr. Kopper,

who had key roles in creating and managing the special-purpose

entities of LJM and Chewco, which contributed to massive

9

misstatements of Enron’s financial security. The report focuses on

only a few of these special-purpose entities, and I have been told

that Enron has had literally thousands of them.

The Powers report, even without full cooperation of many of the

key Enron employees and without the full cooperation of Andersen

officials or Enron’s outside auditors, provides us with an extremely

disturbing tale of greedy executives, lax oversight by senior management and a board of directors, or maybe we should call them

‘‘board of enablers’’ who appear to have not taken their roles very

seriously.

The board of directors gave serious flexibility, serious, dangerous

flexibility to Mr. Fastow, allowing him to establish the LJM and by

not following up on the few strings that they attached to Mr.

Fastow’s deal. The report shows how they robbed Peter to pay Paul

and in some cases, relating to asset transfers, then transferred

back to Peter again. As I stated in the hearing we had with Andersen officials 2 weeks ago, I believe the Securities Litigation Reform

Act of 1995, or the Securities Rip-off Act, as many of us refer to

it, had significant impact on the way corporations approach their

business deals.

Prior to the so-called reform, companies would likely not have

risked many of the transactions in these aggressive accounting

techniques, because they knew there was a very good chance they

would be held accountable. Now, however, corporations are willing

to take additional risk in their business dealings, because the 1995

reform bill insulated them from legal actions by putting up so

many roadblocks for shareholders and employees to take legal action against them.

Mr. Chairman, I fear the Powers report, even with its very serious admonitions, only scratches the surface of what is a thick layer

of deceit atop perhaps the worst case of corporate officer malfeasance in recent memory. In their wake lies thousands of Enron employees and retirees with shattered financial lives, while many of

the corporate executives, many of whom who are still working at

Enron, have lined their pockets. It will be difficult, if not impossible, for Enron to emerge as a credible company from bankruptcy

without a comprehensive purging of Enron executives and board

members who were at the helm during this debacle. They must be

held accountable. I hope the investors in Enron will get themselves

a new board of directors and a new senior management team.

I look forward to having the opportunity to question Andrew

Fastow, Michael Kopper, Richard Causey and others later this

week with regard to the issues in the Powers report. I hope they

will come before our committee on Thursday and be open, honest

and as aggressive in answering our questions as they were in pursuing their own financial futures. I thank you, Mr. Chairman, and

I thank our witness for being here today.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentleman from Kentucky, Mr. Whitfield, for an opening

statement.

Mr. WHITFIELD. Mr. Chairman, thank you very much. Mr. Powers, we appreciate you being here today. I don’t think any of us

would have very many compliments for the Board of Enron, but I

think that they obviously were forced into a situation where they

10

asked you to Chair a group that would do an investigation and

come forth with findings.

We understand, obviously, that you did not have any subpoena

powers and that you were not able to go in as much detail as you

would like to have done, but I think the thing that comes out of

this investigation, as in your own words, it is appalling to think

that Mr. Fastow walked away with $30 million. In one instance, he

put down $25,000 and less than 2 months later walked away, or

his family’s foundation did, with $4.5 million. Mr. Kopper put down

$5,800 or so and walked away with $1 million in 2 months. In

order to try to meet the code of ethics of Enron, knowing full well

that they did not comply with those codes, removed Mr. Kopper

and put in his domestic partner in some of these transactions. So

I think it is very clear that these people were not stunningly inept

but they knew precisely what they were doing, and it is a pure example of corporate greed. And it is really sad because it has basically wiped out the pension funds of thousands of employees who

were depending upon this upon their retirement.

So I am delighted that you are here today, and I look forward

to your testimony. I yield back the balance of my time.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentlelady from Colorado for an opening statement.

Ms. DEGETTE. Thank you very much, Mr. Chairman, and I would

ask unanimous consent to put my entire opening statement in the

record.

Mr. GREENWOOD. Without objection.

Ms. DEGETTE. Thank you. When I read the report Mr. Powers

and his colleagues put together this weekend, I was stunned both

by the duplicitous nature of these deals, these limited partnerships,

which were designed to mask losses and to accentuate profits. I

was also stunned by the breathtaking oblivion, apparently, evidenced by the Enron Board of Directors when they looked at these.

The report indicates that Mr. Fastow and also Jeffrey Skilling, who

was Enron’s former CEO and at times COO, misled the board of

directors by not appropriately disclosing their ownership in specialpurpose entities. In particular, today, I would like to discuss the

gap between the level of ignorance displayed by the board and the

basic fiduciary duties of any corporation.

What jumped out at me when I was reading the Powers report

was how little the board of directors seemed to know about the special entities transactions. We know now from the report, and we

are all very grateful to Mr. Powers and a little amazed he was able

to do what he was without subpoena power or any of the other

powers, but nonetheless the board waived Enron conflict of interest

rules for Mr. Fastow to allow him partial ownership and managerial duties in Chewco and LJM while still on the payroll of Enron

as a senior executive. A provision of the waiver approval included

a set of conditions that Mr. Fastow would be required to meet, but

Mr. Skilling was supposed to oversee Mr. Fastow’s activities—a little like the fox guarding the henhouse, I may add. The report contends, though, that the board had no knowledge of the inappropriate nature of certain related party transactions. It is hard for us

to believe that today, in retrospect, but perhaps, Mr. Chairman,

11

when the committee receives the information we will be able to get

with our subpoena power, we will be able to add to this knowledge.

All of us know that boards of directors of corporations are required to serve in a fiduciary capacity. They are entrusted with the

responsibility of acting in the best interest of shareholders and

their employees, and when you look at the minutes of the Enron

board meetings, dating back to 1997, it appears that the board’s

knowledge of questionable transactions involving Chewco, LJM,

Raptor and other special entities that are detailed in the Powers

report as having substantial problems.

Now, I was looking at the structures of a lot of these transactions, and it is pretty amazing to me that the board would actually approve these. Mr. Deutsch showed the simplified Whitewing

transaction. Here is the Chewco transaction. And if you look at

those, those transactions are both structured completely differently

in ways which are designed, in my opinion and I think in probably

Mr. Powers’ opinion, to mask losses and to maximize profits. This

is a diagram, it looks elegant in its simplicity compared to the

other two, of the Rhythms transaction, which I am interested in because it involves—it is the first transaction, and it involves a Colorado-based company.

What strikes me is all of these transactions were approved by the

Enron Board, and I was trying to think about the investors who

had Enron stock in their 401(k) programs and their other programs. And to think about an unsophisticated investor trying to review Enron’s financial status and trying to understand these very

complex leveraging transactions. It is clear to me that when you

have a corporation as large as Enron and when you have transactions as complex as these, it is incumbent upon the board of directors to exercise their fiduciary duty and to review these transactions in depth, not to simply rubber stamp these things, and especially when corporate employees and officers have financial interest.

This is what we need to learn as a committee, both today and

as we go forward, what did the board know and was it simple negligence on a breathtaking level or was there much more there? And

so I look forward to hearing Mr. Powers’ testimony today. I promise, Mr. Powers, I will not ask you to analyze each of these transactions in depth for us at this hearing, we only have 5 minutes to

question, but perhaps at a later date. Thank you, Mr. Chairman.

Mr. GREENWOOD. The Chair thanks the gentlelady and recognizes the gentleman from Florida, Mr. Stearns.

Mr. STEARNS. Thank you, Mr. Chairman, and welcome, Dean

Powers. We appreciate your coming here to speak. I read your report yesterday, and I looked for the word ‘‘criminal’’ in the report,

and obviously I would not find that, and I understand that. In fact,

this committee here is not here to look for criminality but to investigate and let the Justice Department, and we are well aware of

what our function is, is to highlight the problem.

But I did look at some of your testimony yesterday, and it was

reported in the Washington Post where you said, ‘‘Dealing with the

Raptor partnerships,’’ this is what you said, ‘‘Enron hid the problem and, ‘gave the false impression that Raptor had enough money

to pay Enron what they owed,’ ’’ Now, that is euphemistically for

12

not only did they hide the fact but they didn’t tell the truth. Obviously, you are dean of the law school there at the University of

Texas, and you understand when they don’t tell the truth that is

lying. So the euphemistic statements you are using there are something I think the committee and the American public should realize

that even within your report, while you are not using the word

‘‘criminal,’’ you are indicating indirectly that these people were not

telling the truth.

When you have a report like this, which is based upon volunteers, it is not going to get to the substance of this case, and that

is why this committee and the Banking Committee and the Senate

committees are making the right decision to have these folks come

forward and to speak the truth under oath. This whole Enron thing

is much like a financial Hindinburgh (ph). It was a marvel in the

eyes of Wall Street, yet ultimately went up in flames, with employees and investors getting burned. And I think it is also apparent

that this staff on this committee has done an excellent job in trying

to extricate the facts here, and I think your report, Dean Powers,

is helping also.

But reading through your report, I also had the feeling of the

would have, could have, should have type of philosophy. When you

have people who are volunteering to give information they are

going to present, which is basically people not telling the truth,

self-enrichment, failures at many level, they are going to give a picture which is not totally accurate. So as much as your report is

helpful, it is really just very, very first step here.

You mentioned that there is failures of many levels and many

people. I am not sure that it was a conspiracy that involved people

right down to the middle or lower management. I think, based

upon what we heard earlier in hearings on this committee and

oversight, there were some people at the very top steering this

whole basic series of misstatements and actually in violation of

Enron’s own code of conduct. You point out in the report that the

Enron chief accounting officer failed to provide complete information to the Audit Committee, Enron’s senior risk officers failed to

adequately scrutinize these transactions for economic risk, and the

board of directors, the board of directors failed to provide adequate

oversight, and yet they were making large sums of money, and

they had a fiduciary responsibility to make sure that they had

proper oversight, and, last, of course, Arthur Andersen failed to

provide objective accounting judgment. So this is a flawed, flawed

company.

I am concerned that because the Special Investigative Committee

lacked the power to compel parties, Dean Powers, that some of this

information, while very good, is not necessarily going to be as relevant as it should, but I do commend for your honest effort here,

and I appreciate, again, you coming here this morning. Thank you,

Mr. Chairman.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes for an opening statement the gentleman from Louisiana, Mr.

John.

Mr. JOHN. Thank you, Mr. Chairman, and also thank you for

convening this hearing into the findings of the SIC, the Special Investigative Committee.

13

I believe before this committee or any other person prejudges

what went wrong at Enron, who is to blame and what Congress

can do about it, I think common sense dictates that we closely review all of the available facts. The report produced here today by

Mr. Powers is an important piece of the puzzle that our constituents, Americans and certainly former Enron employees are demanding that we solve. I think it is very apparent and clear from

the report that, at a minimum, a systematic failure of checks and

balances within Enron and between the company and its outside

advisors allowed certain of its current and former employees and

officers to engage in related party transactions that put self-enrichment before the interests of the company and its shareholders. It

seems unimaginable to me that and many Americans and anyone

who is following what has gone on that so many people involved,

from the directors, senior management, auditors and lawyers, could

have been completely unaware of what was happening and that the

blame rests with only a few bad actors.

Beginning with the formation of Chewco, Enron became a Ponzi

scheme of self-dealing partnerships which were designed, in your

own words, to mislead investors about the true financial state of

the company and ultimatly resulted in its financial implosion. Mr.

Chairman, the investigative report clearly shows that there was

not simply a worm in Enron’s apple; it was instead rotten to the

core.

The question for this committee is why thousands of employees

and investors had to lose just about everything that they owned before anyone knew of this mess. Either the accounting system did

not provide warnings of Enron’s troubles or it was too easy to manipulate the rules to hide information from public scrutiny. Either

way, I believe this report raises many more questions than it provides answers.

Mr. Chairman, I look forward to working with you to find out the

answers of what has gone on here, and I thank Mr. Powers for his

report; it was very enlightening.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentleman from New Hampshire, Mr. Bass.

Mr. BASS. Thank you, Mr. Chairman, and thank you, Mr. Powers

for being here today, and I will be brief so you can get on with your

testimony.

To say that your report is troubling would probably be the understatement of the century, and, as you know, market confidence is

based on expectations of firm accounting principles and honorable

corporate governance, both of which obviously have not occurred in

this particular situation. Legal and management structure of entities like Enron, accounting entries, accounting restatements and so

on, really need to become know to this committee. It is part of a

fact-finding nature of what we are attempting to do. But I also believe that we need to, as quickly as possible, develop the facts, find

out what went wrong, find out who is to blame, but what is more

important about this subcommittee’s and full committee’s challenge

is to come up with policy recommendations for changes to make

sure that, first of all, this sort of thing isn’t going on as we speak

still, and, second, that we can take action legislatively if necessary

to make sure that the public is protected and the capital markets’

14

confidence is regained so that we can move forward in 2001 and

2002 with more confidence.

So I appreciate your taking the time, which will be quite a lot

of time, to be here today. I appreciate the efforts that you have undertaken as a member of the Board of Directors of Enron to

produce this report, which is long and thorough. We will get to the

bottom of this, and hopefully we will move forward with something

that will be productive in the very near future. Thank you, Mr.

Chairman.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentleman, Mr. Rush.

Mr. RUSH. Thank you, Dean Powers, for your attendance here

and for your report, and I want to thank you, Mr. Chairman, for

holding this hearing on the findings of the so-called Enron Powers

Report, or in Superbowl terminology, the Enron play-by-play book.

Mr. Chairman, I, like most observers of the Enron collapse, was

appalled to hear that thousands of Enron employees whose savings

disappeared while top Enron executives cashed in their stock for

millions with the release of the Powers report that shock has

turned to utter outrage and disbelief. This report is a crucial piece

to the puzzle of Enron in that it reveals a culture where every selfimposed standard enacted by Enron was broken. All of this was

simply done in an attempt to satisfy a gluttonous appetite for corporate wealth.

In particular, I commend the Powers Committee for its unflinching criticism of Kopper and Fastow who created a profiteering network of friends and associates designed to bleed Enron at the expense of its investors. And while I believe that this criticism is

well-deserved, I am also interested in the degree to which the

board of directors have escaped close scrutiny and criticism.

In raising this issue, I do not question the integrity of Mr. Powers, who I know is a well-respected legal scholar. What I do question is the betrayal of Ken Lay who holds a Ph.D in economics as

a naive and absent-minded professor who simply goofed by not

spotting all of the evil-doings going on all around him. In the case

of LJM transaction, I question the casting of the board of directors

as a group of well-meaning and trustworthy corporate Governors

who, despite their negligence, were unwitting victims of Andy

Fastow and Michael Robert Kopper.

That said, I await the various detailed responses that this report

will certainly bring about from Arthur Andersen and others. I also

await testimony from those parties who refuse to participate in this

study, and with those responses I am certain that a more full and

accurate picture of who knew what and when will emerge.

Mr. Chairman, at the end of the day, I suspect that Mr. Lay and

the rest of the Enron board will not be viewed as a hapless bunch

of know-nothings, but rather as a group of well-educated, well-seasoned and shrewd business people who intentionally blinded themselves to a situation which reeks so badly that it couldn’t help but

be detected by even the most novice of business student.

Whether Enron was a ship of pirates, a ship of fools or a combination of the two, it is my hope that today’s hearing takes us a

step closer to enacting bold, new legislation. Indeed, that legislation should ensure that no ship which is destined to sink with the

15

life savings of thousands of innocent investors ever, ever, ever sets

sail again in this nation. Thank you, and I yield back the balance

of my time.

Mr. GREENWOOD. The Chair thanks the gentleman, and the

Chair thanks Mr. Powers for your forbearance this morning. Mr.

Powers, you are aware that the committee is holding an investigative hearing and when doing so has had the practice of taking testimony under oath. Do you have any objection to testifying under

oath?

Mr. POWERS. None whatsoever.

Mr. GREENWOOD. Appreciate that. The Chair then advises you

that under the rules of the House and the rules of the committee

you are entitled to be advised by counsel. Do you desire to be advised by counsel during your testimony today?

Mr. POWERS. No, I don’t.

Mr. GREENWOOD. Okay. In that case, if you would please rise and

raise your right hand, I will swear you in.

[Witness sworn.]

Mr. GREENWOOD. Appreciate that. You are now under oath, and

you may give a 5-minute summary of your written statement. We

thank you.

STATEMENT OF WILLIAM C. POWERS, JR., CHAIRMAN OF THE

SPECIAL INVESTIGATIVE COMMITTEE OF THE BOARD OF DIRECTORS OF ENRON CORPORATION

Mr. POWERS. Thank you, Mr. Chairman. Mr. Chairman, distinguished members of the subcommittee, my name is William Powers, and I am the dean of the University of Texas Law School. As

you know, for the last 3 months, I have served as the chairman of

the Special Investigative Committee of the Board of Directors of

Enron, and I very much appreciate the opportunity to come here

today and testify.

During October of last year, questions were raised about Enron’s

transactions with partnerships that were controlled by its chief financial officer, Andrew Fastow. In the middle of October, Enron

announced that it was taking an after-tax charge of more than

$500 million against earnings because of transactions with one of

those partnerships. Enron also announced a reduction in shareholder equity of more than a billion dollars.

At the end of October, the Enron board established a special committee to investigate these matters. It then asked me if I would

join the board for the purpose of chairing that committee and conducting that investigation. With the help of counsel and professional accounting advisors, we have spent the last 3 months doing

that, conducting the investigation we were charged to conduct.

Our committee’s report was filed on Saturday. It covers a lot of

ground and I hope it will be a helpful starting point for the necessary further investigations by congressional committees, by the

Securities and Exchange Commission and by the Department of

Justice. As several members of the subcommittee have noted in

their statements, we see this report as just a start, merely a beginning. A copy of the executive summary of our report is attached to

my statement here.

16

Many questions currently part of the public discussion, such as

questions dealing with the employees’ retirement savings—and let

me add, matters dealing with the employees’ retirement savings

and their loss of their savings nest egg is one of the most tragic

aspects of this story—that is an important issue that requires

much investigation. Also public questions about sales and trading

in securities of Enron by Enron insiders, those also are important

public questions. There were, however, questions beyond the scope

of the charge we were given, and they are questions beyond what

we could do in a 3-month period. Again, these are matters of vital

importance, but they were not matters we addressed in our report,

and they need further study by relevant congressional committees,

the Department of Justice and other agencies.

What we were charged with was investigating transactions between Enron and partnerships controlled by its chief financial officer, or people who worked in his department. That is what our report discusses. And, frankly, Mr. Chairman, as I said before, what

we found was appalling.

First, we found that Fastow, and other Enron employees involved

in these partnerships, enriched themselves, in the aggregate, by

tens of millions of dollars that they should have never received.

Fastow got at least $30 million, Kopper at least $10 million, two

others $1 million each, and still two more in amounts that we believe were in the range of hundreds of thousands of dollars. So

there was self-enrichment.

Second, we found transactions that were improperly structured.

But if they had been structured correctly, Enron could have kept

assets, under accounting rules, especially debt, off of its balance

sheet. But Enron did not follow those accounting rules.

Finally, we found something more troubling than individual instances of misconduct or a failure to follow accounting rules. We

found a systematic and pervasive attempt by Enron’s management

to misrepresent the Company’s financial condition. Enron management used these partnerships to enter into transactions that it

could not, or would not, have done with unrelated commercial entities. Many of the most significant transactions apparently were not

designed to achieve bona fide economic objectives.

As our report demonstrates, these transactions were extremely

complex. And I won’t try to describe them in detail here, but I do

think it would be useful if I could give just one example. It involves

efforts by Enron to hedge against losses on investments that Enron

had.

Enron is not just a pipeline and energy trading company. It also

had large investments in other businesses, some of which had appreciated substantially in value. These were volatile investments,

and Enron was concerned because it had recognized the gains

when these investments appreciated, and it didn’t want to recognize the losses if the investments declined. Therefore, Enron purported to enter into certain hedging transactions in order to avoid

recognizing losses from the investments. The problem was that the

hedges weren’t real. The idea of a hedge is normally to contract

with a creditworthy outside party that is prepared, for a price, to

take on the economic risk of an investment. If the value of the investment goes down, that other party will bear the loss, but that

17

is not what happened here. If you cut through the complexity of

these partnerships and transactions, here Enron was essentially

hedging with itself.

The outside parties with which Enron hedged were the so-called

Raptors. The purported outside investor in them was a Fastow

partnership. In reality, these were entities in which only Enron

had a real economic stake, and whose main assets were Enron’s

own stock. The notes of Enron’s corporate secretary, preparing for

the minutes from a meeting of the Financial Committee of the

board, a meeting that was regarding these Raptors, captures the

reality of these transactions. Those notes say, quote, ‘‘Does not

transfer economic risk but transfers P+L volatility.’’ If the value of Enron’s investments fell at the same time that the

value of Enron stock fell, the Raptors would be unable to meet

their obligations, and the hedges would fail. This is precisely what

happened in late 2000 and early 2001 when two of these Raptor

vehicles lacked the ability to pay Enron on the hedges. Even if the

hedges had not failed, though, in the sense I just described, the

Raptors still would have paying Enron with the stock that Enron

had provided in the first place; that is, Enron would simply be paying itself back.

By March 2001, it appeared that Enron would be required to take a charge against earnings of more than $500 million to reflect

the inability of the Raptors to pay. But then rather than take that

loss, Enron compounded the problem by making even more of its

own stock available to the Raptors—$800 million worth. It gave the

false impression that the Raptors had enough money to pay Enron

on the money it owed, on the money that the Raptors owed. This

transaction was apparently hidden from the board, and it certainly

was hidden from the public.

Let me say that while there are questions about who understood

what concerning these many very complex transactions, there is no

question that virtually everyone knew, everyone from the board of

directors on down, everyone understood that the company was

seeking to offset its investment losses with its own stock. That is

not the way it is supposed to work. Real earnings are supposed to

be compared to real losses. As a result of these transactions, Enron

improperly inflated its reported earnings for a 15-month period,

from the third quarter of 2000 through the third quarter of 2001.

It overstated its earnings or inflated its reported earnings by more

than $1 billion. This means that more than 70 percent of Enron’s

reported earnings for this period were not real.

Now, how could that have happened? The tragic consequences of

the related-party transactions and accounting errors were the result of failures at many levels, by many people: a flawed idea, selfenrichment by employees, inadequately designed controls, poor implementation, inattentive oversight, simple, and not-so-simple, accounting mistakes, and overreaching culture that appears to have

encouraged pushing the limits.

Whenever this many things go wrong, it is not just the act of one

or two people. There was misconduct, to be sure, by Fastow and

other senior employees of Enron, there were failures in the performance of Enron’s outside advisors, and there was a fundamental

default in leadership and management. Leadership and manageVerDate 11-MAY-2000 11:33 May 31, 2002 Jkt 010199 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 W:\DISC\77985 pfrm01 PsN: 77985
18

ment begin at the top, with the CEO, Ken Lay. In this company,

leadership and management depended as well on the chief operating officer, Jeff Skilling. And the board of directors failed in its

duty to provide leadership and oversight of the company.

In the end, this is a tragedy that could and should have been

avoided. I hope that our report is a first step. It will take from the

committee and other agencies, but I do hope that our report and

the work of this committee will help reduce the danger that this

tragedy will happen again to some other company. Thank you, Mr.

Chairman.

[The prepared statement of William C. Powers, Jr. follows:]

PREPARED STATEMENT OF WILLIAM C. POWERS, JR., CHAIRMAN OF THE SPECIAL

INVESTIGATIVE COMMITTEE OF THE BOARD OF DIRECTORS OF ENRON CORPORATION

Mr. Chairman and distinguished Members of the Committee. My name is William

Powers. I am the Dean of the University of Texas Law School. For the past three

months, I have served as Chairman of the Special Investigative Committee of the

Board of Directors of Enron Corporation. I appreciate the opportunity to come and

testify before you today.

As you know, during October of last year, questions were being raised about

Enron’s transactions with partnerships that were controlled by its Chief Financial

Officer, Andrew Fastow. In the middle of October, Enron announced that it was taking an after-tax charge of more than $500 million against its earnings, because of

transactions with one of those partnerships. Enron also announced a reduction in

shareholder equity of more than a billion dollars. At the end of October, the Enron

Board established a Special Committee to investigate these matters, and then asked

me if I would join the Board for the purpose of chairing that Committee, and conducting that investigation. With the help of counsel and professional accounting advisors, we have spent the last three months conducting that investigation.

Our Committee’s Report was filed on Saturday. It covers a lot of ground and will,

I hope, be a helpful starting point for the necessary further investigations by Congressional Committees, by the Securities and Exchange Commission, and by the Department of Justice. A copy of the Executive Summary of our Report is attached to

my Statement here.

Many questions currently part of public discussion—such as questions relating to

the employees’ retirement savings and sales of Enron securities by insiders—are beyond the scope of the charge we were given. These are matters of vital importance,

but they are not matters we addressed in our Report.

We were charged with investigating transactions between Enron and partnerships

controlled by its Chief Financial Officer, or people who worked in his department.

That is what our Report discusses. What we found was appalling.

First, we found that Fastow—and other Enron employees involved in these partnerships—enriched themselves, in the aggregate, by tens of millions of dollars they

should never have received. Fastow got at least $30 million, Michael Kopper at least

$10 million, two others $1 million each, and still two more amounts we believe were

at least in the hundreds of thousands of dollars.

Second, we found that some transactions were improperly structured. If they had

been structured correctly, Enron could have kept assets and liabilities (especially

debt) off of its balance sheet. But Enron did not follow the accounting rules.

Finally, we found something more troubling than those individual instances of

misconduct and failure to follow accounting rules. We found a systematic and pervasive attempt by Enron’s Management to misrepresent the Company’s financial condition. Enron Management used these partnerships to enter into transactions that

it could not, or would not, do with unrelated commercial entities. Many of the most

significant transactions apparently were not designed to achieve bona fide economic

objectives.

As our Report demonstrates, these transactions were extremely complex. I won’t

try to describe them in detail here. But I do think it would be useful to give just

one example. It involves efforts by Enron to ‘‘hedge’’ against losses on investments

it had made.

Enron was not just a pipeline and energy trading company. It also had large investments in other businesses, some of which had appreciated substantially in

value. These were volatile investments, and Enron was concerned because it had

19

recognized the gains when these investments appreciated, and it didn’t want to recognize the losses if the investments declined in value.

Therefore, Enron purported to enter into certain ‘‘hedging’’ transactions in order

to avoid recognizing losses from its investments. The problem was that the hedges

weren’t real. The idea of a hedge is normally to contract with a credit-worthy outside party that is prepared—for a price—to take on the economic risk of an investment. If the value of the investment goes down, that outside party will bear the loss.

That is not what happened here; here, Enron was essentially hedging with itself.

The outside parties with which Enron ‘‘hedged’’ were the so-called ‘‘Raptors.’’ The

purported outside investor in them was a Fastow partnership. In reality, these were

entities in which only Enron had a real economic stake, and whose main assets were

Enron’s own stock. The notes of Enron’s corporate secretary, from a meeting of the

Finance Committee regarding the Raptors, capture the reality: ‘‘Does not transfer

economic risk but transfers P+L volatility.’’’

If the value of Enron’s investments fell at the same time that the value of Enron

stock fell, the Raptors would be unable to meet their obligations, and the ‘‘hedges’’

would fail. This is precisely what happened in late 2000 and early 2001 when two

of these Raptor vehicles lacked the ability to pay Enron on the ‘‘hedges.’’ Even if

the hedges had not failed in the sense I just described, the Raptors would have paid

Enron with the stock that Enron had provided in the first place; Enron would simply have paid itself back.

By March 2001, it appeared that Enron would be required to take a charge

against earnings of more than $500 million to reflect the inability of the Raptors

to pay. Rather than take that loss, Enron compounded the problem by making even

more of its own stock available to the Raptors—$800 million worth. It gave the false

impression that the Raptors had enough money to pay Enron what they owed. This

transaction was apparently hidden from the Board, and was certainly hidden from

the public.

Let me say that while there are questions about who understood what concerning

many of these very complex transactions, there’s no question that virtually everyone, from the Board of Directors on down, understood that the company was seeking

to offset its investment losses with its own stock. That is not the way it is supposed

to work. Real earnings are supposed to be compared to real losses.

As a result of these transactions, Enron improperly inflated its reported earnings

for a 15-month period—from the third quarter of 2000 through the third quarter of

2001—by more than $1 billion. This means that more than 70 percent of Enron’s

reported earnings for this period were not real.

How could this have happened? The tragic consequences of the related-party

transactions and accounting errors were the result of failures at many levels and

by many people: a flawed idea, self-enrichment by employees, inadequately-designed

controls, poor implementation, inattentive oversight, simple (and not-so-simple) accounting mistakes, and overreaching in a culture that appears to have encouraged

pushing the limits.

Whenever this many things go wrong, it is not just the act of one or two people.

There was misconduct by Fastow and other senior employees of Enron. There were

failures in the performance of Enron’s outside advisors. And there was a fundamental default of leadership and management. Leadership and management begin

at the top, with the CEO, Ken Lay. In this company, leadership and management

depended as well on the Chief Operating Officer, Jeff Skilling. The Board of Directors failed in its duty to provide leadership and oversight.

In the end, this is a tragedy that could and should have been avoided. I hope that

our Report, and the work of this Committee, will help reduce the danger that it will

happen to some other company.

Mr. GREENWOOD. Thank you, Dean Powers. We appreciate your

testimony, and we know you testified just yesterday, and expect

you will be testifying for days to come.

The Chair recognizes himself for 5 minutes for purposes of inquiry. Chewbaca, JEDI Capital, Kinobi Holdings, Obi Wan Holdings, Enron executives seem to have had a fascination with Star

Wars. My question, Dean Powers, is this: Is Ken Lay the Luke

Skywalker of this of this tale or is he the Darth Vader?

Mr. POWERS. Well, he is not the Luke Skywalker. He certainly

is responsible for allowing this to happen. I think there were red

20

flags that certainly should have indicated to him that this was happening.

Mr. GREENWOOD. Well, let me go right to your testimony. One of

the things you just said was that, ‘‘Virtually everyone from the

board of directors on down understood that the company was seeking to offset its investment with its own stock. This is not the way

it is supposed to be. Real earnings are supposed to be compared to

real losses.’’ So I take it from that you mean that Ken Lay knew

that.

And if you look at the law, the law is pretty clear about what

is deceptive. It is deceptive to employ any device, scheme or artifice

to defraud, to make any untrue statement or material fact or to

admit to state a material fact necessary in order to make the statements made in the light of the circumstances under which they

were made, et cetera. So connect the dots, it seems to me, that here

was a company that in its financial statements was misleading and

that everyone knew, including Ken Lay, that it was misleading its

investors in its financial statements. So how do we get beyond the

assumption, the conclusion, that Mr. Lay is guilty, as guilty as anyone else of intentionally defrauding his investors?

Mr. POWERS. Well, it is absolutely true that Mr. Lay fully understood that they were using their own stock to offset these losses in

their other investments. And that is the problem.

Mr. GREENWOOD. Not only that they were doing that, but they

were not sharing that reality with their investors.

Mr. POWERS. Absolutely, that is correct. Well, can I just—— Mr. GREENWOOD. You interviewed Mr. Lay. About how much

time did you spend interviewing Mr. Lay?

Mr. POWERS. I think it was a couple of hours. Four hours.

Mr. GREENWOOD. Four hours? Okay. And so on this direct line

of questioning about what Mr. Lay understood and when he understood and, as Mr. Tauzin said, certainly we know in August he was

advised of this, what was Mr. Lay’s story about—how did he defend

himself from this obvious line of questioning, which is did he in

fact—was he complicit in intentionally defrauding his investors?

Now, it seems to me when you look at motive, we sort of understand some of Mr. Fastow’s motives, because there was self-dealing

involved. Mr. Fastow seems to be the Betty Crocker of cookbooks.

But Mr. Lay also had a motive, it would seem, for the investors not

to understand that the stock was overvalued, and that is because

he was a holder of millions of dollars of stock.

Mr. POWERS. Well, when we interviewed Mr. Lay, he certainly

understood that as elaborate as these schemes were, ultimately

they were using Enron stock to hedge against these investment

losses. He understood that. I can tell you what his story was: He

didn’t understand or appreciate that there was anything wrong

with that. I don’t know whether that is credible; I am saying that

was his story, that he didn’t—the story was the accountants had

signed off on it; he assumed it was an okay accounting device.

Mr. GREENWOOD. Was it credible to you? Do you think it is credible?

Mr. POWERS. It is very hard—we did present him with documents and in a sense cross examine, but we did not have the devices available to us, and that is a reason why our report is a first

21

start. It certainly is something that people would want to go into

a great deal further. It raises questions, I agree.

Mr. GREENWOOD. You repeatedly note in your report that Andersen, Enron’s outside auditor and internal consultant on these

transactions, refused to fully cooperate with your inquiry by making certain documents and persons available for your review. Can

you be more specific about what Andersen provided you with and

what they would not, both in terms of persons and documents?

Mr. POWERS. Okay. When we started the investigation, we started asking Andersen if we could see documents and interview—see

their work papers and interview their accountant. We wanted to do

that after we developed the basic understanding, but as we went

forward with the investigation, they would say, ‘‘Well, we will do

that,’’ but we never got to interview their accountant. We did see

some of their work papers, we did not see the work papers for

2001, which are crucial; we did not see those. We did see some of

the papers. We asked for copies. A few days later, Enron fired Andersen, and we were told that at that point Andersen would no

longer cooperate. By that point, we had not been able to talk and

get their explanations of these work papers. We have not been able

to talk with their accountant.

Mr. GREENWOOD. Thank you, Mr. Powers. The Chair recognizes

the gentleman from Florida, Mr. Deutsch, for purposes of inquiry.

Mr. DEUTSCH. Thank you, Mr. Chairman. One of the mandates

of your committee was to recommend discipline at Enron. What

discipline is the committee going to recommend?

Mr. POWERS. We did not recommend discipline in the end, and

the reason was we have been going non-stop getting this done. My

testimony had been requested, we wanted to get this report out,

and thought that, frankly, being exhausted at the end of it, we

didn’t want make judgments about discipline. And I think the facts

speak for themselves, and others are going to have to make those

judgments. But we did not, in the end, recommend any discipline,

but we did not mean to imply by that that there should not be discipline imposed here.

Mr. DEUTSCH. Let me follow-up on some of the comments that

the chairman was mentioning. If the company keeps billions of dollars of potential liability off of its balance sheets so that its shareholders and investors don’t know about it, as Enron did, isn’t that

fraud?

Mr. POWERS. Well, there are legitimate accounting devices that—

I am not an expert in the area of securities fraud—but that companies use to keep transactions and debt, using structured financing,

off their balance sheets. And if they don’t use the proper structures

and don’t reveal the proper structures, then there are serious questions about fraud.

Mr. DEUTSCH. So, again, I mean what you are really saying is

that as good the—you are really not an expert in securities fraud.

Mr. POWERS. That is correct, or enforcement of what penalties

should be imposed here.

Mr. DEUTSCH. Let me go directly to the Raptor transactions. You

stated, and I am quoting, ‘‘Virtually everyone from the board of directors on down understood the company was seeking to offset its

investment loss with its own stock. That is not the way it is supVerDate 11-MAY-2000 11:33 May 31, 2002 Jkt 010199 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 W:\DISC\77985 pfrm01 PsN: 77985
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posed to work,’’ closed quote to your statement. If everyone understood that except the shareholders, and it is wrong, isn’t it fraud

on the shareholder?

Mr. POWERS. I don’t feel I am in a position to, under the securities law, answer that question. The shareholders—there was not

transparent disclosure of what was going on in these transactions

with the shareholders, absolutely.

Mr. DEUTSCH. Let me just stop. By any definition of common

usage would you say it is fraud? Putting away your attorney’s hat

and a securities lawyer, which you are not, I mean I think that is

in a sense what our job is, because that is clearly our intention in

the statute, and fraud is fraud.

Mr. POWERS. Right.

Mr. DEUTSCH. I mean if people don’t understand it—your quote

of not understanding it except for the shareholders, the whole purpose of the system is the shareholders are supposed to know what

is going on.

Mr. POWERS. Absolutely. My only hesitation is fraud normally requires a certain state of mind, and I am not in a position to ascertain the state of mind of every one of these individuals. If there is

a state of mind—— Mr. DEUTSCH. And it doesn’t necessarily require state of mind,

because if you have an instance inferring to that, then you can

infer the state of mind. You said that when an additional $800 million of stock was added to the Raptor accounts by Enron so it

wouldn’t have to show a loss, it was, quote, ‘‘apparently hidden

from the board,’’ close quote. What do you mean? Did you interview

all the board members to determine what they knew and what they

didn’t know?

Mr. POWERS. Yes. We interviewed—formally interviewed nine

board members. That was a restructuring deal that—much else

was known by the board, but that was a restructuring deal in early

2001 that there was agreement, as the evidence showed, that was

not brought before the board.

Mr. DEUTSCH. And can the company issue $800 million in stock

without the approval of the board?

Mr. POWERS. They couldn’t issue the stock. This was stock that

was already owned by the company because of contracts it had

with outside parties. And that avoided the necessity to actually

issue new stock. They transferred stock the company owned to

these structures, and I am sure that is why already-owned stock

was used.

Mr. DEUTSCH. So, again, I mean clearly an intention to keep that

information from the board itself?

Mr. POWERS. Absolutely. I have no doubt that that was intentional by the people that restructured—Fastow and others. It was

intentionally keeping that from the board, and therefore keeping it

from the public, absolutely.

Mr. DEUTSCH. Let me ask one question, and, again, I didn’t see

it in the report, but it just is a disturbing issue, and, again, you

mentioned the limitations specifically on the 401(k) issue. But as

someone who has spent 3 months—the last 3 months looking at

Enron, one of the real disturbing issues, not just the lock-out provision on Enron stock but the switching of the managers of the

23

401(k)s to basically have a 60-day additional lock-out, which, again,

from an outside-looking-in perspective, I mean there is different

levels of evil that have occurred in this process. I mean that is

about at the highest level that I can think of. I mean have you

looked at that decisionmaking process at all or you were just not

able to look at that?

Mr. POWERS. We did not look at that. We did a great deal. We

reviewed, I think, over 400,000 pages of documents, interviewed 60

people, and we did not look into the 401(k)s and the lockout.

Mr. GREENWOOD. The time of the gentleman has expired. The

Chair recognizes the chairman, Mr. Tauzin.

Chairman TAUZIN. Thank you, Mr. Chairman. Dean Powers,

when I was attending law school at LSU, it was apparent to me

that Latin was going to be important to me, and in preparation for

that, I took a non-credit Latin course. And the reason I did was because in the law we use Latin, because it is so precise. Terms like

res judicata and res ipsa loquitur have special meanings in the law

and jurisprudence. But I want to help get away from that, and I

hope you will help me, as dean of law school, to put this in lay

terms so we can understand it in a layman’s sense.

Basically, what you have presented to us is a report that details

how these partnerships and the deals, some two dozen deals structured by either Chewco or LJM1 and 2—LJM1 and 2, by the way,

I think were the initials of the wife and children of Mr. Andrew

Fastow.

Mr. POWERS. That is correct.

Chairman TAUZIN. Structured by him. These deals structured by

this partnership failed the basic test of structural compliance and

operational compliance with current accounting principles; is that

right?

Mr. POWERS. That is right, and their whole concept was flawed.

Chairman TAUZIN. Now, just for a second, let us think about

what would be a legitimate function of a special-purpose entity, an

SPE, or a partnership like LJM. Legitimately, Enron had some

problems, it had some assets like Rhythms, which they put $10

million in and all of a sudden it was worth $500 million because

of inflation and the value of the stock market and the run-up of

the stocks. Like many corporations holding a risky stock like that,

they probably had a need to put that risk off, to share that risk

with someone else if the stock fell dramatically so it didn’t hurt

their own stock. That is a legitimate function that corporations use

special-purpose entities and they use partnerships in some cases to

do. Isn’t that premised upon the notion, however, that there is a

real independent sharing of the risk, that the company really gives

the risk over to someone else to either take, in whole or in part,

in order to hedge potential loss to its own stockholders if a company like Rhythms suddenly lost its value, which it did, which it

eventually did? Isn’t that, in layman’s terms, what occurs in these

partnerships, in these SPEs?

Mr. POWERS. I can’t add anything that would clarify it more than

your statement; that is absolutely correct.

Chairman TAUZIN. Now, what you found and we have been finding is that, No. 1, in the case of Chewco, it was structured wrong.

They didn’t have enough outside investment to meet the standards

24

of independence. And you also found some clear questions. We have

found many, many clear questions of how independent these operations were. On Thursday, we will detail, for example, how these

sweetheart deals were being struck between the partnerships and

the corporation, how managers of the partnerships were actually

threatening people at Enron with firing if they aggressively negotiated for Enron. They threatened others with loss of their bonuses.

We had a weird situation where the bonus came from the partnership, and the salary came from Enron. Incredible conflicts of interest where employees were invited in to share in the profits of some

of these outside ventures and profits guaranteed at 2,500 percent

in one case and where the risk to Enron and its shareholders was

never really properly transferred. In fact, Enron continued to guarantee the losses to the partnerships. The only person protected was

the manager of the partnerships. It was guaranteed they could

take their money out, plus profit.

So what we have at Enron, as I see from your report, and as we

are beginning to see, is a failure of the independence of these organizations, or these deals, or these SPEs and the failure to properly

shift the risk away from the corporation when a hedge fund was

created or a put was attempted, if you will, on stock that was kind

of risky, that they were concerned about, in a scheme that guaranteed money to the managers of the partnership but nevertheless

left the stockholders of Enron completely at risk, all the while creating the impression that Enron was making money and was free

of debt when the debt was still there.

Now, if I were a corporation in America using one of these vehicles legitimately, then my company would be protected from that

loss when it occurred; I would have shared that risk with the partnership, or the special-purpose entity, and my shareholders would

have been the better off for it. But in the case of these entities that

were created and these deals that were cut, where the risk did not

transfer, can you give me any purpose for doing that, other than

to hide debt from investors, other than possibly to enrich the managers of the business, the account that was doing it, or to create

a false impression of income to the corporation? Can you give me

any other reason to do it?

Mr. POWERS. I cannot, and I would just add that the statement

that you just made, Congressman Tauzin, is exactly correct.

Chairman TAUZIN. So, Mr. Chairman, if I can, and I will conclude, what you are concluding is what I have concluded, that if

your facts are correct, and if our investigation continues to bolster

the evidence of the situation as I have just described it, there was

no legitimate purpose in the construction of some of these deals, except the defrauding of investors who were putting their money into

Enron, and in some cases, the defrauding of investors who were

putting their money into these partnerships, because we have also

found, by the way, that some banks were told they would get special bond deals if they would put the money up to fund the partnership.

And I want to end it maybe with this and see if you agree with

me. What we really have here, as I said earlier, is a case of inside

theft. It is a deal where whoever managed the deal was using the

credit of the corporation, which remained liable for the deal, to borVerDate 11-MAY-2000 11:33 May 31, 2002 Jkt 010199 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 W:\DISC\77985 pfrm01 PsN: 77985
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row money from other investors to the partnership so that they

could take it and go home with it, while the corporation remained

fully at risk, not only for the new loans but for all the risk of the

stock, such as Rhythms, which might decline in value, and eventually collapse the corporation.

Mr. POWERS. These partnerships were definitely using Enron’s

assets and credit to then create partnerships that enriched themselves.

Chairman TAUZIN. And they were benefited two ways. One way,

they got money out of it. Enron was borrowing money, in effect,

that they took home. Enron had debt, but it was called income, miraculously, under these plans. And, second, because they kept the

investing public and the employees of Enron who had their 401(k)

plans tied to the Enron stock, because they kept them in the dark

as to what was going on, Enron stock kept inflating in value, because we all thought it had a billion dollars of income it didn’t

have, and it had a lot less debt than it had.

So they benefited twice. Their stock values are going up. They

can then sell, even though the employees couldn’t sell it. And they

were sucking money out of the partnerships that Enron was putting up the credit for. Now, how can anybody look at all that and

conclude that the FBI doesn’t need to be over there with the search

warrant and a potential set of handcuffs is beyond me. If there isn’t

consumer fraud here, I don’t know where we are going to find it.

Thank you very much.

Mr. GREENWOOD. The Chair thanks the chairman and recognizes

the ranking member of the full committee, Mr. Dingell, for purposes of inquiry.

Mr. DINGELL. Mr. Chairman, Mr. Powers, I begin by complimenting you on a fine report. I have limited time so I have got to

ask you questions in a way that you can respond pretty much with

a yes or no, and I say that with apologies to you because of the

respect I have for you.

Now, I would like to go to Vincent & Elkins. Isn’t it true that

they helped to structure many of the deals that were the subject

of your investigation?

Mr. POWERS. They did work on the deals. As I point out in the

report, I disqualify myself from making judgments about those, but

they did work on these deals.

Mr. DINGELL. Now, Vincent & Elkins concluded that they facts

in its preliminary investigation revealed it did not warrant, and I

now quote, ‘‘further widespread investigation by an independent

counsel or auditors.’’ Is that right?

Mr. POWERS. I believe they did say that in their conclusion.

Mr. DINGELL. Now, if you were in Mr. Lay’s position with Mr.

Watkins’ letter in your hand, would you have asked the law firm

that represented your company in many of these transactions to review these same transactions?

Mr. POWERS. If I were in Mr. Lay’s position, I would have asked

for a much more extensive investigation.

Mr. DINGELL. And by somebody who was in fact independent as

opposed to somebody who had been involved in the structuring of

the deal; is that not so?

26

Mr. POWERS. If I had been Mr. Lay, I certainly would have considered that.

Mr. DINGELL. That would have been the proper way. Now, Mr.

Jordan Mintz, then general counsel of Enron Global Finance, was

so concerned about the LJM deals that he sought outside counsel

to investigate the structure and the propriety of these transactions.

Were you aware of that fact?

Mr. POWERS. Yes.

Mr. DINGELL. Did you know that Mr. Mintz went out of his way

to hire a firm other than V&E because of the conflicts inherent in

the firm’s relationship with Enron?

Mr. POWERS. Yes. Mr. Mintz did use another firm.

Mr. DINGELL. Do you believe that V&E should have had the professional judgment to recuse itself from the investigation because

of its role in structuring many of these controversial partnerships?

Mr. POWERS. Well, I disqualified myself from evaluating those,

and I don’t think I have enough information to make a judgment

on that.

Mr. DINGELL. So it would not seem improper that they should

have done the same thing.

Mr. POWERS. I would have to focus on those facts more than I

have.

Mr. DINGELL. All right. Now, isn’t it true that most of Ms. Watkins’ concerns related to accounting issues?

Mr. POWERS. Yes.

Mr. DINGELL. Isn’t it also true that V&E agreed with Enron

management that it wouldn’t examine accounting issues as a part

of its investigation into the Watkins memo?

Mr. POWERS. I would have to go back and look at the letter, because, again, I haven’t focused on that.

Mr. DINGELL. Factually, it would appear to be correct, however.

Mr. POWERS. I don’t have any reason to disagree.

Mr. DINGELL. Does this instill in you great confidence in the

V&E investigation?

Mr. POWERS. Again, I disqualified myself from making judgments

on that, and so I am not informed enough about it.

Mr. DINGELL. Would I be unfair in assuming that they should

have followed your wisdom in these matters?

Mr. POWERS. They weren’t asked to do the kind of investigation

that I was asked to do.

Mr. DINGELL. Now, how much V&E bill Enron for the investigation?

Mr. POWERS. I don’t know.

Mr. DINGELL. Mr. Baxter committed suicide, as you well know,

several weeks ago—a very tragic event. Did V&E ever interview

Mr. Baxter as a part of its investigation into Ms. Watkins’ allegations?

Mr. POWERS. I don’t know whether they did or not.

Mr. DINGELL. Did your committee interview Mr. Baxter?

Mr. POWERS. Yes, we did.

Mr. DINGELL. Ms. Watkins alleged—I wonder why you would and

they would not interview Mr. Baxter.

Mr. POWERS. Well, we conducted a very thorough 3-month investigation.

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Mr. DINGELL. Are you telling me they did not?

Mr. POWERS. They didn’t conduct a 3-month investigation, I don’t

think.

Mr. DINGELL. Now, Ms. Watkins alleged numerous accounting

failures, but Enron and Vincent & Elkins agreed not to look at

these transactions. How can we call this a complete report?

Mr. POWERS. Our report or——

Mr. DINGELL. No, the Vincent & Elkins report, which did not

look at accounting failures and accounting matters?

Mr. POWERS. Again, I did not myself pursue what they looked

into and what they didn’t. Other people on the committee did.

Mr. DINGELL. Do you have any reason to believe that anyone at

Enron took Ms. Watkins’ allegations seriously?

Mr. POWERS. Well, they responded to some extent. The management at Enron didn’t take it seriously enough.

Mr. DINGELL. It is also clear that people at Enron were told not

to worry because Vincent & Elkins was reviewing them; isn’t that

right?

Mr. POWERS. I don’t remember, but I have no reason to disagree

with that.

Mr. DINGELL. Can you think of another reason why they might

not have taken them seriously?

Mr. POWERS. I am sorry, why the management didn’t take

the——

Mr. DINGELL. Seriously Ms. Watkins’ allegations.

Mr. POWERS. Well, they were very troubling allegations.

Mr. DINGELL. They were.

Mr. POWERS. Yes.

Mr. DINGELL. But were they taken seriously? Did you find any

evidence in your inquiry that these allegations were taken seriously by Enron?

Mr. POWERS. I think they were not taken seriously enough, certainly.

Mr. DINGELL. Did you find any evidence that Vincent & Elkins

went into these allegations?

Mr. POWERS. Again, I did not, myself, personally. The report

deals with that. I disqualified myself from that, because Vincent &

Elkins has done a tremendous amount of pro bono work for the law

school and has been a supporter of the law school, and I thought

it would be better for the report if I didn’t participate in that.

Mr. DINGELL. Well, I applaud that, but I am just curious of did

they—well, never mind. Mr. Chairman, I thank you for your kindness. Mr. Powers, I have asked you some rather not so nice questions, but you continue to enjoy my respect.

Mr. POWERS. Well, thank you very much.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentleman from North Carolina, Mr. Burr.

Mr. BURR. Thank you, Mr. Chairman. Dean Powers, you noted

in your report that there were individuals that you did not have

the opportunity to have Q&A with. Was that—that was requested

of those individuals, they just denied to participate; is that correct?

Mr. POWERS. Yes, especially Fastow and other people in these

partnerships. We tried to interview them and they declined.

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Mr. BURR. You also referred to a limited amount of Andersen

documents. Did you make requests for documents from Andersen

that they denied you access to those documents?

Mr. POWERS. We asked them for all of their work papers over

this period of time.

Mr. BURR. And did they produce all their work papers?

Mr. POWERS. They did not. They did not produce work papers

over the period of 2000. We negotiated with them, it dragged on,

and we did not get them.

Mr. GREENWOOD. Will the gentleman yield just for 5 seconds. To

put a point on Mr. Burr’s question on interviewing Mr. Fastow, I

believe, according to your report, you had a brief interview with

Mr. Fastow.

Mr. POWERS. Yes, that is correct.

Mr. GREENWOOD. Clarify that.

Mr. POWERS. At some point, Mr. Fastow’s lawyer said that he

would be interviewed, and I was not personally there, but I think

it was an extremely short interview, because he simply wouldn’t cooperate.

Mr. GREENWOOD. How short?

Mr. POWERS. Well, I think the—it took an hour, but I don’t think

there were—very little information was forthcoming. Can I correct,

the work papers that we didn’t get were from 2001.

Mr. BURR. And for the papers that you didn’t get, did Andersen

give you an explanation as to why they couldn’t produce them or

wouldn’t produce them?

Mr. POWERS. It dragged out, and then finally we—the company

discharged them, and they called us back and said, ‘‘We won’t cooperate any further.’’

Mr. BURR. So Andersen refused to cooperate.

Mr. POWERS. From that point on. That was in January.

Mr. BURR. Dean, your committee, in 3 months, discovered a tremendous amount. They discovered some things that it took Andersen 4 years to correct or amend in financial statements. Based on

the information you have, was Andersen misled by Enron management?

Mr. POWERS. I am not in a position to say that they were never

misled by Enron management on any details. They certainly had

a great deal of information about the structure of these transactions.

Mr. BURR. Were they in collusion with Enron management?

Mr. POWERS. I don’t think I have the information from our investigation to know that. They certainly were working contemporaneously on the accounting of these structures.

Mr. BURR. Were they competent to handle the Enron audit?

Mr. POWERS. I think Arthur Andersen is a competent accounting

firm.

Mr. BURR. Let me ask you, Dean, going back to Mr. Dingell’s

questions, relative to V&E and specifically their investigation, and

I understand where you are on it, but there is a news report that

says that individuals from Enron limited greatly what they asked

V&E to look at, that they didn’t ask them to look at accounting

structures; as a matter of fact, the told them not to. Is that your

29

understanding of the instructions that were given by Enron management to V&E on that investigation?

Mr. POWERS. I think that is in our report, yes.

Mr. BURR. And you also referred to others within the committee

that looked at V&E, not you.

Mr. POWERS. Yes.

Mr. BURR. Those others were on your special committee?

Mr. POWERS. Yes, that is correct, the other two members and

counsel.

Mr. BURR. And what they found, relative to V&E’s participation,

would be found in your report?

Mr. POWERS. Oh, yes, absolutely.

Mr. BURR. In its entirety.

Mr. POWERS. And the committee investigated that and interviewed people. I just recused myself from it.

Mr. DINGELL. Mr. Chairman, would the gentleman yield, because

he has raised a question, and I think it is valuable?

Mr. GREENWOOD. Be happy to.

Mr. DINGELL. Here is reading from Vincent & Elkins’ document

entitled, ‘‘Preliminary Investigation of Allegations of an Anonymous Employee.’’ It says, as follows, in the second page: ‘‘In preliminary discussions with you, it was decided that our initial approach would not involve second-guessing the accounting advice

and treatment afforded by AA and that there would be no detailed

analysis of each and every transaction and that there would be no

full-scale, discovery-style inquiry.’’ The letter is directed to Mr.

James B. Derrick, Jr., and I believe it would useful, Mr. Chairman,

it goes in the record at a suitable place. And I thank the gentleman

for his patience.

Mr. GREENWOOD. Without objection.

[The information referred to follows:]

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Mr. BURR. Reclaiming my time, Dean, it is my understanding

that under Enron’s code of conduct Mr. Fastow would have to have

received the blessings of Mr. Lay, who was then CEO and chairman of the board, to participate in the partnerships. Certainly,

their accounts might have been out of your report, but Mr. Lay said

he was not asked and did not grant his blessings. Is that your understanding?

Mr. POWERS. My understanding is that he would have to get approval by the Office of the Chair.

Mr. BURR. And—— Mr. POWERS. And that included—— Mr. BURR. [continuing] Mr. Lay was the Chair.

Mr. POWERS. He was the Chair, but there were three people in

what was called the Office of the Chair.

Mr. BURR. Did you find any of those three that granted permission to Mr. Fastow?

Mr. POWERS. Even though the structure was to go to the Office

of the Chair, they actually took that to the board on LJM1 and

LJM2, and the board made the findings necessary to permit Mr.

Fastow to participate in those partnerships.

Mr. BURR. So the board of directors actually signed off on it.

Mr. POWERS. Yes.

Mr. BURR. And did they also sign off on Mr. Kopper’s involvement in partnerships?

Mr. POWERS. No.

Mr. BURR. Was he not under the same code of conduct at Enron,

that he would have had to have received the chairman, CEO or

board’s permission to participate in the partnerships.

Mr. POWERS. Yes, but he did that surreptitiously, I believe.

Mr. BURR. So he got nobody’s approval—— Mr. POWERS. Correct.

Mr. BURR. [continuing] to participate in the partnerships.

Mr. POWERS. That is correct.

Mr. BURR. How much did Andersen play in the actual structure

of the partnerships?

Mr. POWERS. We don’t know how much they actually—whether

they designed them. They were contemporaneously to the development; that is, before, for example, Raptor was put in place. They

were doing accounting work—it is hard for us to know exactly what

they were doing. We have their bills, but whether it was actually

designing, doing the accounting, approval work, but they were

doing it contemporaneously to the design of these structures, not

simply after they had been year-end and being audited.

Mr. GREENWOOD. The time of the gentleman has expired.

Mr. BURR. I would ask unanimous consent for 1 additional

minute.

Mr. GREENWOOD. Without objection.

Mr. BURR. I thank the Chair. Let me clear up one thing. Now,

Mr. Kopper participated in partnerships, not with the approval of

the CEO, the chairman or the board, but it is my understanding

that Mr. Fastow and Mr. Skilling were aware of his participation

in these partnerships. Is that also your understanding?

Mr. POWERS. Skilling told us that he knew about Chewco and

Kopper’s involvement in Chewco.

40

Mr. BURR. So he would have to have known—— Mr. POWERS. And Fastow knew, yes.

Mr. BURR. So both of them would have to have know of Mr.

Kopper’s involvement.

Mr. POWERS. Yes.

Mr. GREENWOOD. And signed off on it?

Mr. POWERS. Not in anything that is—he may have verbally said, ‘‘Go ahead and do it.’’ He didn’t sign off on it in a way that the approval is supposed to be obtained.

Mr. GREENWOOD. In a document.

Mr. POWERS. Yes.

Mr. BURR. On 10-6, Enron took a $544 million after-tax charge. They also, at the same time, reduced shareholder equity by $1.2

billion. Less than a month later, Enron restated its financial statement for 1997 through 2001 because of, and I quote, ‘‘accounting

errors’’ relating to the transactions with these different partnerships. Who made the accounting errors, Enron, the partnership,

Andersen or everybody?

Mr. POWERS. Enron, and to the extent that Andersen was doing

the audits, Andersen and Enron.

Mr. GREENWOOD. The time of the gentleman has expired. The

Chair recognizes the gentleman from Michigan, Mr. Stupak.

Mr. STUPAK. Thank you, Mr. Chairman. Thank you, Mr. Chairman. Mr. Powers, if your committee isn’t going to make any recommendations of discipline to the Board of Directors of Enron, then

who is going to make disciplinary or who is going to put forth disciplinary charges against these people?

Mr. POWERS. Well, I think whether the government brings

charges, the appropriate government officials are going to have to

make, I don’t think—one, frankly, we ran out of time, but I think

many of these questions as to what Enron would do to these people

will become moot. If they don’t, somebody is going to have to make

that determination. We did not.

Mr. STUPAK. Whether it does or does not, I guess, sitting from

where we are sitting, it sort of seems like we have seen all the

egregious actions. Someone has a responsibility here to hold people

accountable, at least from an employment setting, but yet we are

looking the other way and let someone else deal with it, and that

seems to be the attitude with Enron——

Mr. POWERS. Yes.

Mr. STUPAK. [continuing] we will just look the other way and let

these things go.

Mr. POWERS. Well, I don’t think—I doubt if Enron is going to be

able to look the other way on these. Enron came out with a press

release, I believe, on Saturday, it might have been Sunday, that appointed a committee to restructure—to look into restructuring the

board, and I would anticipate that process will go forward with the

cooperation of the Creditors Committee.

Mr. STUPAK. Was the—the charge you received in your committee to do this investigation, was that one of your charges, to

make recommendations as to any action that should be taken?

Mr. POWERS. Yes, it was. I believe the understanding would be

that it would be an ongoing company when we finished our investigation, and that turned out not to be true.

41

Mr. STUPAK. Well, will your investigation continue now and look

at any of this possible disciplinary action, at least from an employment setting?

Mr. POWERS. We haven’t made that determination. I will take

the opportunity to say being the dean of the University of Texas

Law School is a demanding, full-time job, and my fervent hope is

I can return to that task.

Mr. STUPAK. But even—and I am sure you will return and do an

incredible job there, but will you remain on the board then at

Enron?

Mr. POWERS. I anticipate that I will not.

Mr. STUPAK. Okay. Well, I guess, you know——

Mr. POWERS. I would like to—I need to fulfill my obligations to

the SEC, and I will do that. But otherwise I anticipate that I will

not.

Mr. STUPAK. Okay. Well, we just don’t want—you know, I guess

I said in my opening statement, there are a lot of these people who

are responsible for this whole debacle who are still sitting there—

still drawing salaries, still sitting on boards, still sitting in key senior management positions. And I would think if we are ever going

to clean this thing up and come out of bankruptcy as a credible

company, the board and, as I said in my opening, maybe senior

management should be replaced. I just thought it was odd that

your committee had an opportunity to at least make some recommendations like that, and once again it was sort of left at the

wayside.

Mr. POWERS. But by not doing that, we did not in any way mean

to indicate that what you are suggesting is not the appropriate outcome.

Mr. STUPAK. So other than the SEC, who else would take disciplinary action or action against these individuals?

Mr. POWERS. The Department of Justice I think will be looking

into these.

Mr. STUPAK. Okay. You indicated to Mr. Dingell’s question that

in fact you did talk to Cliff Baxter.

Mr. POWERS. I didn’t personally, but the committee did.

Mr. STUPAK. Your committee did. And he was the vice president

in Mr. Lay’s office. You said there were three people in there?

Mr. POWERS. He was, for a time, a vice chairman and part of the

Office of the Chair.

Mr. STUPAK. Okay. And, actually, in the Watkins memo, I believe

she said that you should talk to Mr. Baxter, especially on the LJM

and Raptor transactions.

Mr. POWERS. Yes, that is correct.

Mr. STUPAK. So what did Mr. Baxter say then about—did you

ask him about these two transactions or your committee ask him

about these two transactions in particular?

Mr. POWERS. We interviewed him, and he was troubled by these

transactions and expressed that in his interview as well.

Mr. STUPAK. How long did this interview take place? You said

the one with Mr. Fastow was an hour.

Mr. POWERS. People think a couple of hours. I am not sure the

person who interviewed Mr. Baxter.

42

Mr. STUPAK. Would these interviews be recorded or would there

be notes of these interviews available?

Mr. POWERS. Yes.

Mr. STUPAK. Would you make them available to the committee?

Mr. POWERS. I certainly would. I would support that. Much of

this is the property of the company, and I am not in a position to

authorize releasing it. I personally, and the committee would certainly support releasing those; we want to cooperate in every way

we can and provide information to this committee.

Mr. STUPAK. It may be something that we have to talk to the

chairman later, if need be. To cover everyone’s grounds here, we

may have to do a subpoena or something like that. It just looked

like he was a critical part in the Watkins memo, and unfortunately

we will never have a chance to talk with him. So if there is some

interview there that we can review that may give us more leads,

it would probably be prudent——

Mr. POWERS. From my point of view, I am happy to do what I

can to bring that about.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentleman from Kentucky, Mr. Whitfield?

Mr. WHITFIELD. Dean, from your discussion with those people

who did interview Mr. Baxter, was there anything particular that

stood out with the committee as to your interview with him? Was

there any——

Mr. POWERS. One would not have looked through all of the interviews and thought this is somebody who particularly would be in

danger.

Mr. WHITFIELD. Now, what are your areas of expertise in the

law?

Mr. POWERS. I teach torts and products liability, I teach some

legal philosophy, and then I have also taught contracts and some

other subjects.

Mr. WHITFIELD. I see.

Mr. POWERS. Insurance law.

Mr. WHITFIELD. In your report, you talk about the two characteristics of SPEs: One, there must be 3 percent equity by an independent group, and, two, that there not be any control by Enron.

And there were a number of those transactions that obviously did

not meet that criteria, which meant that the financial statements

should be consolidated. From your information or from your knowledge, is that a violation of any law?

Mr. POWERS. I don’t know. Whether it is just a violation of accounting principles or law—if it is misrepresented on the financials, that might pick up the securities reporting laws, but just the

mere accounting violations, I don’t know the answer to that question.

Mr. WHITFIELD. So you are not aware of that?.

Mr. POWERS. I am not, correct.

Mr. WHITFIELD. Now, Vincent & Elkins is no longer legal counsel

for Enron; is that correct?

Mr. POWERS. I don’t know the answer to that.

Mr. WHITFIELD. I thought that you had indicated to me that they

had been dismissed by Enron.

43

Mr. POWERS. No, Andersen. I do know that Andersen was dismissed by Enron, because that was the reason they gave us for not

cooperating further.

Mr. WHITFIELD. What was Mr. Fastow’s position with Enron?

Mr. POWERS. He was the chief financial officer.

Mr. WHITFIELD. Do you happen to know what his salary was?

Mr. POWERS. I don’t know myself. It was very substantial, but I

don’t have the figure in my head right now.

Mr. WHITFIELD. But from these independent transactions that he

was involved in, you said that he received at least $30 million from

those.

Mr. POWERS. That is what the evidence indicates to us, yes.

Mr. WHITFIELD. And when he realized that he was not going to

be able to manage Chewco, he did bring in Mr. Kopper; is that correct?

Mr. POWERS. Yes.

Mr. WHITFIELD. And Mr. Kopper did report directly to Mr.

Fastow; is that correct, at Enron?

Mr. POWERS. Yes, at Enron, that is correct.

Mr. WHITFIELD. And then once Mr. Kopper took his management

position in the SPE, at some point Enron entered into negotiations

to purchase back the interest of Chewco; is that correct?

Mr. POWERS. Yes, that is correct.

Mr. WHITFIELD. And the gentleman that was negotiating for

Enron on behalf of Enron’s interest, did he also report to Fastow

at Enron?

Mr. POWERS. It was Fastow himself who negotiated that, I believe.

Mr. WHITFIELD. Oh, Fastow himself negotiated with Kopper?

Mr. POWERS. Yes.

Mr. WHITFIELD. But wasn’t there one incident in another transaction where an employee of Enron was negotiating with Kopper

and Mr. Fastow intervened?

Mr. POWERS. Yes.

Mr. WHITFIELD. And that person reported to Mr. Fastow, correct?

Mr. POWERS. I believe that is correct, yes.

Mr. WHITFIELD. And Mr. Fastow basically ordered him or told

him to accept the terms as Mr. Kopper offered it; is that correct?

Mr. POWERS. Right, correct.

Mr. WHITFIELD. Do you know the name of that employee?

[Pause.]

Mr. POWERS. Thank you for your indulgence, Congressman.

There is a lot of detail here, and it is hard to keep it all straight,

and I want to be accurate. In one of them, it was Bill Brown.

Mr. WHITFIELD. Bill Brown?

Mr. POWERS. Yes. In the other, we would want to go back and

check the records, if we have that.

Mr. WHITFIELD. But Bill Brown did report to Fastow at Enron.

Mr. POWERS. Yes.

Mr. WHITFIELD. Did Mr. Fastow’s wife work at Enron?

Mr. POWERS. Yes, she did.

Mr. WHITFIELD. Was she in the same general area of the company that he was in or do you know?

44

Mr. POWERS. I am not sure. She was in the finance area, generally.

Mr. WHITFIELD. Okay. So she was in the finance area with Mr.

Fastow?

Mr. POWERS. Yes.

Mr. WHITFIELD. And—I see my time has expired here anyway,

so——

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentlelady from Colorado, Ms. DeGette.

Ms. DEGETTE. Thank you, Mr. Chairman. Mr. Powers, it looks to

me from Martindale Hubble that your specialty is really products

liability.

Mr. POWERS. Yes.

Ms. DEGETTE. That is your academic specialty, right?

Mr. POWERS. That is one of them.

Ms. DEGETTE. Okay. Certainly not securities issues.

Mr. POWERS. Absolutely.

Ms. DEGETTE. And Wilmer, Cutler & Pickering was your legal

counsel and Deloitte and Touche was your accounting firm.

Mr. POWERS. Yes, that is correct.

Ms. DEGETTE. Are these three gentlemen behind you with one or

the other of those firms?

Mr. POWERS. They are from Wilmer, Cutler & Pickering.

Ms. DEGETTE. I know you have been getting advice from them

today, and I am wondering if you can identify for the record who

they are?

Mr. POWERS. Yes. Bill McLucas, Chuck Davidow and Joe Brenner.

Ms. DEGETTE. Thank you very much.

Mr. POWERS. And I have just been trying to get factual information from them.

Ms. DEGETTE. No, you are doing great. You are doing a lot better

than I could do in your position, certainly.

Mr. POWERS. Thank you.

Ms. DEGETTE. I want to follow up on a couple of questions that

Chairman Tauzin asked you about Rhythms. In your report, you

noted that the Rhythms transaction was the first business dealing

that Enron had with the LJM partnership, and that it is significant

because, No. 1, it was the first time Enron transferred its own

stock to an SPE and used the SPE to hedge an Enron investment.

No. 2, it was the first and perhaps most dramatic example of how

the purportedly arms-length negotiations between Enron and the

LJM partnerships resulted in economic terms skewed toward LJM

and enriched Fastow and others. And, third, because in Rhythms

the investors included Enron employees who were secretly offered

financial interests by Fastow, right?

Mr. POWERS. Yes, that is correct.

Ms. DEGETTE. Okay. I want to walk through this a minute, because I thought the chairman got us to a good point, but I think

we need to talk about why this was inappropriate. The first thing

that happened was in March 1998, Enron invested $10 million in

Rhythms, which was a privately held company, correct?

Mr. POWERS. Yes, that is correct.

45

Ms. DEGETTE. And then on April 7, 1999, Rhythms went public

at $21 a share, and then it spiked up to $69 that day.

Mr. POWERS. Yes.

Ms. DEGETTE. Right?

Mr. POWERS. Yes.

Ms. DEGETTE. The second thing that happened was by May

1999, Enron’s investment in Rhythms was worth about $300 million, but Enron was prohibited from selling its shares by the end

of 1999, right?

Mr. POWERS. Yes, that is correct.

Ms. DEGETTE. And so then what happened was Skilling was

afraid that because Rhythms was so volatile he wanted to hedge

the position to capture the value already achieved and to protect

against further volatility, right?

Mr. POWERS. Yes, that is correct.

Ms. DEGETTE. And, in fact, I can tell you Rhythms was a very

volatile company, because it just went out of business last year.

Mr. POWERS. Yes.

Ms. DEGETTE. So it was very volatile. All of those would be generally accepted business practices.

Mr. POWERS. Absolutely. There is nothing wrong with that if the

hedges were proper.

Ms. DEGETTE. Right, there is nothing wrong with that. But here

is where the problem came in and here is where the beginning of

the precedent for the later partnerships started. Enron wanted to

take advantage of the increase in value in Enron stock, but it

can’t—under general accounting principles, it can’t recognize an increase in its own value of its stock as income, right?

Mr. POWERS. Yes, that is absolutely correct.

Ms. DEGETTE. So what it wanted to do was look at this as a

trapped value, right?

Mr. POWERS. That is what they wanted to do.

Ms. DEGETTE. So then what happened is Fastow and others developed a plan to hedge the Rhythms investment by taking advantage of the value in Enron shares covered by the forward contracts,

and that is when they created the limited partnership, SPE, right?

Mr. POWERS. Yes, that is correct.

Ms. DEGETTE. And it was capitalized with the appreciated Enron

stock, right?

Mr. POWERS. Yes.

Ms. DEGETTE. And that is where the hedging transaction created

the problem, and that is where the problem was, right?

Mr. POWERS. Absolutely.

Ms. DEGETTE. And that is against general accepted accounting

principles, as far as we know, right?

Mr. POWERS. Yes. You have captured it exactly.

Ms. DEGETTE. And SEC law too, as far as we know.

Mr. POWERS. I would have to look at SEC law, but it certainly

ought to be looked into.

Ms. DEGETTE. Right. Okay. And this was kind of the model then

for what happened afterwards.

Mr. POWERS. Yes.

46

Ms. DEGETTE. Okay. Let me talk to you for a few minutes about

Rick Causey. He is Enron’s chief accounting officer, was and still

is today, right?

Mr. POWERS. I have heard newspaper reports that he—I heard

reports when I presented this document to the board on Saturday

that he had resigned the week before.

Ms. DEGETTE. Okay. But he was up until a——

Mr. POWERS. Up until last week.

Ms. DEGETTE. [continuing] couple of days ago.

Mr. POWERS. And I don’t know that he—that report may be accurate. I am just saying I got that report.

Ms. DEGETTE. Okay. You mean you don’t always trust the press.

Based on the accounting advice your investigation received, you

concluded in your report that Mr. Causey’s accounting judgment,

‘‘went well beyond the aggressive.’’

Mr. POWERS. Yes.

Ms. DEGETTE. What does that mean?

Mr. POWERS. I think Mr. Causey was not providing proper accounting supervision in the company.

Ms. DEGETTE. That, in your view, is well beyond the aggressive?

Mr. POWERS. Yes.

Ms. DEGETTE. Thank you. Thank you, Mr. Chairman.

Mr. GREENWOOD. The Chair thanks the gentlelady and recognizes the gentleman from Florida, Mr. Stearns.

Mr. STEARNS. Thank you, Mr. Chairman. I am just curious, the

chairman opened up his questions with a reference to Star Wars

and Luke Skywalker and Darth Vader. When you and your colleagues interviewed Kenneth Lay, did he feel like he was Darth

Vader? I mean did he feel like he was a bad guy?

Mr. POWERS. He certainly did not indicate that to us.

Mr. STEARNS. Did he feel like he was a noble public servant and

doing the right thing?

Mr. POWERS. That certainly was the attitude he conveyed.

Mr. STEARNS. So all during the 4 hours, he felt that he had done

nothing wrong.

Mr. POWERS. I think he felt that he had not been watching carefully enough, but he certainly indicated that he thought he—I am

reporting what he said—that——

Mr. STEARNS. Well, that is what I am asking you to do.

Mr. POWERS. [continuing] he had been betrayed and should have

looked more carefully.

Mr. STEARNS. So his position has been that he was betrayed, he

was high above and didn’t know all the details.

Mr. POWERS. That was the position, yes.

Mr. STEARNS. Okay. Mr. Winokur served as chairman of Enron’s

Finance Committee.

Mr. POWERS. Yes.

Mr. STEARNS. Did you folks interview Mr. Winokur regarding his

role as chairman of the Finance Committee?

Mr. POWERS. Yes, we did.

Mr. STEARNS. And you went into his understanding of the LJM

transaction?

Mr. POWERS. Yes.

47

Mr. STEARNS. Okay. Your committee reports, quote, ‘‘We have

identified some evidence that in three of the transactions where

Enron ultimately bought back LJM’s interest, Enron had agreed in

advance to protect the LJM partnerships against loss.’’

Mr. POWERS. Yes, we say that.

Mr. STEARNS. Okay, you say that. That is on page 12.

Mr. POWERS. And that is correct.

Mr. STEARNS. Okay. How did Enron do this, and if that was true,

and Mr. Winokur is chairman of the Finance Committee, is that

something that he could accept in his role to have them, as you

say, protect LJM’s partnership against loss by guarantying?

Mr. POWERS. Well, we didn’t have any evidence that the Finance

Committee, or the Chair of the Finance Committee, was aware of

those sort of side agreements to buy back from LJM1.

Mr. STEARNS. But wasn’t his role to understand these transactions?

Mr. POWERS. Our understanding was that these were informal

side assurances that don’t worry——

Mr. STEARNS. Well, wait a second. On October 11, 1999, Mr.

Winokur presented the LJM2 proposal to the board of directors.

Mr. POWERS. Yes.

Mr. STEARNS. Okay. That is what the minutes show. And he said

that he put in controls, indicated he discussed the controls that

would be used to guaranty LJM/Enron’s transaction would be fair

to Enron.

Mr. POWERS. Yes.

Mr. STEARNS. And so he had some knowledge of this, although

you are just saying——

Mr. POWERS. Well, he had knowledge of the structure, and he

had knowledge of the kinds of transactions that would take place

between Enron and LJM, and the committee put in controls to attempt, unsuccessfully, to mitigate the risks of conflict.

Mr. STEARNS. Okay. What kind of controls did he put in place to,

as you say, mitigate, to prevent the loss?

Mr. POWERS. Causey and Rick Buy and Skilling were supposed

to look at these transactions and approve them to ensure that they

were either arms length, or similar to arms length transactions and

were not sweetheart deals. Those were the controls that were put

in place.

Mr. STEARNS. Well, it is one thing to put in controls, but then

you have got to implement them. So what did he do to make sure

and go back—trust and verify, as we would say? What did he do?

Mr. POWERS. Right. I think the board and the committee did

not—I am not saying they did not do anything to go back, but they

certainly—the controls were not followed.

Mr. STEARNS. So you admit that he had no trust and verify of

his controls in place.

Mr. POWERS. Well, I wouldn’t say no trust and verify, inadequate

trust and verify.

Mr. STEARNS. On page 105 of the report, it notes that Jeff

Skilling’s signature is missing from the LJM2 approval sheet for

Raptor I. What knowledge did Skilling have of the Raptor I transaction?

48

Mr. POWERS. Skilling certainly knew about the transaction that

set up the Raptors.

Mr. STEARNS. But why wouldn’t he sign it?

Mr. POWERS. I am sorry?

Mr. STEARNS. Why wouldn’t he sign it?

Mr. POWERS. This is an approval sheet for hedging—individual

hedging deals between the Raptors and Enron after the Raptors

had been set up. It wasn’t an approval sheet to approve the setting

up of the Raptors. The board did that.

Mr. STEARNS. So in your opinion, his signature wasn’t needed?

Mr. POWERS. I am sorry. This was an approval sheet for setting

up that Raptor. He didn’t sign it; he was at the board meeting that

approved it.

Mr. STEARNS. And so why didn’t he sign it? I mean I am not asking you.

Mr. POWERS. Right.

Mr. STEARNS. I mean just don’t you think that that shows something?

Mr. POWERS. Right.

Mr. STEARNS. And what do you think that shows, the fact that

he doesn’t sign it, as a lawyer?

Mr. POWERS. He was at the board meeting that approved it. He

was at the board meeting that approved it. I really don’t know

whether—I don’t know why he didn’t sign it.

Mr. STEARNS. But the thing that strikes me here is Winokur was,

as chairman of the Finance Committee, he was responsible for putting in the controls and then making sure the controls were implemented. Now, wasn’t he part of this report? Wasn’t he on your

board on this report?

Mr. POWERS. He was. He did recuse himself from the judgments

about the board. Mr. Troubh and I had several conversations with

counsel independently without Mr. Winokur when we made our

conclusions about the board.

Mr. STEARNS. Do you think Skilling knew about these side agreements that were protecting these partnerships and ensuring that

Enron would guaranty them?

Mr. POWERS. From the evidence that I have seen, I don’t know

that I can answer that. There is a great deal of evidence that he

knew about the transactions.

Mr. STEARNS. And you are saying Mr. Winokur had no idea also

about these side agreements, and he never followed up with a trust

and verify, he never did some verification of the controls that he

put in place?

Mr. POWERS. I think these are going to take further investigation. I can say what we were able to ascertain from our interviews

and evidence, and we don’t have any evidence that he was aware

of those side agreements.

Mr. STEARNS. Thank you, Dean.

Mr. GREENWOOD. The time of the gentleman has expired. The

Chair recognizes the gentleman from Louisiana, Mr. John.

Mr. JOHN. Mr. Powers, on Friday, the Wall Street Journal reported that Mr. Lay told other Enron officials that he had never

heard of Chewco. In your 4-hour interview with him, did he indicate anything to that effect or did he tell you that? Chewco.

49

Mr. POWERS. He was at the Executive Committee meeting that

approved the transaction. He did say at his interview that he didn’t

recall the name.

Mr. JOHN. Thank you. The rest of my questions really are going

to be focused on the accounting side with Mr. Causey, because I

think that it is very important. Your report specifically states that

Mr. Causey was charged by the board of directors with a substantial role in the oversight of Enron’s relationship with the LJM partnerships; in fact, he was supposed to review and approve every

transaction—— Mr. POWERS. Yes, that is correct.

Mr. JOHN. [continuing] within LJM to determine if it was in the

best interest of Enron.

Mr. POWERS. Yes.

Mr. JOHN. And then he was supposed to report that to the board

of directors, correct?

Mr. POWERS. Yes.

Mr. JOHN. Mr. Causey told the board everything was fine, even

though his approvals came after the deals were finalized. Without

Mr. Skilling’s signature and your report concludes that many of the

most significant transactions apparently were designed to accomplish favorable financial statement results, not to achieve bona fide

economic objectives or a transfer of risk. Again, according to your

report on page 4, the transactions did not follow the applicable accounting rules. What was Mr. Causey’s excuse in your interview

with him for not carrying out these duties?

Mr. POWERS. In this interview, he said that he thought he was

responsible only for signing off on the accounting, which, in our

view, was not consistent with what his charge was by the board.

Mr. JOHN. But he was in fact the chief accounting officer.

Mr. POWERS. He was.

Mr. JOHN. In fact, in one instance, involving a Fastow partnership named Talon, on page 108 in your report—— Mr. POWERS. Yes.

Mr. JOHN. [continuing] Mr. Causey actually backdated a docu- ment of a swap so that Enron would not have to show about $75

million on its quarterly financial statements. Backdating documents to hide losses from shareholders, is that fraud?

Mr. POWERS. Well, backdating is extremely serious. I would have

to trace through what was then reported to the shareholders to determine—and backdating the intent does seem easy. And I don’t— I need to check. There was backdating, we did find evidence of

backdating in some of these transactions, which is, individually,

very serious. I would have to check.

Mr. JOHN. As it relates to Talon.

Mr. POWERS. Yes. That is the first Raptor vehicle, and there were

hedges with the Raptor vehicle, and we found very compelling evidence that some of those transactions were backdated.

Mr. JOHN. And in your own words, these are very serious when

you——

Mr. POWERS. Yes, very serious.

Mr. JOHN. Mr. Powers, Mr. Causey told our investigators here

that he didn’t see the collapse of Enron coming and awoke to it

once the Wall Street Journal began reporting on the company’s

50

troubles in October of last year. In your expert opinion, shouldn’t

the chief accounting officer and the person responsible of approving

every single transaction with Mr. Fastow’s entities, have identified

some warning signs? Don’t you think there should have been some

warning signs before October of last year.

Mr. POWERS. Absolutely.

Mr. JOHN. If so, what do you think he should have seen or did

not come—what do you think—give me maybe an idea of what

maybe he should have at least notified the board of, or Mr. Fastow,

or alerted them?

Mr. POWERS. Well, as we document in the report, these were not

real transactions, and he was the chief accounting officer, and

should and I think did—he certainly knew about the nature of the

transactions. And has subsequently turned out, that structure

made the company extremely fragile economically, because it

wasn’t solidly backed, and he should have warned the board about

that, he should have talked to senior management about it. He was

the chief accounting officer, he should have done something about

it.

Mr. JOHN. Real quick, if you could summarize, I guess, Mr.

Causey’s failures as the lead accountant of the company, how

would that summary read?

Mr. POWERS. He was not an effective check on Mr. Fastow, and

the accountant needs to be an effective check.

Mr. JOHN. Was it a lack of his credentials and his training and

background?

Mr. POWERS. Not to my knowledge.

Mr. JOHN. Thank you.

Mr. GREENWOOD. The time of the gentleman has expired. The

Chair recognizes the gentleman from New Hampshire, Mr. Bass.

Mr. BASS. Thank you, Mr. Chairman. Dean Powers, you have obviously overseen a very detailed report here, an investigation, and

in the very end of your testimony, in the last very paragraph, in

the first sentence, you say, ‘‘In the end, this is a tragedy that could

and should have been avoided.’’ Without getting into the kind of detail where you are discussing what individuals did or didn’t do,

who signed what, who was reporting to who, who transferred

money from here to there, how could this tragedy have been avoided, in your opinion?

Mr. POWERS. Well, as somebody who invests at a very, very modest level myself, I see the idea of statements to the public that

there should be transparency in the financial condition of a company. And if there was more transparency about the finances of

Enron, the market would have reacted to that and, frankly, adjusted in ways that wouldn’t have let Enron get away with it, if

there had been more transparency.

Mr. BASS. Well, then what, in your opinion, aspects of the regulatory structure created an environment in which there wouldn’t be

the kind of transparency that should have been with Enron?

Mr. POWERS. I want to give the judgments that I feel I can give.

I am not, in any way, an expert in securities regulation and how

that regulatory structure would have or might have detected some

of these problems.

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Mr. BASS. Well, is, in your opinion, the Enron investigation, in

general, then, primarily a criminal or a justice-related investigation

dealing with individuals who may have broken the law? Or are

there thematic conclusions from your report that require increased

or more aggressive oversight on the part of either regulators or policymakers, like the Congress?

Mr. POWERS. Well, I think there certainly was individual wrongdoing that needs to be investigated by the proper authorities. But

I think there are larger issues that are raised by what we found

in our report.

Mr. BASS. What larger issues are you thinking about?

Mr. POWERS. Yes, they deal with 401(k) plans, they deal with the

accounting industry. Not having looked into them and not being an

expert, I don’t know that I have particular suggestions, but I do

think those are important issues that the Congress and the committees need to look into.

Mr. BASS. This may be a repetitive question, but the second sentence in your last paragraph says that you hope that our report

and the work of your committee will help reduce the danger that

it will happen to some other company. How do you think that?

Mr. POWERS. Well, I think by bringing to light what happened,

I hope that your committee, other congressional committees at

least have a starting point as to some of the problems, and that

this will help, in a small way, to focus attention on some of these

problems and that our Congress, State legislators, other regulatory

and policymaking groups will respond to some of these problems.

Mr. BASS. One last question, Dean Powers. Were there any questions that—are there any questions that have come about as a result of the report that you are presenting or the investigation that

you conducted that you don’t have answers to at this point?

Mr. POWERS. You mean with respect to the particular events?

Mr. BASS. Yes.

Mr. POWERS. Oh, absolutely. Much more needs to be done. Who

knew what when? We, again, did not have subpoena power, did not

have true cross examination power, and I think this report is just

a start.

Mr. BASS. Thank you, Mr. Chairman.

Mr. GREENWOOD. The Chair thanks the gentleman. The gentleman from Florida, Mr. Stearns, made reference to a document

that I would, without objection, enter into the record. It is an excerpt from the October 11 and 12, 1999 Enron Corporation Board

of Directors meeting.

[The information referred to follows:]

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53

54

55

Mr. GREENWOOD. The Chair recognizes the gentleman from Illinois, Mr. Rush.

Mr. RUSH. Thank you, Mr. Chairman. Mr. Powers, I want to

commend you on your stamina. This has been a very long session,

and you have certainly stood up quite well.

Mr. POWERS. Thank you.

Mr. RUSH. Again, I commend you for your stamina. Our investigators were also told that Enron had more than 900 accountants

reporting to Mr. Causey, and I think that my colleague from Louisiana, Mr. John, pointed to this direction. And this 900 accountants does not include the nearly 100 accountants that Arthur Andersen supplied to audit Enron. How is it possible that Mr. Causey

could not see this train wreck coming when he apparently had almost 1,000 accountants on the Enron work force?

Mr. POWERS. I think it is that Mr. Causey, as the chief accountant, would have seen these problems.

Mr. RUSH. You think that he actually saw this problem.

Mr. POWERS. I think he certainly should have, and I would expect that he would have.

Mr. RUSH. Okay. Well, with all these accountants, 900 accountants of its own, who had access to all these internal records, in

your opinion, how can Enron blame Arthur Andersen alone for not

revealing the accounting shenanigans that were taking place? And

are Enron’s accountants simply incompetent or not well trained or

shouldn’t they have known Enron’s numbers even more than Andersen should?

Mr. POWERS. We certainly did not intend to, and I don’t think we

have, made judgments or, as you put it, blamed Andersen alone.

I think the Accounting Department within Enron and people outside the Accounting Department, including all of the people in

management and the board, bear responsibility for this.

Mr. RUSH. Well, I want to return quickly, if I could, back to Mr.

Fastow. One conclusion surfaces from our investigation into Enron

is that on one was minding the store. It was almost like the fat rat

was in the cheese factory, and the cat was on vacation. No single

person appeared willing to come forward and say it was their job

to take a big picture view of the multitude of deals and transactions taking place to assess how much risk the company was assuming. Shouldn’t that job have been the chief financial officer’s job

or Mr. Fastow’s job?

Mr. POWERS. Well, I think the chief financial officer—I am sorry,

the chief financial officer or the chief accounting officer?

Mr. RUSH. The chief financial officer.

Mr. POWERS. The chief financial officer. Well, the chief financial

officer is certainly responsible for the financial aspects of the company, and certainly these were within the financial areas of the

company. The problem with Mr. Fastow wasn’t in a position to

mind the store, because he was personally and directly involved in

these transactions.

Mr. RUSH. Well, isn’t it true also, according to your report, you

term Mr. Fastow as a, quote, ‘‘walking conflict of interest,’’ and

that Mr. Fastow got more income from his outside businesses in 2

years than he did from Enron; is that accurate?

56

Mr. POWERS. He certainly got very substantial income from these

outside investments.

Mr. RUSH. Mr. Fastow, I call him ‘‘Fast Andy,’’ Fast Andy was

known to curse and abuse people who got in the way of his partnerships. He told Mr. Jeff McMahon, the treasurer, that he couldn’t

work with him because McMahon was, quote, ‘‘screwing up his

deals.’’ Where was the chairman at in all of this? Why didn’t the

chairman put a stop to this?

Mr. POWERS. Well, McMahon went and complained to Skilling,

and Skilling then transferred McMahon to another part of the company. And Skilling, from our information, then didn’t do anything

about McMahon’s very accurate and serious issues that he had

raised with Skilling.

Mr. RUSH. I have one final question, Mr. Chairman, if I could.

I want to get back to the Talon transaction. Mr. Fastow negotiated

directly with Mr. Causey, putting together a deal that gave LJM2

$41 million for basically nothing, according to your report on page

108; is that right?

Mr. POWERS. I want to clarify this.

[Pause.]

Mr. POWERS. I think it was Ben Glisan who was involved in that

negotiation, and I don’t want to be inaccurate about the other person involved in it. I would have to go back and look more carefully.

Mr. RUSH. Thank you, Mr. Chairman. I yield back.

Mr. GREENWOOD. The Chair thanks the gentleman. The gentleman from Texas, Mr. Green, is recognized for 5 minutes.

Mr. GREEN. Thank you, Mr. Chairman, and, again, I would like

to thank you for your courtesy as allowing me as the member of

the full committee but not of the subcommittee to come in and ask

questions. I want to continue following up what my colleague from

Chicago mentioned on that LJM2, the $41 million. Sorry, I didn’t

hear the answer. Do you think he violated Mr. Fastow—by negotiating directly, Mr. Causey violated an agreement not to negotiate

with these entities?

Mr. POWERS. I think Fastow was negotiating on LJM. There is

lots that Fastow did wrong, but in that negotiation, I believe he

was negotiating on LJM’s side. He was not negotiating——

Mr. GREEN. On Enron’s side.

Mr. POWERS. [continuing] on Enron’s side. Now, the idea of

Fastow and Causey doing a real arms-length negotiation is very

problematic.

Mr. GREEN. Okay. And Mr. Causey, by representing Enron, could

have stopped that negotiation, I guess.

Mr. POWERS. Well, that kind of negotiation with LJM had been

approved. He and others could have identified the inappropriate

nature of the conflict of the whole structure.

Mr. GREEN. Who else is in a position to stop or disagree with the

inappropriateness, as you said, of the whole structure? Our staff

was told yesterday anyone with an understanding of how general

partners are paid would have quickly understood that Mr. Fastow

would get at least $15 million from the LJM2 alone. Was anyone

at Enron or his board, were they that inexperienced in the world

of finance that they couldn’t do the same calculations?

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Mr. POWERS. That is certainly a question that we had. LJM1, I

think the board looked into more carefully. It was a much smaller

partnership, and those calculations came to a much more reasonable number. When LJM2 was set up, it was a much larger partnership. I think there was a sense that it was like LJM1, therefore

let us go ahead and approve it. The problem was it was a much

larger partnership, and if one had run these numbers, it would

have suggested that Fastow might have a quite substantial return.

Mr. GREEN. On page 43 of your report, it indicates Mr. Fastow

had planned to merge Chewco until he was told that the participation be revealed in Enron’s proxy statement.

Mr. POWERS. Yes, that is correct.

Mr. GREEN. And at that point, Mr. Fastow substituted Mr.

Kopper?

Mr. POWERS. Yes.

Mr. GREEN. If anyone in the company knew this, do you think

the board knew it?

Mr. POWERS. I don’t—— Mr. GREEN. And why do you think they knew it?

Mr. POWERS. We don’t have any evidence that they did.

Mr. GREEN. What are the—a CFO in a corporation, I know they

have typically defined, particularly a company as large as Enron,

have defined responsibilities. Isn’t that person the person the investors and the shareholders depend on to give a credible picture

of the company’s finances?

Mr. POWERS. Well, the chief financial officer and the chief accounting officer, yes.

Mr. GREEN. If Mr. Fastow was doing his job properly, would this

train wreck would have happened?

Mr. POWERS. If Mr. Fastow had been doing his job properly, it

would have substantially reduced. I can’t say in hindsight whether

it would have prevented it. They would have never gotten into

these deals if he had been—if he had been raising questions about

them, I think there is a substantial likelihood that this train wreck

would not have happened.

Mr. GREEN. So the debt just kept piling up. So Enron had too

much debt, and too many bad investments kept piling up.

Mr. POWERS. It had a great deal of debt, and it had—I think if

they had taken the—well, one can’t tell what had happened. It

wasn’t just that they didn’t take the loss on the investments and

as they were happening take charges. They had these hedging arrangements that, in a sense, were acting as though those losses

were not there.

Mr. GREEN. Did your committee specifically find out what actions

Mr. Fastow failed to do, to take, as CFO, that might dramatically

have mitigated the events that overtook Enron?

Mr. POWERS. Well, he should have come forward and disclosed

that he was self-dealing with the company on a much larger scale

than he had ever indicated.

Mr. GREEN. Thank you, Mr. Chairman.

Mr. GREENWOOD. The time of the gentleman has expired. The

Chair would note his intention to initiate another round of questions. Mr. Powers, are you good for another half hour or so, or

would you like a break?

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Mr. POWERS. No, I am fine, Mr. Chairman.

Mr. GREENWOOD. Okay. In that case, the Chair recognizes himself for 5 minutes. Mr. Powers, on page 43 of your report, it reads,

‘‘Fastow told Enron employees that Jeffrey Skilling, then Enron’s

president and chief operating officer, had approved his participation in Chewco as long as it would not have to be disclosed in

Enron’s proxy statement.’’ Who are the employees that Fastow told

that to? How do you know that? If you need to consult—— Mr. POWERS. Well, let me read the statement. Could I—— Mr. GREENWOOD. Please.

Mr. POWERS. One of the people he told was Bill Brown, who I

mentioned before, and Mr. Brown has notes that reflect that.

Mr. GREENWOOD. Do you have those notes that you could share

with us?

Mr. POWERS. We don’t have them here, and, again, I will support

cooperating in every way, and I think the company will as well. I

don’t, myself, have the authority to dispose of the company—— Mr. GREENWOOD. Do you know what Skilling said about that?

Did Skilling comment on that observation?

Mr. POWERS. I believe Skilling said that he didn’t—— Mr. GREENWOOD. There is a footnote that says, ‘‘Skilling told us

that he recalled Fastow—— Mr. POWERS. Yes. Thank you.

Mr. GREENWOOD. [continuing] proposing that the Chewco outside

investors be members of Fastow’s wife’s family, and Skilling told

Fastow he did not think that was a good idea.’’ Mr. POWERS. Correct.

Mr. GREENWOOD. Okay.

Mr. POWERS. Thank you.

Mr. GREENWOOD. The Special Committee’s report states Jeff

Skilling appeared to be entirely uninvolved in the review of the

Chewco transactions, despite, quote, ‘‘representations made to the

board that he had undertaken a significant role.’’ Mr. POWERS. Yes.

Mr. GREENWOOD. That is from page 10. What were these representations and who made them?

Mr. POWERS. I believe these are the LJM transactions. Chewco

was more of an investment fund, and the LJM transactions were

the transactions where there was more self-dealing. And Skilling

represented to the board, or to the Finance Committee, I would

have to clarify that Fastow represented to the board that these controls would be put in place. Skilling was at that board meeting

when those representations were made, and the representations

were that Skilling and Causey and Buy would review the transactions to make sure that they were at arms length and not selfenriching to Fastow.

Mr. GREENWOOD. The Special Committee’s report states that the

critical piece of missing information relating to the Chewco transaction was the side agreement for the $6 million Enron

collateralization of the partnership outside $11.4 million equity investment by Big River Funding, LLC, which is a partnership controlled by Michael Kopper and his domestic partner, William

Dodson. At least one Enron official, Ben Glisan, knew of these

facts. Andersen says it knew nothing about this aspect of the

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Chewco transaction. What evidence did you uncover about who

knew what and when with respect to this side agreement on

Chewco?

Mr. POWERS. Well, we were able to ascertain that Glisan was involved in setting up—in doing the work around Big River and Little River. And he would have known that the loans from Barclay’s

were being backed by reserve accounts that had been provided by

distributions from JEDI, but let me make sure I get this right. I

am told we don’t have notes that definitely pin that down.

Mr. GREENWOOD. How did you discover this side agreement?

Who found out about that?

Mr. POWERS. Well, when these issues—there is some unclarity as

to whether we have those notes or not. Let me just clarify. I am

sorry. We do have notes that show that Glisan was at meetings

where the reserve accounts were described.

Mr. GREENWOOD. And we would ask that you share those notes

with our staff.

Mr. POWERS. The same thing.

Mr. GREENWOOD. Thank you.

The Special Committee’s report also states that if Glisan in fact knew about the $6 million side agreement, it is, ‘‘implausible that

he or any other knowledgeable accountant would have concluded

that Chewco met the 3 percent standard.’’ That is from page 53.

Since the Special Committee’s report concludes that Glisan knew

about the side agreement, are you in effect saying that he knowingly approved faulty accounting for this transaction?

Mr. POWERS. To the extent he was at that meeting and to the

extent that he knew, our view is that a knowledgeable accountant

like Glisan would know that was faulty accounting. We did not

come across anyone who, once they understood the Big River and

Little River loans were backed by essentially Enron dispersements

from JEDI, everybody agreed immediately that that was an improperly funded SPE.

Mr. GREENWOOD. My understanding is that the $6 million side

agreement was not discovered until late October of 2001, after

Enron started to look more closely into this transaction. Do you

know who at Enron discovered this side deal and how the discovery

actually took place?

Mr. POWERS. No, I am sure we do.

[Pause.]

Mr. POWERS. I want to clarify one thing. It may very well be that

people at Enron knew about this before it came up in October. The

larger Enron group, the accounting and legal staff, went back and

started looking into it as events started to unfold in October. And

I don’t have the individuals, but, again, I think——

Mr. GREENWOOD. Was it found in Enron’s documents? Was it

found in Vincent & Elkins’ documents?

Mr. POWERS. In Enron’s documents and I think both.

Mr. GREENWOOD. Both? Okay. The Chair recognizes the gentleman from Florida, Mr. Deutsch.

Mr. DEUTSCH. Thank you, Mr. Chairman. I know we have been

talking about Mr. Powers, so let me just go back to a question. Actually, Mr. Fastow widely reported questionable activities, directly

or indirectly, paramount to fraud on Enron stockholders. It was his

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concealment of the lack of independent equity in these partnerships

that kept the losses off Enron’s books for at least 2 years. Isn’t that

fraud on the shareholders?

Mr. POWERS. My only hesitation is I don’t know myself the securities definition of fraud because that is not my field. It is misrepresenting things to the shareholder.

Mr. DEUTSCH. All right. The Wall Street Journal reported last

week that Mr. Fastow and Mr. Skilling dreamed up all of these

partnerships to hide debt and hedge losses. Mr. Fastow was required under the company’s code of conduct to reveal his interests

in these partnerships in writing to Mr. Lay and Mr. Skilling. Did

Mr. Skilling received such a document in writing, as required

under the agreement?

Mr. POWERS. The evidence we have is that Skilling got a handwritten note from Fastow.

Mr. DEUTSCH. Have you seen it?

Mr. POWERS. Yes—oh, no. That is just reported to us.

Mr. DEUTSCH. Did Mr. Skilling ever ask for legal advice, either

from inside or outside the company, on the procedures for waiving

the code of conduct and what was appropriate and what was not?

Mr. POWERS. I don’t know. Not to my knowledge.

Mr. DEUTSCH. Did Mr. Skilling ever consider that an officer’s loyalties might be conflicted if he was receiving more income from his

non-Enron business than from his Enron job?

Mr. POWERS. Did he consider that?

Mr. DEUTSCH. That is correct.

Mr. POWERS. The interview with Fastow did not reveal much information where we could get an answer to that question.

Mr. DEUTSCH. Right, but it would seem Mr. Skilling, in terms of

evaluating where his loyalties would be.

Mr. POWERS. Oh, I am sorry. Yes, certainly, Mr. Skilling and everyone involved in approving LJM1 and LJM2 understood that

there would be a conflict of loyalties that Fastow had.

Mr. DEUTSCH. And Mr. Skilling and the board could have required Mr. Fastow to share his offering documents and reveal his

fee structure; is that correct?

Mr. POWERS. That is correct. I believe the board and management could have done that.

Mr. DEUTSCH. And why didn’t they?

Mr. POWERS. Their explanation is that they wanted to make the

LJM partnerships as, ‘‘independent’’ as possible, and looking into

the financial structure of the partnerships would somehow be inconsistent with that. We still think they could have gotten K-1s

and other information about Mr. Fastow’s remuneration.

Mr. DEUTSCH. Right. And, again, it seems as if your concern is

really a conflict, that would be almost a requirement to understand

that.

Mr. POWERS. I would think, at a minimum, you would want to

know what the compensation for Ms. Fastow would be.

Mr. DEUTSCH. Did Mr. Skilling ever ask to see any of the offering

papers of the Fastow entities?

Mr. POWERS. Not to my knowledge.

Mr. DEUTSCH. According to a Fortune magazine article, Mr.

Skilling errantly responded to those who questioned how Enron

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made its money by saying, ‘‘People who raise questions are people

who have not gone through our business in detail and who want

to throw rocks at us.’’ Based upon your own investigation, don’t you

think that as chief executive officer, Mr. Skilling himself knew how

Enron was cooking the books?

Mr. POWERS. I think Mr. Skilling knew a great deal about these

transactions and how losses were being hedged with Enron’s own

stock, yes.

Mr. DEUTSCH. And in fact, Mr. Powers, doesn’t your report state

that Skilling, and I quoted from the report, ‘‘had direct responsibility for ensuring that those reporting to him performed their

oversight responsibilities properly and that Skilling did not appear

to have given much attention to these duties.’’ Are you saying that

Mr. Skilling was inattentive and didn’t understand his own company or—I mean is that the answer or is this again a case of fraud?

Mr. POWERS. Well, at a minimum, he wasn’t attending to his own

company. He claims in his interview that he knew very little about

them. Causey and others say that he was very involved in them.

And to answer that question, I think the proper investigators and

authorities are going to have to ascertain what his state of mind

was.

Mr. DEUTSCH. Right. And the last question: Mr. Skilling was

supposed to review and sign off on each of these deals, these are

the partnerships. He didn’t, but he allowed Mr. Causey to tell the

board that everything was fine. As CEO and also president and

chief operating officer, wasn’t Mr. Skilling’s primary obligations,

again, I mean violated by that action?

Mr. POWERS. Yes. I don’t think he performed his function.

Mr. DEUTSCH. Thank you.

Mr. WHITFIELD [presiding]. The gentleman’s time has expired. At

this time, we will call on the chairman of the entire committee, Mr.

Tauzin.

Chairman TAUZIN. Thank you, Mr. Chairman. Dean Powers, the

New York Times reports that Mr. Skilling may not have been

aware of what was happening, but he was certainly, and this is a

quote, ‘‘in no mood to hear anybody question what went on at

Enron.’’ The quote is, ‘‘In early April, when Enron reported its

freshly scrubbed, and apparently falsified, first quarter profits, Mr.

Skilling bristled when one questioner on the conference call tried

to ask questions about the company’s balance sheet. He used a vulgarity to describe the question, stunning many who were listening

to the call.’’ We produced documents indicating that when members

in the corporation sent signatures sheets around to indicate approval of all these transactions that LJM1 and LJM2 were conducting, and everybody signed except one person. There is one signature missing—Jeffrey Skilling’s. Did you see those documents?

Did you have any questions about why Mr. Skilling didn’t sign

those approval documents?

Mr. POWERS. Yes.

Chairman TAUZIN. What did you learn?

Mr. POWERS. He didn’t explain it. He was at the board meeting,

though, that voted on it.

Chairman TAUZIN. Yes. You do know that Jordan Mintz sent him

a memo saying, here are all the documents. Please sign them.

62

Mr. POWERS. Yes.

Chairman TAUZIN. Did he explain why he didn’t sign them?

Three times I think he tried to call. Mintz was doing everything

he could to get Mr. Skilling on the record as saying these deals

were okay and everything was honkey-dory, and Mr. Skilling

wouldn’t sign them.

Mr. POWERS. Absolutely. I understand he should have signed

them, it was his responsibility to sign them, and he didn’t sign

them.

Chairman TAUZIN. And we just don’t know why.

Mr. POWERS. He didn’t explain that to us.

Chairman TAUZIN. I will take you to page 95, because the question of corporate self-dealing and profiteering is a pretty interesting

one. In the report you issued, on page 95, you talk about the—I

think it is the South Hampton deal.

Mr. POWERS. Yes.

Chairman TAUZIN. In which a group called the Fastow Family

Foundation, which was composed of people like Glisan. We just

heard about Enron employee, Mr. Glisan, who later became treasurer of Enron.

Mr. POWERS. Right. It was the Family Foundation and Glisan.

Chairman TAUZIN. And also Mordaunt.

Mr. POWERS. And Mordaunt.

Chairman TAUZIN. And Mordaunt and Glisan were part of the

Family Foundation, as well as separate investors, right?

Mr. POWERS. No, I don’t think they were part of the Family

Foundation.

Chairman TAUZIN. Well, let us go back to your report on page 93: ‘‘The limited partners were the Fastow Family Foundation, signed

by Fastow, the director, Glisan, Mordaunt’’—you mean they were

separate investors.

Mr. POWERS. Yes.

Chairman TAUZIN. They were not part of the foundation.

Mr. POWERS. We don’t know who was in the Family Foundation.

Chairman TAUZIN. We don’t know.

Mr. POWERS. Yes.

Chairman TAUZIN. But the Family Foundation puts up 25 grand.

Big Doe Foundation, whatever that is, puts up another bunch of

money, and Glisan and Mordaunt, as well as some of the other

Enron employees, including Yaeger Patel, I think, who was married—at the time some of the negotiations were going on, they were

engaged, the two Patels. They later signed as marriage partners,

and they were operating on different sides of the table. Talk about

a sweetheart deal, that was really interesting. But these players, Glisan and Mordaunt, put up $5,800 each. Within 6 weeks, they each received $1 million, and they apparently

told you they don’t know—nobody explained to them why they got

such a big return in 6 weeks, but they took the money. And you

asked the question, ‘‘The magnitude of these returns raises serious

questions as to why Fastow and Kopper offered these investments

to other employees.’’ I think the answer comes in the next paragraph. You talk about what those other employees did. You have

Glisan who has presented to the Raptor I transaction to the board.

He was called the business unit originator and the person negotiVerDate 11-MAY-2000 11:33 May 31, 2002 Jkt 010199 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 W:\DISC\77985 pfrm01 PsN: 77985
63

ating for Enron. He is the guy on the other side of the table, and

Fastow says, ‘‘Come on in and be an investor on this side of the

table, and you make a million dollars as a result in 6 weeks.’’ And

you asked the question why they offered him this deal?

You also asked the question why Mordaunt was involved? Well,

we find out Mordaunt was a lawyer. She was involved in the initial

Rhythm transaction, general counsel structured finance. She becomes later the general counsel of Enron Communications and

later the Enron Broadband Services Board where all this

broadband capacity was transferred out to one of these partnerships in an attempt to show a lot of profit that never existed. And

you asked why they were interested in bringing her in and letting

her earn a million dollars? Isn’t the answer quite obvious?

Mr. POWERS. Well, let me say why we asked the question.

Chairman TAUZIN. Yes.

Mr. POWERS. We tried to be very careful in this report——

Chairman TAUZIN. I know.

Mr. POWERS. [continuing] not to draw surmises and conclusions,

but certainly this is extremely suggestive as to why this happened.

We understand that, and we tried to lay out the facts as best we

could.

Chairman TAUZIN. And I alluded to it, and we are going to discuss it more on Thursday, but you, too, discovered, as we did, that

in some cases, other than offering them a chance to invest, partnerships in some cases actually threatened employees with firings and

losses of bonuses; is that correct?

Mr. WHITFIELD. The gentleman’s time is expired.

Mr. POWERS. We did find pressure, yes. The exact nature of it I

would have to go back and check, but we did find pressure.

Chairman TAUZIN. I think we got some of your answers. Thank

you.

Mr. WHITFIELD. The gentleman from Michigan is recognized for

5 minutes.

Mr. DINGELL. Mr. Chairman, I thank you for your courtesy. I

find at page 9 of your report this footnote which says this: ‘‘One

member of the Special Investigative Committee, Mr. Herbert S.

Winokur, Jr., was a member of the board of the directors and the

Finance Committee during the relevant period. The portions of the

report describing and evaluating the actions of its board and its

committees are solely the views of the other two members of the

committee, Dean William C. Powers, Jr., the University of Texas

Law School, and Raymond S. Troubh.’’ What does that mean, and

why is that there, and what does it tell us?

Mr. POWERS. Well, when the committee was set up, in fact when

it was originally set up, there were no new directors. I was brought

in to Chair the committee and then Mr. Troubh was brought in to

be on the committee. Other members were taken off the committee,

and Mr. Winokur was left on the committee, so that there was a

majority on the committee of outside, that is, new directors that

didn’t have any involvement in these transactions. We felt that Mr.

Winokur was a very good source of information about the backgrounds of some of these transactions, and it was invaluable to

have that information. When it came time to——

64

Mr. DINGELL. You could have gotten that from him under the cooperation you were promised from the company, could you not?

Mr. POWERS. Well, the interviews were for a period of time and

couldn’t go back, and there were lots of—especially early on, there

was a great deal of information that we needed. When it came time

to judging the board, we thought the report would speak more

forcefully if Mr. Troubh and I made those judgments. That was a

judgment we made as to how to best go forward with this investigation. And I think the report hopefully indicates we had an unvarnished position.

Mr. DINGELL. I don’t criticize the report, but doesn’t it indicate

that Mr. Winokur was essentially participating in an investigation

of himself?

Mr. POWERS. Well, it was an investigation of a number of things,

and it did include himself. And when it came to judgments about

the board Mr. Troubh and I had independent meetings of the committee with counsel and approved and decided what would go in

the report about the board.

Mr. DINGELL. Thank you. Mr. Winokur told the board he was familiar with and recommended approval of a plan by Mr. Skilling

and Mr. Fastow to sell 50 percent interest in JEDI, an affiliate of

Enron and Chewco; isn’t that correct?

Mr. POWERS. Yes.

Mr. DINGELL. The minutes record that Mr. Winokur states he

was going to meet further with Mr. Fastow the next day, presumably on this matter since it was the only one on the agenda involving Mr. Fastow. Did that meeting occur?

Mr. POWERS. During his interview—we did interview Mr.

Winokur; he didn’t recall whether that meeting occurred.

Mr. DINGELL. Okay. According to the board’s minutes, Mr.

Fastow reviewed the economics of the project, the financing arrangements, the corporate structure of the acquiring company with

the board. I presume this had previously been reviewed with the

Finance Committee; is that correct?

Mr. POWERS. I believe so. Yes.

Mr. DINGELL. Now, Mr. Fastow told the board that Chewco was

a special purpose vehicle not affiliated with the company or

CalPERS, since the board was approving a bridge loan of $383 million and a corporate guaranty of $250 million loan to Chewco, an

unknown entity. Did Mr. Winokur or any board member ask who

controlled Chewco?

Mr. POWERS. I would have to go back to the particular—that was

the Executive Committee, it wasn’t the Finance Committee, and we

don’t know whether they asked those questions.

Mr. DINGELL. Was due diligence done by the Enron board officers

or counsel?

Mr. POWERS. I don’t know if I am in a position to say whether

the diligence was due. That is a very complicated legal question,

and——

Mr. DINGELL. It should have——

Mr. POWERS [continuing] we tried to lay out what happened.

Mr. DINGELL. Due diligence should have been done on this matter, should it not?

65

Mr. POWERS. Due diligence should be done on all corporate matters.

Mr. DINGELL. Now, Chewco understood that it did not have the

necessary—in your report, you state Enron employees involved in

Chewco understood that it did not have the necessary 3 percent in

outside equity required to stay off Enron’s books. If the employees

understood that, did Mr. Winokur and the Finance Committee also

understand it?

Mr. POWERS. I think that when Chewco was originally set up, it

was widely understood that it did not have the 3 percent equity.

Mr. DINGELL. Did it ever get the 3 percent equity?

Mr. POWERS. Well, then the idea was that it would be reconstituted or restructured to get the 3 percent equity.

Mr. DINGELL. Did it ever get the 3 percent—— Mr. POWERS. And then they attempted to but did not because of

the guarantees that were given to the loans, to Big River and Little

River.

Mr. DINGELL. Did Mr. Winokur or any other member of the Finance Committee ever ask who was providing the outside equity?

Mr. POWERS. I don’t know.

Mr. WHITFIELD. The gentleman’s time is expired.

Mr. DINGELL. Mr. Chairman, I thank you. There are a lot of

other fine questions here.

Chairman TAUZIN. Would the Chair—I ask unanimous consent

that the gentleman have 30 seconds that could be yielded to me

just to put a fact in the record.

Mr. DINGELL. I yield to my friend, if I get the time.

Chairman TAUZIN. I thank the Chair. I simply wanted to make

sure I had in the record that in the South Hampton deal, the

$25,000 investment in March by the Fastow Family Foundation

paid back $4.5 million in May to that foundation.

Mr. POWERS. Yes, that is correct.

Chairman TAUZIN. Thank you, Mr. Chairman.

Mr. WHITFIELD. The gentleman from North Carolina is recognized for 5 minutes.

Mr. BURR. Thank you for your patience and your willingness to

go through all this. You have helped us to sort out a lot of things.

Mr. POWERS. Thank you, Congressman.

Mr. BURR. I am going to try to clarify some things that we have

already been over, so be patient with me. Did your committee

interview Sherron Watkins?

Mr. POWERS. We asked to, but she wouldn’t.

Mr. BURR. She declined.

Mr. POWERS. Right, she declined.

Mr. BURR. Do you or do the folks who are with you know the reason that she chose to decline?

Mr. POWERS. I don’t know if she stated it. We communicated

with her lawyer, and he said that she was going to be interviewed

by a lot of other people and did not want to be interviewed by us,

which I must say I don’t fault her for.

Mr. BURR. To your knowledge, or the knowledge of your committee, was Sherron Watkins interviewed in any way, shape or

form by V&E when they carried out their investigation?

Mr. POWERS. Yes.

66

Mr. BURR. And do we know the specifics of whether they agreed

or disagreed with the claims that she had made in the letter to Mr.

Lay?

Mr. POWERS. Well, they wrote a letter to Mr. Lay reporting on

that.

Mr. BURR. Were you——

Mr. POWERS. I am sorry, to Jim Derrick, who was the chief financial officer—who was the general counsel.

Mr. BURR. Is it true that the lawyers for V&E were told not to

review the underlying accounting for the partnerships or the very

area that Ms. Watkins had raised questions about?

Mr. POWERS. That is what I understand from the letter. Again,

I haven’t looked into that carefully.

Mr. BURR. So what would a law firm hired to investigate ask Ms.

Watkins if her claims were about the underlying accounting procedures and the lawyers were told not to investigate that? What

could you possibly glean from it if you can’t ask her about the accusations that she made, or at least you were instructed not to?

Mr. POWERS. Right.

Mr. BURR. Is that not your understanding, though, of what they

were told?

Mr. POWERS. It is my understanding from what I have heard

today. I did not focus on what Vincent and Elkins did.

Mr. BURR. Let me go back to the special-purpose entities, if I

could, and I think you agreed with Chairman Tauzin earlier that

there was no economic purpose for the creation of the SPEs in their

structure that they eventually ended up, am I correct?

Mr. POWERS. Well, the deals made with the Raptors are where

we say there was—the hedges, there was no economic purpose.

SPEs are very common in business, and there are legitimate reasons to use SPEs.

Mr. BURR. And I realize that, and I think that it will become a

very common word used in the next several months. But, specifically, the way these were designed, is it safe to say that the architect of these SPEs would have known it is not for economic purposes?

Mr. POWERS. Well, I would distinguish between Chewco and the

Raptors.

Mr. BURR. Okay.

Mr. POWERS. When we found out what the Raptors were about,

it is apparent to us and our conclusion is they weren’t for economic

purposes. And so somebody who is knowledgeable in accounting

that designed them, I would say they would know that these were

for accounting rather than economic purposes. Chewco I think is

different.

Mr. BURR. In layman’s terms, they were designed to hide debt,

weren’t they?

Mr. POWERS. Well, the Raptors were designed to offset losses and

therefore show other earnings on the income statement and other

than that didn’t have an economic purpose.

Mr. BURR. Is it safe to say that anybody that participated in the

architecture of these SPEs would have known what the intent was

of creating them?

67

Mr. POWERS. I would think that the architect, the people that

put together the Raptors understood why they were being put together.

Mr. BURR. Let me ask you if your committee looked at who participated in the compensation packages for Fastow and his involvement in the partnerships, Kopper or any other individual? I mean

Fastow didn’t create his own compensation package within the

partnership, did he?

Mr. POWERS. I assume that was a negotiation with the limited

partners in those partnerships, and we have not had access to

those materials.

Mr. BURR. I think alluded, at least in some of the SPEs that the

board signed off on it, the Board of Enron.

Mr. POWERS. Well, the board signed off on the creation, and we

are told that the LJM compensation to Fastow was LJM business,

and they didn’t look into it.

Mr. BURR. And is that common practice for a board not to have

interest or did the board not know of Enron’s backdoor exposure?

Mr. POWERS. Well, I think there was interest on the board on

Fastow’s compensation. The thought was, the explanation was that

it would be somehow inappropriate to pierce LJM, because they

were supposed to be independent. We don’t agree with that.

Mr. BURR. Did you have any——

Mr. WHITFIELD. The gentleman’s time has expired.

Mr. BURR. If I could finish this question, Mr. Chairman. Were

you aware of whether Skilling knew of the compensation package?

Mr. POWERS. He says he—well, we don’t know.

Mr. BURR. Lay?

Mr. POWERS. He said he didn’t know. Both knew that Fastow

would be getting some return, but the magnitude of the compensation package Lay says to us he didn’t know.

Mr. BURR. And the board would be a no.

Mr. POWERS. The board did not know. The board says they didn’t

know.

Mr. BURR. I would only say this, Mr. Chairman, in concluding:

I find it unusual, and I hope you do, Dean Powers, that in this case

the two CEOs and chairman of the board could have the structure

of what was created here and, one, been ignorant of the structure

and, two, been ignorant of the compensation package that went

along with it, because, in essence, it was Enron’s money. I thank

you.

Mr. POWERS. Thank you.

Mr. WHITFIELD. The gentleman from Michigan is recognized for

5 minutes.

Mr. STUPAK. Thank you, Mr. Chairman, and, Mr. Powers, thanks

again for being here and being patient with all of our questions.

Mr. POWERS. Thank you.

Mr. STUPAK. You said earlier in some testimony that Mr. Lay did

not understand that hedging with Enron stock was not okay and

that accountants told him it was okay, therefore he went along

with the accountants; is that right?

Mr. POWERS. I said that is what he said to us.

68

Mr. STUPAK. Okay. That is what he said to you. Did he say who

the accountants were who told him it was okay? Would that be Mr.

Causey?

Mr. POWERS. Certainly Mr. Causey, and I think Andersen.

Mr. STUPAK. Andersen Consulting, or the Andersen the firm.

Mr. POWERS. Yes, Arthur Andersen. I believe that is what he

said in his interview.

Mr. STUPAK. Okay. Michael Kopper, who is he at Enron?

Mr. POWERS. He was in the Finance group, and I don’t know exactly what his job was. He was not senior management.

Mr. STUPAK. Wasn’t he a former vice president involved in these

partnerships like Chewco and a couple others?

Mr. POWERS. Well, he was involved—he did have an interest in

Chewco, yes, absolutely.

Mr. STUPAK. Okay. And that is the deal that went from $125,000

to, what, $10 million? Mr. Kopper took $125,000 investment into

Chewco, and it went to $10 million?

Mr. POWERS. Yes, that is correct.

Mr. STUPAK. How could that—I mean how is that conceivable? I

mean how is that—is that even legal to—I mean the return on that

is astronomical in a short period of time.

Mr. POWERS. That is an extremely abnormal rate of return.

Mr. STUPAK. How quickly did that turn around to $10 million?

Mr. POWERS. A little more than 3 years.

Mr. STUPAK. Can you think of any legal way in which you could

do that, take $125,000 and turn it into $10 million in 3 years at

Enron, in the partnerships——

Mr. POWERS. Not without taking on a tremendous amount of

risk, and we don’t see that he did take on risk.

Mr. STUPAK. They took no risk, because it was all backed up by

Enron stock, right?

Mr. POWERS. Well, I can’t say that he took no risk. These are

very complex transactions. There were ways in which the investors

could lose money. There were options on Enron stock, but little

risk.

Mr. STUPAK. If it is a possibility, did any investor in any of these

partnerships lose any money?

Mr. POWERS. Not that I am aware of.

Mr. STUPAK. Okay. Mr. Kopper also received up to $2 million in

management fees relating to Chewco, and yet in your review, you

were unable to identify, and I am going to quote now, ‘‘how these

payments were determined or what, if anything, Mr. Kopper did to

justify these payments.’’

Mr. POWERS. Yes.

Mr. STUPAK. How is it possible to have an employee make in excess of $2 million and no one knows what he did to earn it?

Mr. POWERS. Well, these were investment funds, and they were

simply managing these investments, and the work would have been

relatively simple back office work, and it was never explained to us

why that would justify a $2 million fee.

Mr. STUPAK. This $2 million, whose money would that be?

Mr. POWERS. That would be——

Mr. STUPAK. It is relating to Chewco and——

69

Mr. POWERS. It is very complicated. It would have been paid out

of JEDI——

Mr. STUPAK. Okay.

Mr. POWERS. [continuing] which was another one of these entities, not related parties, so we didn’t probe into JEDI. It was paid

out of JEDI, but ultimately that is coming out of the interest of

Enron. So when you track it all back, Enron is effectively paying.

Mr. STUPAK. So when we go through this simplified Whitewing

leveraging transaction, all those pyramids and circles and boxes

and squares and parts of South America and all over this country,

that is really—when it is all said and done, that is really Enron’s

money.

Mr. POWERS. Well, there are some outside investors in these, this

3 percent rule, et cetera, but Enron has very substantial interests

in these entities.

Mr. STUPAK. And Enron is really the employees’ 401(k) plan,

their pension plan and the shareholders who invested in Enron.

They are really the ones who really are left here—after we get done

with all these nice pyramids and everything else, they are the guys

who are left holding the empty promises.

Mr. POWERS. The employees and the shareholders and the people

with their retirement nest eggs and the 401(k) plans are tragic and

terrible victims of this.

Mr. STUPAK. So whether Kopper made $10 million over 3 years

or $2 million for consulting on Chewco, it was those investors—the

bottom line, it was really their money that got——

Mr. POWERS. They were the ones that got hurt.

Mr. WHITFIELD. The gentleman’s time has expired. The gentleman from Florida is recognized for 5 minutes.

Mr. STEARNS. Thank you, Mr. Chairman. Dean Powers, you and

I talked a little bit about Mr. Winokur and his responsibilities, as

he is a board member. Now, I would like you to go to Rick Causey

who was, I understand, the chief accounting officer, an officer of

Enron himself, and then Rick Buy who, as I understand, his title

was chief risk officer.

Mr. POWERS. Yes.

Mr. STEARNS. So now we are moving into the corporate officers,

the people who worked, the employees of Enron, and I just want

to go into a little bit about what their responsibilities were, and did

you interview both these individuals?

Mr. POWERS. I didn’t personally, but the committee, yes, it did

interview those individuals.

Mr. STEARNS. And were they forthright with you?

Mr. POWERS. They certainly answered our questions.

Mr. STEARNS. Causey and Buy stated they participated in the

LJM transaction reviews in a limited capacity.

Mr. POWERS. Yes, that is what they said.

Mr. STEARNS. And they said this is, I guess, that we on the committee are having a little trouble understanding. Buy stated that

the Global Finance Group made the strategic decisions regarding

the deals, and that his risk review had nothing to do with the big

picture. Causey stated that his review of the transaction was to

make sure that the accounting treatment was accurate, and he did

70

not participate in the strategic decisions. So we have an idea what

they feel. What do you think they did?

Mr. POWERS. I think they had very limited review of the transactions between Enron and LJM2, and that they were charged with

the responsibility of having much more robust and substantial review.

Mr. STEARNS. So who charged them with this responsibility? Did

the board of directors?

Mr. POWERS. The board, yes.

Mr. STEARNS. The board of directors, in your opinion, charged

them with the responsibility to have a thorough understanding of

these LJM transactions.

Mr. POWERS. And ensure that there were transactions that would

be for the benefit of Enron.

Mr. STEARNS. Why didn’t these two officers who were employees

of the corporation and had the great title of chief accounting officer

and chief risk officer, I mean I would think if you or I had those

titles of risk and accounting, that we would not think, well, we are

not really here to make sure these agreements are accurate. We

don’t participate in strategic decisions. If you are going to be in

charge of risk, you have got to understand what the strategic decisions. So where do you think—am I missing something or as a

dean do you think we are missing something? The board thought

they had the responsibility and yet they are telling you they didn’t

have that responsibility or authority.

Mr. POWERS. Right. In my view, they didn’t fulfill their responsibilities with respect to review of these transactions.

Mr. STEARNS. And why do you think that was?

Mr. POWERS. We don’t know that for certain. I think they were

unwilling to stand up to Andy Fastow.

Mr. STEARNS. And what about—do you think—you think that is

it, that Fastow intimidated them that much; is that it?

Mr. POWERS. I don’t know Fastow. I have talked to people around

the company. He was a very aggressive person and was in charge.

I don’t know this to be the case. The most plausible explanation to

me—we don’t have any evidence that Causey or Buy participated.

Something may come out later, but we didn’t find any evidence of

that.

Mr. STEARNS. Dean Powers, in all deference to you, it sounds like

you are suspending disbelief here. I mean either they were intimidated by him or they are complicit in the operation.

Mr. POWERS. Well, I think they certainly understood how LJM

wanted to and how the Raptors were working; certainly, Causey

did. So complicit in that sense I agree with. We didn’t find any

events of financial participation, which does not mean that——

Mr. STEARNS. No, I understand.

Mr. POWERS. [continuing] we will come out. I think they were intimidated by Fastow.

Mr. STEARNS. That is what you think.

Mr. POWERS. Partly.

Mr. STEARNS. I am just curious why they didn’t mention the

problem, the accounting problem or the risk problem to the Audit

and Compliance Committee and the Finance Committee.

71

Mr. POWERS. Because doing so would have brought down scrutiny on these deals that Fastow was participating in, and for whatever reason they didn’t do that.

Mr. STEARNS. The board of directors was similarly not informed on March 2001 that Raptor deficit grew to approximately $500 million or that it would require a charge against Enron’s earning in

that quarter if not addressed prior to March 31, 2001. The board

of directors was not informed that the Raptors SPEs were restructured on March 26, 2001 to avoid the anticipated charge to earnings. And the board was not informed about the transfer of approximately $800 million of Enron stock contracts that was part of

the restructuring. Causey and Buy were aware of the deficit and

restructuring. Why did they fail to mention them to the board? And

you are saying they were totally intimidated. That is what you are

conjecturing.

Mr. POWERS. They wanted to—I think at that point, at the point

that you are describing with the restructuring, I think now they

would have a motivation—I don’t know what happened—of not

having come out all the structures that had been there before.

Mr. STEARNS. Dean Powers, my last question.

Mr. POWERS. Yes.

Mr. STEARNS. Did you ever ask him the same questions I am asking you? Why didn’t they refer—based upon all this restructuring and all this loss and this $800 million of Enron stock contracts as

part of the restructuring, did your group ever say to Mr. Causey

and Mr. Buy, ‘‘Hey, fellas, why didn’t you tell the board of directors?’’ Mr. POWERS. We did ask them that question—— Mr. STEARNS. And what was his answer?

Mr. POWERS. [continuing] and his answer, what he said was by

the time of the next board meeting, they had fixed the problem; in

fact, they had and it kept going on. But by the time of the next

board meeting, they thought they fixed it, so they didn’t mention

it. I do not think——

Mr. STEARNS. Who said they fixed the problem?

Mr. WHITFIELD. The gentleman’s time has expired.

Mr. STEARNS. Okay. Thank you.

Mr. WHITFIELD. The gentlelady from Colorado is recognized for

5 minutes.

Ms. DEGETTE. Thank you, Mr. Chairman. Mr. Powers, I assume

you are familiar with the corporate governance guidelines of the

Board of Directors of Enron, are you?

Mr. POWERS. Yes.

Ms. DEGETTE. I was just looking over these a little while ago. Dr.

Jaedicke, as I understand, is the chairman of the Audit and Compliance Committee, or was during the relevant time; is that right?

Mr. POWERS. Yes, and I believe still is.

Ms. DEGETTE. Okay. And what these guidelines say is the Audit

and Compliance Committee serves as the overseer of Enron’s financial reporting process, system of internal controls and corporate

compliance process, and it provides reasonable assurance that

Enron conducts its business in conformance with appropriate legal

and regulatory standards and requirements. Do you think that the

Audit and Compliance Committee met those standards?

72

Mr. POWERS. If I could just preface it, that the committees of the

board are entitled to rely on statements by management, unless

they have reason to believe those statements by management are

unreliable.

Ms. DEGETTE. Well, yes, I understand, but——

Mr. POWERS. So whether they met that obligation I don’t know.

I don’t think the board generally looked hard enough into these

very complicated transactions, knowing of these conflicts of interest.

Ms. DEGETTE. Well, and case in point, annually the Audit and

Compliance Committee was given a deal approval sheet by which

they were supposed to look at the related party transactions, right?

Mr. POWERS. Yes.

Ms. DEGETTE. And that is the sheet we were talking about before

where everybody signed it but Skilling, right?

Mr. POWERS. No.

Ms. DEGETTE. No?

Mr. POWERS. There is an approval of LJM——

Ms. DEGETTE. Right.

Mr. POWERS. [continuing] which Skilling was supposed to approve—was at the board, he did approve it, he just didn’t sign off

on the sheet.

Ms. DEGETTE. Right, but he didn’t sign it.

Mr. POWERS. Then there are the—once LJM was set up, there

are the individual hedging deals between Enron.

Ms. DEGETTE. Okay. Right, right. You are right, you are right.

But did the Audit Committee review those?

Mr. POWERS. They had a meeting where Causey said, ‘‘Here are

the transactions,’’ and they didn’t do anything more than that.

Ms. DEGETTE. They didn’t do anything more than that.

Mr. POWERS. Correct.

Ms. DEGETTE. That would seem to me, if I were one of the small

investors who had all my 401(k) invested in this Enron stock, I

would think that that would not provide me with reasonable assurance that these deals were being conducted in conformance with

appropriate legal and regulatory standards and requirements. I

don’t know.

Mr. Winokur was the chairman of the Finance Committee, which

under the guidelines reviews and makes recommendations to the

board and management on matters concerning both current and

long-range financial strategy and planning, including, without limitation, budgets, dividends, equity offerings, debt and other financing, foreign exchange policy, investment policy and trading limits

policy, correct?

Mr. POWERS. Yes, that is correct.

Ms. DEGETTE. Now, in reviewing everything you have reviewed,

do you think the Finance Committee fulfilled its obligation?

Mr. POWERS. Not knowing the details of the standards of securities law, I don’t know the answer from a legal point of view.

Ms. DEGETTE. Yes, but Mr. Powers, you know what happened

here with these financial——

Mr. POWERS. I don’t think they oversaw these transactions sufficiently.

73

Ms. DEGETTE. Thank you. Now, do you have any idea what were

the limits of the directors and liabilities insurance that the Enron

Board had? That might be of interest to many of the board members.

Mr. POWERS. I think I do, but I would like to check.

Ms. DEGETTE. Thank you.

Mr. POWERS. I am not absolutely sure. My understanding is it is

$350 million.

Ms. DEGETTE. Thank you. Now, quickly, I just want to talk about

the South Hampton deal, because we had mentioned that before.

And in your report, you talked about Ms. Mordaunt who is the lawyer—in-house lawyer for Enron, Kathy Lynn, who is an employee

in the finance area, and Ann Yaeger Patel, who is also an employee

at Enron Global Finance. You said that they appeared to have violated Enron’s code of conduct by accepting interest in the South

Hampton Place deal without the consent of Enron’s chairman and

CEO, correct?

Mr. POWERS. That is correct.

Ms. DEGETTE. Can you talk for a minute about what the South

Hampton deal was, briefly?

Mr. POWERS. When the Rhythms net was unwound, there was a

partnership formed to take the distributions from that transaction,

and this was a partnership formed to take in some of the distributions from that unwind.

Ms. DEGETTE. Now——

Mr. WHITFIELD. The gentlelady’s time has expired.

Chairman TAUZIN. Mr. Chairman, could I ask unanimous consent

the gentlelady have 2 additional minutes? I think she is on a good

trail here.

Mr. WHITFIELD. Without objection, the gentlelady has 2 additional minutes.

Ms. DEGETTE. Thank you very much, and thanks to the chairman of the full committee. Didn’t some of these employees also

work for LJM and get bonuses from that partnership?

Mr. POWERS. I believe so, yes.

Ms. DEGETTE. And that is the partnership you just said a few

minutes ago in which Mr. Fastow, in exchange for $25,000, got $4.5

million for his Family Foundation, right?

Mr. POWERS. That was the South Hampton partnership, yes.

Ms. DEGETTE. Right, that is the one we are talking about right

here.

Mr. POWERS. Yes, exactly.

Ms. DEGETTE. Now, on page 16 of your report, you also say that

two other employees who each invested $5,800 in the South Hampton deal each received a million dollars in the same time period,

correct?

Mr. POWERS. Yes.

Ms. DEGETTE. Who were those two employees, and how did they

get those returns, if you have any idea?

Mr. POWERS. That was Yaeger—I am sorry, Glisan and

Mordaunt.

Ms. DEGETTE. Okay.

Mr. POWERS. Glisan and Mordaunt.

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Ms. DEGETTE. Now, Mordaunt is a lawyer who worked on some

of these deals for Enron, correct?

Mr. POWERS. Yes.

Ms. DEGETTE. And now when she talked to committee staff, it

is my understanding that she never asked Mr. Kopper what the investment was, because it was such a small amount of money. Then

1 day Mr. Kopper said, ‘‘Where do we wire the money,’’ and then

low and behold it was a million dollars. She didn’t ask questions

then either. Now, as an attorney for Enron, Mr. Powers, don’t you

think that Ms. Mordaunt had an ethical responsibility to know

where the money was coming from and if it conflicted with her client’s interests?

Mr. POWERS. Yes.

Ms. DEGETTE. Thank you. No further questions.

Chairman TAUZIN. But would the gentlelady—— Ms. DEGETTE. Oh, happy to yield.

Chairman TAUZIN. Before that, the gentlelady yield. Didn’t Ann

Yaeger, later Ann Yaeger Patel, contribute $2,900 and take about

$500,000 back?

Mr. POWERS. Yes, that is my understanding.

Chairman TAUZIN. And didn’t Kathy Lynn, another Enron em- ployee, contribute $2,330 and take back about $500,000 as well?

Mr. POWERS. Yes.

Chairman TAUZIN. And they were in the same position as these

two employees that the gentlelady just discussed; is that right?

Mr. POWERS. They weren’t lawyers.

Chairman TAUZIN. They weren’t lawyers, but they were employees of Enron—— Mr. POWERS. Absolutely.

Chairman TAUZIN. [continuing] in violation of the code of ethics,

investing in a partner to whom Enron was dealing and taking out

an extraordinary rate of return. Did you ask them if they ever

questioned why they got so much money back?

Mr. POWERS. Yes. They declined to be interviewed.

Chairman TAUZIN. Who do they work for?

Mr. POWERS. They work for Enron.

Chairman TAUZIN. But for whom at Enron?

Mr. POWERS. They work for LJM now.

Chairman TAUZIN. Now, but who did they work for at the time?

Mr. POWERS. They worked for Enron in the Finance Group.

Chairman TAUZIN. In the Finance Department.

Mr. POWERS. Yes.

Chairman TAUZIN. And who was their immediate supervisor?

Mr. POWERS. I don’t know who their immediate supervisor was.

Fastow was——

Chairman TAUZIN. I am thinking it was Michael Kopper; is that

correct?

Mr. POWERS. It may be, but I don’t——

Chairman TAUZIN. I would like you to supplement that answer,

if you can determine it, for the record.

Mr. POWERS. Okay.

Chairman TAUZIN. Thank the gentlelady.

Mr. WHITFIELD. The gentleman’s time has expired.

Ms. DEGETTE. Reclaiming my time.

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Mr. DINGELL. Could I ask unanimous consent the gentlelady

have 1 additional minute?

Mr. WHITFIELD. Is the gentleman asking that the chairman have

an additional minute or the lady from Colorado?

Mr. DINGELL. The gentlewoman from Colorado.

Mr. WHITFIELD. Without objection, the gentlelady from California

is recognized for 1 additional minute.

Ms. DEGETTE. Colorado, please.

Mr. WHITFIELD. I mean Colorado. What did I say?

Ms. DEGETTE. I yield to my friend from Michigan.

Mr. DINGELL. And I thank my dear friend. I have a curiosity.

How many of these people have cooperated with you and been

fully—of those mentioned, and have been fully forthcoming in

terms of all of the events and the production of records?

Mr. POWERS. Of these people we are talking about? Mordaunt did

talk with us, and I think Mordaunt, even before she talked with

us, did go to talk to the general counsel of the company.

Mr. DINGELL. How about the others?

Mr. POWERS. The others have not cooperated with us.

Mr. DINGELL. Would you name then those who have not cooperated?

Mr. POWERS. I think Glisan, Yaeger, Patel—— Ms. DEGETTE. Lynn?

Mr. POWERS. Yes, Lynn and of course Kopper has not either.

Mr. DINGELL. And I gather that Andersen has not permitted the

committee to review all its working papers too; is that right?

Mr. POWERS. Well, yes. Andersen—we had long negotiations with

Andersen. We have seen some of their papers, we haven’t seen

other papers. We never got to interview them. When Enron finally

discharged them, they then said, ‘‘We are not’’—we had been discussing interviewing their employees and then they finally said no.

Mr. DINGELL. Did Andersen tell you why they are not cooperating with you?

Mr. POWERS. Well, they told us they weren’t cooperating with us

because Enron discharged them. That was what they said.

Mr. DINGELL. Do they not have a continuing fiduciary duty to

their former client to discuss matters which went on between Andersen and Enron?

Mr. POWERS. To be honest, after discharge, whether they do or

not, I don’t know the answer to that question.

Mr. DINGELL. What does your logic tell you?

Mr. POWERS. I think they ought to cooperate fully with getting

to the bottom of this. Legally, whether their fiduciary ends, I just

don’t know the answer to that.

Mr. WHITFIELD. The gentleman’s time has expired.

Mr. DINGELL. And I thank the gentlewoman; I thank the Chair.

Mr. WHITFIELD. The Chair will now grant himself 5 minutes.

Dean Powers, this relates to the Chewco transaction, and I think

Mr. Greenwood touched on this, but on the issue of trying to meet

the reserve account for the Barclay’s Bank, in your report, you stat- ed that others told us that those matters involving the $6 million

side agreement and reserve accounts were known openly and discussed. Could you tell me who those others were, the names of

those others?

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Mr. POWERS. I am not sure we know, other than people said that

it was being discussed. Of the people that told us, Shirley Hudler

is one person.

Mr. WHITFIELD. Shirley Hudler?

Mr. POWERS. Yes. I think there may have been other people that

have told us that I don’t recall now.

Mr. WHITFIELD. Okay.

Mr. POWERS. There were also notes from meetings where this

issue was discussed to some extent, and I don’t know now whether

there is an indication of who was at those meetings or if there was,

who they were.

Mr. WHITFIELD. We would ask that you supply those notes. Can

you do that?

Mr. POWERS. The same thing. It is not my property to dispose of,

but we will certainly address that to Enron.

Mr. WHITFIELD. Okay. You will talk to Enron.

Mr. POWERS. And we will support that request.

Mr. WHITFIELD. Okay. Now, let me ask you this: Do you think

that the transfer by Mr. Kopper of his ownership interest in

Chewco’s limited partner to his domestic partner, William Dodson,

resolved the accounting and disclosure issues, as Enron, Andersen

and Vincent & Elkins apparently all did?

Mr. POWERS. I am not sure we know whether he was his domestic partner at the time, which would be relevant to this. Kopper

and Dodson didn’t talk with us. If it was his domestic partner at

the time, that certainly raises an issue of whether Kopper still had

control.

Chairman TAUZIN. Would the chairman yield?

Mr. WHITFIELD. Yes.

Chairman TAUZIN. My understanding is our investigators have

determined that they were. I believe that they were.

Mr. POWERS. Yes. I am not saying they weren’t. That was a fact

that we were unable to track down.

Chairman TAUZIN. Thank you.

Mr. WHITFIELD. Did you find any evidence that despite this

transfer of ownership interest that Mr. Dodson actually exercised

any control over the limited partners or exercised control?

Mr. POWERS. I don’t think we know what Mr. Dodson did.

Mr. WHITFIELD. So you don’t have any evidence on that. Now, on

page 61 of your report, you discussed the buyout of Chewco by

Enron, in which Enron paid Chewco Kopper $10 million. Did you

find any evidence of improper influence by Fastow or others on

Kopper’s behalf in that transaction?

Mr. POWERS. Yes. Fastow is the one that negotiated with Kopper

on this deal.

Mr. WHITFIELD. So he was negotiating with the person that reported to him at Enron?

Mr. POWERS. Yes.

Mr. WHITFIELD. Okay. And what did Mr. McMahon tell you

about his involvement in this transaction and the conversations he

had with others about it, including Mr. Fastow?

Mr. POWERS. I believe he knew about these negotiations and had

complained that $10 million was too much.

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Mr. WHITFIELD. Did he indicate what he would consider to be the

appropriate price?

Mr. POWERS. My recollection is about a million dollars, but——

Mr. WHITFIELD. A million dollars.

Mr. POWERS. About a million dollars.

Mr. WHITFIELD. So he was aware of that then, okay. You have

already indicated that your conversations with Fastow were quite

short, and that is correct, right?

Mr. POWERS. It took about an hour, but there is very little information.

Mr. WHITFIELD. Did he tell you about his involvement in this

deal at all? Did he talk about his involvement in that transaction?

Mr. POWERS. He gave—sorry.

Mr. WHITFIELD. On page 61, footnote 17, it indicates that,

‘‘Fastow told us that he had not participated in these negotiations.’’

Mr. POWERS. Right. And then we had a document that demonstrated that wasn’t true, and at that point he stopped talking to

us, or meaningfully talking to us.

Mr. WHITFIELD. And what was that document?

Mr. POWERS. It was a document that demonstrated he had participated in these negotiations.

Mr. WHITFIELD. And you have that document.

Mr. POWERS. Yes.

Mr. WHITFIELD. Okay. And we would also like to have that, and

if you would talk to Enron about that and——

Mr. POWERS. Okay.

Mr. WHITFIELD. [continuing] support us in our efforts.

Mr. POWERS. And I will say we will support providing whatever

information and backup of this information the committee needs.

Mr. WHITFIELD. And we appreciate that very much. The Special

Committee’s report states how facetious earnings from the Raptors

accounted for more than 80 percent of Enron’s earnings from the

last two quarters of the year 2000. Even if no one knew about the

problems lurking with the Raptors at that time, wouldn’t the very

fact that 80 percent of earnings are coming from transactions with

a partnership headed by Enron’s CFO have been enough to send

off alarms in the investor and analyst communities?

Mr. POWERS. Yes. I think it was a little over 70 percent, but, yes,

I would think that would be something that would have set off concerns in the investor community.

Mr. WHITFIELD. Okay. And what was Enron’s Board of Directors’

understanding regarding the Enron/LJM2 services agreement?

Mr. POWERS. The board members that we talked to said they understood—well, some said they didn’t know about that. Those who

did said they assumed it was a very minor services agreement for

back office booking of transactions, and that it was not significant.

Mr. WHITFIELD. And did the members of the board of directors

understand that Enron’s own employees were negotiating on behalf

of LJM2 against Enron?

Mr. POWERS. Yes. They understood that Fastow was representing

LJM1 and LJM2.

Mr. WHITFIELD. Any others, other than Fastow, that they understood?

78

Mr. POWERS. They say that they didn’t know that other Enron

employees were then over on the services agreement working for

Fastow and negotiating on the basis of LJM.

Mr. WHITFIELD. But the entire board was aware of Fastow’s involvement.

Mr. POWERS. Yes, yes.

Mr. WHITFIELD. Okay. All right. That is the end of my questions.

I recognize the gentleman from Illinois for 5 minutes.

Mr. RUSH. Thank you, Mr. Chairman. Mr. Powers, I want to get

back to this question of bona fide economic objectives. And in your

estimation, how common is it for corporations to misuse SPEs

merely to accomplish favorable financial results and not achieve

bona fide economic objectives or risks—or transferring risk? And is

this abuse specific to certain industries? And I also would like for

you just to give us some examples of what you would call a bona

fide economic objective or transfer of risk.

Mr. POWERS. Okay. In answer to the first part of your question,

I don’t know how widely used, how they are used by other companies, and I hope and I am quite sure other companies are looking

into how they are using.

I think there are two different kinds of transactions here. One

is a hedging transaction, and there is nothing inappropriate about

a hedging transaction to take risk from a company. We all do it,

in a sense, when we buy insurance, as long as you are really buying insurance, rather than just setting up something to look like

a hedging transaction that isn’t accomplishing that purpose. That

is the first issue.

The second are these SPEs to, as we say, put debt off the books,

and I would just give two examples. If I buy 100 shares of Ford

Motor Company, I risk the value of my equity but not all the balance sheet of the Ford Motor Company when I consolidate it into

my financial statements, and that seems appropriate. If I own almost—you know, if I own all of the Ford Motor Company, maybe

it should be different. When I lease equipment rather than buy

equipment, one of the considerations I may take into account is I

don’t want to have the debt on the equipment on my balance sheet.

So these are extremely difficult policy questions for the accounting

industry, for Congress, for the Securities and Exchange Commission to sort out how these ought to be used. But I do think it would

be unfair to come away with the Enron experience thinking that

all hedges or all special-purpose vehicles are inappropriate. They

are not; they are often and I desperately hope by most people in

the country used in appropriate ways.

Mr. RUSH. With that in mind, I know you are not a securities expert—you have testified about that on more than one occasion this

afternoon—but do you have an opinion or opinions in terms of how

we, as Members of Congress, can avoid the abuses of SPEs that

were perpetuated by Enron without doing away with what you

have clearly defined as the more legitimate purposes and benefits

of SPEs?

Mr. POWERS. Well, I look at it, from a non-securities expert, as

a fairly simply issue: There ought to be transparency. To the extent

that the problem here is that the existing laws might have been

enforced, then enforcement. To the extent that the existing laws

79

aren’t requiring enough transparency, then maybe the existing

laws need to be changed. But transparency is absolutely crucial,

and that was one of the problems here.

Mr. RUSH. I want to try to get quickly back to the question of

Mr. Richard Buy here, who is the Enron senior risk officer. In staff

interviews with Mr. Buy, he suggested, similar to the findings of

your report, that his group was not charged with the responsibility

of evaluating Enron’s big picture risk as it related to all of these

activities in total. What then is the role of someone who is the risk

management officer, the risk manager, is it just to look at a risk

change here or a risk change there or a willy nilly look at this or

do they have to be more focused and more concerted in their efforts?

Mr. POWERS. As I indicated at the outset of my testimony, Enron

isn’t just a pipeline and energy trading company; it has a very significant investment portfolio. And a primary, if not only, job of the

risk assessment group was to evaluate the risks of those investments, diversification, what doing due diligence on the investments

and things like that. I am not an expert on this, but as an investment manager, that was one of the roles.

Mr. RUSH. Mr. Chairman, one additional question here. According to your report, the board of directors also charged Mr. Buy with

a substantial role in the oversight of Enron’s relationship with the

LJM partnerships, and he was supposed to review and sign off

every deal. Why then was Mr. Buy not in a position to see the multitude of problems and conflicts facing these partnerships and

Enron? Do you any thoughts on that?

Mr. POWERS. Well, I think he was in a position to see that these

were not arms-length deals.

Mr. RUSH. So you say he was in a position.

Mr. POWERS. He might not have been in a position to see the

complexities of the underlying transactions, but he was in a position to monitor the arms-length nature of many of these deals.

Mr. RUSH. Thank you, Mr. Chairman. I yield back.

Mr. WHITFIELD. The gentleman’s time has expired. The gentleman from Texas is recognized for 5 minutes.

Mr. GREEN. Thank you, Mr. Chairman. First, Mr. Powers, I appreciate you spending all this time with the subcommittee this

afternoon. I may be the last questioner, but let me ask you some

questions about Arthur Andersen accounting firm. In your report,

it stated that, ‘‘Evidence available to us,’’ and I am quoting, ‘‘suggests that Andersen did not fulfill its professional responsibilities

in connection with its audits and Enron’s financial statements or

its obligations to bring to the attention of Enron’s Board concerns

about Enron’s internal controls.’’ What specifically should Andersen

have been doing that it was not doing?

Mr. POWERS. Well, we have, throughout the morning and afternoon, talked about many, many things in the accounting, including

the overall structure of hedging with one’s own stock that were, we

think inappropriate, but at a minimum very questionable. And in

their audit should have brought those to the attention of the Audit

Committee.

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Mr. GREEN. Since Arthur Andersen earned $5.7 million in consulting fees to set up the LJM deals, how could they not have

known about the outside equity was bogus?

Mr. POWERS. Well, they may have known that, but the source of

the money to back the Big River and Little River loans was from

Barclay’s, and the only reason it wasn’t equity was it was backed

with a reserve account that came from a distribution from JEDI in

a very complicated way, and I must say, it is not possible, even in

a thorough audit, to see every little movement of money. Again, I

am not an accountant who goes through these audits. I would not

be surprised by that claim that we didn’t know that. I don’t know

whether it is true or not. And I don’t think—in the report, we have

not stated otherwise. We don’t know whether Andersen was aware

that the Big River and Little River loans in Chewco were backed

by reserve accounts, which made them not equity but debt.

Mr. GREEN. You also mentioned that Andersen participated in

the structuring and accounting treatment of the Raptor transactions and charged again over a million dollars for its services, yet

it apparently failed to provide the oversight to prevent those transactions from going forward. Was Andersen purely—and I hate to

say this about such a great company I thought of so many years,

their partnership—was it purely incompetent in its duties or simply taking advantage of a company that appears to be out of control? In other words, was Andersen there as a whistleblower or to

earn fees?

Mr. POWERS. Well, I don’t know why Andersen did not recognize

these issues. What we do say is that as the Raptors, for example,

were being developed, Andersen was providing accounting services

of some sort, whether we call them consulting, or real-time accounting. They were providing real-time accounting as those were

being developed, and they did not bring to the attention of the

board—they did not bring independent judgment to bear on those

transactions. If they did, they didn’t do it adequately.

Mr. GREEN. I guess it is frustrating being from Houston and seeing the tragedy and the devastation from Enron and the collapse,

and I guess—and I have read lots of articles—I guess Enron could

be the Michael Milken in a tall, shiny skyscraper in downtown

Houston. And it is just such a shock to watching a company over

15 or 16 years grow and be so successful and aggressive but aggressive to the point where they created these multiple partnerships. It is just astonishing, I guess.

Mr. POWERS. Well, Congressman, being not too far up the road

from Houston and being in Houston quite a bit——

Mr. GREEN. Hundred and sixty-two miles; I have driven it lots

of times.

Mr. POWERS. [continuing] this is a terrible tragedy for Houston

and our part of the country. Yes, there is a lot of technical material

we have talked about today, but I think you are absolutely right

to bring that point that this is a great human tragedy for many individuals.

Mr. WHITFIELD. The gentleman’s time has expired.

Mr. GREEN. Thank you, Mr. Chairman.

Mr. WHITFIELD. I understand the chairman of the entire committee seeks recognition?

81

Chairman TAUZIN. I seek recognition with the consent of the

members to do something on behalf of our investigation, collectively, and ask the gentleman a few more questions, if you don’t

mind. Would the gentleman yield?

Mr. WHITFIELD. Without objection.

Chairman TAUZIN. On behalf of our investigation, Dean Powers,

has the alleged shredding of documents at Enron impeded the investigation of your committee in any way?

Mr. POWERS. I don’t think so. We haven’t seen some hole that,

‘‘Where is that?’’ Having said that—and we haven’t had the opportunity to go through a lot of documents. We haven’t been able to

download a lot of e-mail. So there is a great deal of material.

Chairman TAUZIN. Do you admit going in that you had limited

access to documents?

Mr. POWERS. Correct.

Chairman TAUZIN. Are you aware of why shredding is occurring

at Enron as late as January and what is being shredded? Why did

they hire a company called Shredco to come in and do all this

shredding?

Mr. POWERS. I don’t know. I can’t answer that.

Chairman TAUZIN. Well, you have not asked that question in the

purview of your investigation? Didn’t it disturb you that all this

shredding is going on while you are trying to do this investigation

for the board?

Mr. POWERS. Well, I mean I read about it in the paper, and we

did ask, are there areas of documents that we are not getting, are

there transactions that we can’t understand? And we came to the

conclusion that we were trying to move ahead expeditiously, that

there were not gaps in our——

Chairman TAUZIN. Did you ask the question, why is all this

shredding going on?

Mr. POWERS. We did talk to the FBI about that and cooperated

with the FBI and——

Chairman TAUZIN. This is going on while the FBI is there in

Houston?

Mr. POWERS. No, no. They came in after the——

Chairman TAUZIN. After the shredding?

Mr. POWERS. [continuing] after the shredding had started.

Chairman TAUZIN. Just to put in this perspective, my understanding from the investigators, Mr. Dingell, is that the web site

of the shredding company, Shredco, opens up with a statement,

‘‘You think you got rid of it, now you are being sued. Call us, we

guarantee destruction.’’ And Enron would hire a company with that

as their invite to come in and shred documents in the middle of all

this. Doesn’t that disturb you?

Mr. POWERS. Well, I agree these allegations of shredding are extremely serious allegations that the FBI ought to look into.

Chairman TAUZIN. And to put this in perspective, because you

had limited access to documents anyhow, you can’t know whether

documents were being shredded that may have aided and assisted

you in understanding the intricacies and the involvement of parties

in these affairs.

82

Mr. POWERS. Right. We can’t know whether some of those documents would have helped us or whether even if they had not been

shredded we would have gotten them.

Chairman TAUZIN. Thank you, Mr. Chairman.

Mr. WHITFIELD. Dean, I know you will be disappointed, but that

probably concludes the hearing. And on behalf of the committee, I

want to thank you so much for being here today and testifying.

Your report of the Special Investigative Committee has been particularly helpful to us as we continue our efforts to get to the bottom of this and to determine what we can do from preventing this

in the future. So thank you very much for joining us.

Mr. POWERS. Thank you.

[Whereupon, at 2:45 p.m., the subcommittee was adjourned.]