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THE FINANCIAL COLLAPSE OF ENRON—Part 4

HEARING

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

MARCH 14, 2002

Serial No. 107–90

Printed for the use of the Committee on Energy and Commerce

(

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

2

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 

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 

— — (Vacancy) 

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 

RICHARD BURR, North Carolina 

ED WHITFIELD, Kentucky 

Vice Chairman 

CHARLES F. BASS, New Hampshire 

— — (Vacancy) 

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) 

3

C O N T E N T S 

Page

Testimony of: 

Astin, Ronald T., Partner, Vinson & Elkins, L.L.P ....................................... 15

Derrick, James V., Jr., Former General Counsel, Enron Corporation ......... 16

Dilg, Joseph C., Managing Partner, Vinson & Elkins, L.L.P ....................... 19

Rogers, Rex R., Vice President and Associate General Counsel, Enron 

Corporation .................................................................................................... 15

Sefton, Scott M., former General Counsel, Enron Global Finance, Enron 

Corporation .................................................................................................... 15

St. Clair, Carol L., former Assistant General Counsel, ECT Resources 

Group, Enron Corporation ............................................................................ 22

(III) 

(1)

FINANCIAL COLLAPSE OF ENRON CORPORATION, WITH FOCUS ON ENRON’S INSIDE 

AND OUTSIDE COUNSEL 

THURSDAY, MARCH 14, 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. 

Members present: Representatives Greenwood, Stearns, Burr, 

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

DeGette, and Dingell (ex officio). 

Also present: Representatives Markey, Green, and Waxman. 

Staff present: Tom Dilenge, majority counsel; Mark Paoletta, majority counsel; Brendan Williams, legislative clerk; Mike Geffroy, 

majority counsel; Will Carty, legislative clerk; Peter Kielty, legislative clerk; Shannon Vildostegui, majority counsel; David Cavicke, 

majority counsel; Brian McCullough, majority professional staff; 

Edith Holleman, minority counsel; Consuela Washington, minority 

counsel; Chris Knauer, minority investigator; and Jonathan 

Cordone, minority counsel. 

Mr. GREENWOOD. The hearing will come to order. 

Witnesses may be seated at the table. Good morning and welcome to the Subcommittee on Oversight and Investigations’ ongoing inquiry into the financial collapse of the Enron Corporation. 

Today we are going to examine elements of Enron’s structure of 

corporate governance. The words ‘‘corporate governance’’ describe 

the entire architecture of how a modern corporation is managed on 

behalf of its investors and stockholders, its customers, and its employees. 

This encompasses executives at every level, corporate accounting 

teams, corporate counsel, senior managers, and the Board of Directors. It also includes the outside expert advice, often consultants, 

attorneys, and accountants, that senior management, the Board of 

Directors, or the Audit Committee of the Board retained to provide 

advice on a wide array of issues. These issues ranged from human 

resources to tax analyses to producing an audited financial statement. 

Up to this point, our work has focused primarily on what went 

wrong at Enron. Through our work we have been able to cast a 

considerable amount of light on the people and transactions behind 

2

this company’s unparalleled failure. As a result of this effort, we 

have been able to slowly parse the complex of self-dealing transactions that contributed to Enron’s dramatic descent into bankruptcy. 

We have also acquired a more complete understanding of how 

these highly irregular transactions were cloaked behind a curtain 

of nearly impenetrable financial arrangements. We know much 

more, too, about the individuals who devised and implemented 

these schemes. 

And it becomes increasingly clear that the collapse of Enron, 

which was greeted with such surprise by investors, shareholders, 

customers, analysts, and employees alike, was more than mere 

happenstance. Instead, a complex infrastructure of ill-defined partnerships, hedges, collars, and various other off-the-books transactions were purposefully designed to mislead shareholders about 

Enron’s precarious financial position. 

Phantom assets and phantom earnings were created in order to 

create phantom wealth. Sadly, the investors and employees who 

risked their fortunes and their futures were very real, and they 

suffered very real losses. 

Among the many mysteries yet surrounding this collapse, one in 

particular has emerged. What role, whether by omission, commission, did Enron’s corporate governance team play in the slide into 

bankruptcy and the increasing reliance on riskier and riskier transactions to keep Enron afloat? 

It is especially important to undertake this examination, since 

we now know that many of the seeds of this particular financial 

tragedy were sewn years ago. How is it, then, that the Board of Directors and senior management failed to red flag flagrant issues of 

conflict of interest and highly questionable transactions behind several key partnerships, such as the Chewco deal and the various 

LJM associated transactions? 

What we have discovered to date amounts to a systemic failure 

on the part of Enron’s legal and accounting personnel, as well as 

outside counsel and accountants, both to discover these problems 

and to warn of their dangers. Clearly, no actions were taken to prevent the ensuing disaster. 

A few courageous individuals attempted to raise the alarm, but 

either their warnings came too late or too half-heartedly. Or perhaps the right people didn’t hear the alarms. 

This disserving situation brings us to the question at hand today. 

Where were the faithful stewards of Enron? In particular, where 

were the people whose fiduciary duty it was to guard against hidden dangers and to protect the interests of Enron and its shareholders? Where were the professionals whose job it was to ferret 

out wrongdoing and guard against malfeasance? What, if any, actions did they either take or recommend to put an end to those irresponsible actions which eventually led to Enron’s demise? 

This phase of our hearing involves the people who were paid to 

have known better, and who should have done more, much more, 

the accountants and lawyers. Next week we will have a chance to 

hear from the accountants. This morning we have before us the attorneys, Enron’s inside and outside counsel. 

3

I look forward to this opportunity to listen to their testimony 

about a wide array of issues, particularly their actions and advice 

surrounding the many dubious related party transactions. For example, I’d like to get a clearer understanding of the attorneys’ assessments and advice on the thorny ethical problems surrounding 

the two LJM partnerships which did business with Enron, even 

though these partnerships created a clear conflict of interest with 

Enron’s former CFO Andy Fastow, who succeeded in having a financial stake on both sides of the transactions. 

I would like to know why legal counsel worked so hard to minimize what Mr. Fastow disclosed about his financial arrangements 

with the partnerships in proxy filings. Was his comfort level about 

disclosure more compelling than the interests of Enron and its 

shareholders in ensuring that he wasn’t benefiting improperly at 

their expense? 

I would like to learn about the attorney’s role and advice in the 

formation and evidence of the LJM Enron transaction approval 

process. It was this document that was supposed to manage the inevitable conflicts arising out of such a curious arrangement and ensure the fairness of these transactions to Enron and its shareholders. 

Why did it take so long for the lawyers to catch inherent weaknesses in the process? And why weren’t these corrected in a timely 

manner? 

I also want to know why no one seemed to be monitoring the actions of senior Enron employees working on behalf of outside interests, and why the LJM2 private placement memorandum, in which 

Mr. Fastow and other Enron employees were marketing their access to inside information, failed to raise any red flags to those responsible for looking out for Enron’s interests? 

We are not looking at 1 or 2 missteps here, but a pattern of behavior characterized by neglect and avoidance by Enron’s legal advisors. We will also look at the series of decisions and actions following Sherron Watkins’ letter to Kenneth Lay. Who made the decision that the investigation of her serious allegations by Enron’s 

outside counsel, Vinson & Elkins, should be so limited, and on 

whose advice? 

We have a lot of ground to cover, so let me thank the witnesses 

who have come today. You all have been responsive to our requests 

for interviews, and we appreciate that. We also appreciate that you 

have come here voluntarily to try to help us understand your role 

in these matters. We thank you again. 

I will now recognize the ranking member, the gentleman from 

Florida, Mr. Deutsch. 

[The prepared statement of Hon. James C. Greenwood follows:]

PREPARED STATEMENT OF HON. JAMES C. GREENWOOD, CHAIRMAN, SUBCOMMITTEE

ON OVERSIGHT AND INVESTIGATIONS

Good morning, and welcome to the Subcommittee on Oversight and Investigations’

ongoing inquiry into the financial collapse of the Enron Corporation. Today, we are 

going to examine elements of Enron’s structure of ‘‘Corporate Governance’’. The 

words Corporate Governance describe the entire architecture of how a modern corporation is managed on behalf of its investors and stockholders, its customers and 

its employees. 

This encompasses executives at every level, corporate accounting teams, corporate 

counsel, senior managers and the Board of Directors. It also includes the outside 

4

expert advice, often consultants, attorneys and accountants, that senior management, the Board of Directors or the Audit Committee of the Board, retain to provide 

advice on a wide array of issues.These issues range from human resources to tax 

analyses, to producing an audited financial statement. 

Up to this point, our work has focused primarily on what went wrong at Enron. 

Through our work, we have been able to cast a considerable amount of light on the 

people and transactions behind this company’s unparalleled failure. 

As a result of this effort, we have been able to slowly parse the complex web of 

self-dealing transactions that contributed to Enron’s dramatic decent into bankruptcy. 

We have also acquired a more complete understanding of how these highly irregular transactions were cloaked behind a curtain of nearly impenetrable financial arrangements. We know much more too about the individuals who devised and implemented these schemes. 

And it becomes increasingly clear that the collapse of Enron, which was greeted 

with such surprise by investors, shareholders, customers, analysts and employees 

alike, was more than mere happenstance. Instead a complex infrastructure of illdefined partnerships, hedges, collars, and various other off-the-books transactions 

were purposefully designed to mislead shareholders about Enron’s precarious financial position. Phantom assets and phantom earnings were created out of whole cloth 

in order to create phantom wealth. Sadly, the investors and employees who risked 

their fortunes and their futures were very real and they suffered real losses. 

Among the many mysteries yet surrounding this collapse, one in particular has 

emerged. What role, whether by omission or commission, did Enron’s corporate governance team play in the slide into bankruptcy and the increasing reliance on 

riskier and riskier transactions to keep Enron afloat? 

It is especially important to undertake this examination, since we now know that 

many of the seeds of this particular financial tragedy were sewn years ago. How 

is it then that the Board of Directors and senior management failed to red flag flagrant issues of conflict of interest and highly questionable transactions behind several key partnerships—such as the Chewco deal and the various LJM-associated 

transactions? 

What we have discovered to date amounts to a systemic failure on the part of 

Enron’s legal and accounting personnel, as well as outside counsel and accountants, 

both to discover these problems and to warn of their dangers. Clearly no actions 

were taken to prevent the ensuing disaster. 

A few courageous individuals attempted to raise the alarm, but either their warnings came too late or too half-heartedly. Or perhaps the right people didn’t hear the 

alarm. This disturbing situation brings us to the question at hand today: 

Where were the faithful stewards of Enron? In particular, where were the people 

whose fiduciary duty it was to guard against hidden dangers and to protect the interests of Enron and its shareholders? Where were the professionals whose job it 

was to ferret out wrongdoing and guard against malfeasance? What, if any actions 

did they either take or recommend to put and end to those irresponsible actions 

which eventually led to Enron’s crack-up? 

This phase of our hearing involves the people who were paid to have known better, and who should have done more... much more—the accountants and the lawyers. Next week we’ll have a chance to hear from the accountants. This morning, 

we have before us the attorneys—Enron’s inside and outside counsel. 

I look forward to this opportunity to listen to their testimony about a wide array 

of issues, particularly their actions and advice surrounding the many dubious ‘‘related party transactions’’. 

For example, I would like to get a clearer understanding of the attorneys’ assessment and advice on the thorny ethical problems surrounding the two LJM partnerships, which did business with Enron even though these partnerships created a 

clear conflict of interest with Enron’s former CFO Andy Fastow... who succeeded in 

having a financial stake on both sides of the transactions. 

I would like to know why legal counsel worked so hard to minimize what Mr. 

Fastow disclosed about his financial arrangements with the partnerships in proxy 

filings. 

Was his comfort-level about disclosure more compelling than the interests of 

Enron and its shareholders in ensuring that he wasn’t benefiting improperly at 

their expense? 

I would like to learn about the attorneys’ role and advice in the formation and 

evolution of the LJM-Enron transaction approval process.it was this process that 

was supposed to manage the inevitable conflicts arising out of such a curious arrangement and ensure the fairness of these transactions to Enron and its shareVerDate Jun 13 2002 08:36 Jul 17, 2002 Jkt 010199 PO 00000 Frm 00008 Fmt 6633 Sfmt 6621 W:\DISC\78506 pfrm17 PsN: 78506
5

holders. Why did it take so long for the lawyers to catch inherent weaknesses in 

the process? And why weren’t these corrected in a timely manner? 

I also want to know why no one seemed to be monitoring the actions of senior 

Enron employees working on behalf of outside interests. And why the LJM2 private 

placement memorandum—in which Mr. Fastow and other Enron employees were 

marketing their access to insider information—failed to raise any red flags to those 

responsible for looking out for Enron’s interests? 

We are not looking at one or two missteps here, but a pattern of behavior characterized by neglect and avoidance by Enron’s legal advisors. 

We’ll also look at the series of decisions and actions following Sherron Watkin’s 

letter to Kenneth Lay. Who made the decision that the investigation of her serious 

allegations by Enron’s outside counsel, Vinson & Elkins, should be so limited? And 

on whose advice? 

We’ve got a lot of ground to cover. So let me thank the witnesses who have come 

today. You all have been responsive to our requests for interviews and we appreciate that. We also appreciate that you have come here voluntarily to try to help 

us understand your role in these matters. Thank you again. 

I will now recognize the Ranking Member.

Mr. DEUTSCH. Thank you, Mr. Chairman. And the reason I asked 

staff to put up this chart is this is a chart that we showed at the 

hearing with the Enron executives of one of the 4,000 partnerships. 

And we have looked inside of the partnership at this point in time, 

and I guess I feel comfortable saying that at least this partnership 

was illegal, because if we look inside of the partnership it did not 

have a business purpose. 

And we can get into the details at a later date, but my understanding is that at least the structure of the partnership was approved by Mr. Derrick and by Mr. Astin. And I guess in the questioning, I guess I am going to ask you direct questions about if we 

now know, or at least you can disagree with my assessment, that 

the partnership itself was a violation of security laws. The structure might not have been, but inside, why did, you know, as attorneys representing a client and representing your company, did we 

miss that? 

And since my understanding is the structure of the partnerships 

were not that much different, and we know that some—at least 

several of the others that we have been able to understand and 

really delve into, also did not have business purposes. Why did that 

occur? 

So I yield back the balance of my time and look forward to questions. 

Mr. GREENWOOD. The Chair thanks the gentleman from Florida 

and recognizes the Chairman of the full committee, the gentleman 

from Louisiana, Mr. Tauzin. 

Chairman TAUZIN. Thank you, Mr. Chairman. And let me commend you again for doing such a thorough job throughout this process, and for the great assistance the minority has provided and 

partnership in which this investigation has occurred. 

This subcommittee’s task has been to investigate the reasons behind the sad tale of Enron’s collapse, so that the full committee can 

understand what went wrong, so that our committee and our committees of Congress might address, legislatively if necessary, some 

of these problems. 

Only by accurately identifying the basic problems can we accurately identify an appropriate remedy. I believe we have gone a 

long way toward this goal, but we have more to learn. And we have 

6

been able to begin exploring remedies because of the subcommittee’s good and instructive work, and I want to thank you for that. 

This morning we turn, of course, to the attorneys in the equation, 

the people whose duty it was to protect the legal interest of Enron 

and its shareholders, and I look forward to hearing what they have 

to say for themselves. 

Last month when we had Sherron Watkins before us I pointed 

out a legal doctrine known as the Doctrine of Last Clear Chance. 

It holds that basically, even if you are totally in the right on the 

highway, if you had the last clear chance to avoid a crash, you 

could be responsible for what happened if you didn’t exercise the 

last clear chance to avoid that accident. 

Indeed, Sherron Watkins offered Enron’s leadership a last clear 

chance to avoid the crash, not to avoid a total loss, not to avoid 

damage, but to avoid potentially a total crash. And what strikes me 

today about her action as a loyal employee was that Sherron Watkins was not an attorney. She did the right thing, I think, but she 

did something that was technically not her job, something that 

might more directly be associated with the legal team, counsel’s office. Vinson & Elkins’ team was responsible, basically, for helping 

Enron make the right legal choices. 

I think, in some respects, the folks who literally had that responsibility and who could have helped avoid the last clear chance, and, 

therefore, this accident, are with us today, and we intend to learn 

as much as we can about what went wrong. Why didn’t this team 

and the counsel’s office at Enron see these problems as clearly as 

a non-attorney, Sherron Watkins, did? 

Well, it is clear from my investigations that others in the company, particularly the Board of Directors, either relied upon the supervision of the legal team and the accounting firm, as Mr. Skilling 

claims to have done, or they are hiding behind that assertion to 

hide the problems of their own failure to supervise the conduct of 

some of their employees. 

I understand that arrangements of duties and functions among 

attorneys are complex. I am an attorney myself, and I understand 

those complexities. Responsibilities, in fact, at Enron were divided, 

and I know that Enron was a huge and a complicated operation, 

so I want to hear your sides of the story as carefully as we can, 

and to understand it as carefully as we can. 

But we want to hear about the LJM transactions, the approval 

processes, which were meant to prevent the CFO from taking advantage of the company and its shareholders. All of these controls 

the Board told us about, you were asked to examine, when, in fact, 

Mr. Lay’s attention was brought to these problems, and he asked 

for assistance from his counsel’s office and eventually from the 

legal team who were hired to protect the company. 

I want to know why the outside counsel, the duty to make sure 

these extremely complex transactions would not put Enron at risk, 

eventually signed off on it and ended up providing legal cover for 

what would turn out to be a very destructive transaction—set of 

transactions. 

I want to know why when Mr. Lay was advised by Ms. Watkins 

that the company was about to implode, that individuals had 

breached their fiduciary duty and were investors, and had breached 

7

their ethical duty and were crossing the line by making money 

from these transactions, and she requested that an outside legal 

team look at what happened, and she requested that outside auditors look at what happened, why it was that the counsel’s office 

ended up, instead, turning to the same legal team whose duty it 

had been in the first place to prevent those transactions from endangering the company, turning to them to ask them if it was a 

good idea to get an outside legal team and then receiving a reply, 

I suppose that you could sort of guess would be coming, that, no, 

everything is okay, we don’t need a legal team to look over our 

shoulder and tell us we did a good job or a bad job. 

Why, instead, wasn’t an outside legal team called in to look at 

whether or not people had adequately protected the company? And 

why it was, at that point, that counsel’s office said maybe it isn’t 

a good idea to get some outside auditors in and check and see 

whether the auditors hired by the company had led us astray. 

Why, instead, the same legal team is called in to give advice to 

the president of the company that, no, you don’t need anybody else 

to look at this, everything is okay. It is a pretty serious problem. 

Mr. Chairman, I look forward to this hearing and look forward 

to giving these important witnesses a chance to clarify these questions and to help us understand these complex relationships. I 

yield back my time. 

[The prepared statement of Hon. W.J. ‘‘Billy’’ Tauzin follows:]

PREPARED STATEMENT OF HON. W.J. ‘‘BILLY’’ TAUZIN, CHAIRMAN, COMMITTEE ON

ENERGY AND COMMERCE

Thank you Chairman Greenwood. And let me commend you for doing such a thorough job throughout this process. This Subcommittee’s task has been to investigate 

the reasons behind this sad tale of Enron’s collapse, so that the Full Committee can 

understand what went wrong. 

Only by accurately identifying the basic problems can we accurately identify an 

appropriate remedy. And I believe we’ve gone a long way towards this goal. We have 

more to learn, but we’ve been able to begin exploring remedies because of the Subcommittee’s good and instructive work, and I thank you for that. 

This morning we turn to the attorneys—the people whose duty it was to protect 

the interests of Enron and its shareholders. I look forward to hearing what they 

have to say for themselves. 

Last month, when we had Sherron Watkins before us, I pointed to a legal doctrine 

known as the last clear chance; this holds that, basically, even if you’re totally in 

the right on the highway, if you had that last clear chance to avoid a crash, you 

could be responsible for what happened. 

Sherron Watkins offered Enron’s leadership that last clear chance to avoid the 

crash. And what strikes me today about her action as a loyal employee was that 

Sherron Watkins was not an attorney. She did the right thing, but she did something that was not in her job description, something not directly associated with her 

function at Enron. 

What also strikes me is that some of the people who should have shown Enron 

leadership the proper course—who could have prevented the crash—are sitting before us today. They could have acted before matters got out of hand. They could 

have been more skeptical of the proposals and promises of the business teams. They 

could have looked to learn what was really happening, and warned Enron leadership about what they found. But they didn’’t do this. They were not around to provide a last clear chance to save the company. 

I think it says something when you have non-attorneys doing what attorneys are 

supposed to be doing. The attorneys are the people others rely upon to make sure 

matters are okay, are legal, are not going to put a company at undue risk. 

They’re the adult supervision. And it’s clear from our investigation that others in 

the company, particularly on the Board of Directors, either relied on this supervision, or—as Mr. Skilling seems to have done—hid behind it to excuse their actions. 

8

Now I understand the arrangements of duties and functions among the attorneys 

was complex. Responsibilities were divided. I know that Enron was a huge and complicated operation. And so I want to hear their side of the story. 

I want to hear from them about the LJM transaction approval process, which was 

meant to prevent the CFO from taking advantage of the company and its shareholders. I look forward to learning about the attorney reactions to emerging warnings that the process was flawed, that questionable negotiations were taking place, 

that there were potentially serious problems to investigate. 

I want to know why outside counsel, with the duty to make sure extremely complex transactions would not put Enron at risk, saw fit to sign off—providing the 

legal cover for what would turn out to be very destructive transactions indeed. 

We do have a lot to cover this morning, Mr. Chairman. And I too would like to 

thank the witnesses for coming before us this morning. They’ve been responsive to 

our staff’s requests and I thank them for their willingness to help us accurately 

identify the problems here. 

I yield back.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes for 3 minutes for an opening statement the gentlelady from— I beg your pardon. The Chair recognizes the ranking member of the 

full committee, the gentleman from Michigan, Mr. Dingell. 

Mr. DINGELL. Mr. Chairman, I thank you for your courtesy. I 

commend you for these hearings and for the inquiry by this subcommittee into the matters now under consideration. 

I want to depart from my prepared statement just to commend 

my friend, the Chairman, also of the full committee for the courage 

and the energy which he has brought to the matters before us, and 

to express to him my respect and affection. 

Mr. Chairman, one of the things that struck me as we get deeper 

and deeper into the Enron investigation is the ability of almost all 

of the people involved to disclaim knowledge of, or responsibility 

for, any of the events that caused Enron’s collapse. 

I remember a case when I was a young lawyer in the Detroit 

River area. Three ships had collided in a fog in the middle of the 

Detroit River, and in the case the judge observed that this event 

could not have occurred because of the testimony of all the witnesses indicated that none of the vessels was within three-quarters 

of a mile of the point of impact. 

The most notable of those proclaiming lack of knowledge and responsibility are Messrs. Skilling, the former president and chief executive officer, and Lay, the chairman of the board. Now, although 

Mr. Skilling is widely understood to have been the architect of 

Enron as an asset-lite energy trading company with an increasing 

off-balance-sheet debt load, he presents himself as the unfortunate, 

unknowing ‘‘victim’’ of some as-yet-undefined forces of the marketplace. 

Mr. Lay, who was CEO during all of Enron’s history except the 

last 6 months when Mr. Skilling held the job, claims that he knew 

even less. Yet most of these top officers ran a company which numerous former and current employees have described as ‘‘crooked,’’

a ‘‘pyramid scheme,’’ the home of ‘‘house of cards accounting,’’ a 

place where you ‘‘drank the Kool-aid’’ instead of questioning what 

was going on, and fed the earnings ‘‘monster’’ with more and more 

questionable deals. 

Moreover, the Board of Directors, from one end to the other, was 

asleep. For example, they never even bothered to find out how 

much Andrew Fastow, the company’s chief financial officer, was 

making on his side deals with the company. To this day, neither 

9

the Board nor anyone at the top levels of Enron knows exactly how 

much Mr. Fastow made on those deals. Nor did the Board bother 

to check if the controls it had ordered to keep these deals aboveboard were actually being carried out. 

Today we are going to hear more disclaimers of responsibility. 

Today we are going to hear from lawyers who will disclaim with 

great diligence. Some asked questions, but never followed up, and 

we will hear from other lawyers who knew of problems but never 

asked questions. For example, both the in-house and outside lawyers who represented Enron in the related-party transactions involving Mr. Fastow and Mr. Michael Kopper, who worked with Mr. 

Fastow, will tell us that. 

It wasn’t their responsibility to make sure that Enron or its accountants knew about the side guarantee with Barclay’s Bank that 

brought down the Jedi-Chewco deal. 

It wasn’t their responsibility to make sure that Mr. Kopper’s interest in Chewco was approved by the Office of the Chairman and 

known by the Board of Directors, even though these lawyers knew 

it was a conflict of interest violation. 

It wasn’t their responsibility to make sure the many deals made 

between Mr. Fastow’s LJM entities and Enron were actually at 

arm’s length and represented a fair deal for Enron in both the 

short and the long term. 

We will hear that most of these lawyers didn’t even know what 

controls were required by the Board of Directors to try and keep 

related-party deals above-board. They were told that the Board had 

approved the relationship with Mr. Fastow, and that was enough. 

Sometimes they even relied on Mr. Fastow himself as justification. 

We will hear from lawyers who tried to find out how much Mr. 

Fastow made so it could be included in Enron’s proxy, but when 

Mr. Fastow refused to tell them, their response was, ‘‘Next year we 

will do it.’’ We will hear that lawyers were not responsible for asking about accounting decisions. We will hear from lawyers who ignored, rationalized, or even discounted problems brought to the 

company’s attention by Sherron Watkins and others. 

Maybe the lawyers involved in the Enron mess were simply 

doing their job. I find this a most troublesome prospect. And I 

would note that it appears that the legal profession may have 

changed in the 50 years since I was sworn in to the bar. At that 

time, we thought that it was the responsibility of the lawyer to 

serve with the highest integrity and responsibility, to protect the 

interests of the clients, and to see to it that justice is done. 

Until this fiasco, then, I had always thought of lawyers as more 

than highly paid technicians. In this case, I was apparently wrong. 

It is very sad, Mr. Chairman. 

Thank you. 

[The prepared statement of Hon. John D. Dingell follows:]

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

Thank you, Mr. Chairman. One of the things that has struck me as we get deeper 

and deeper into the Enron investigation is the ability of almost all of the people involved to disclaim knowledge of, or responsibility for, any of the events that caused 

Enron’s collapse. The most notable of these are, of course, Jeffrey Skilling, the 

10

former president and chief executive officer, and Kenneth Lay, the chairman of the 

board. 

Although Mr. Skilling is widely understood to have been the architect of Enron 

as an asset-light, energy trading company with an increasing off-balance-sheet debt 

load, he presents himself as a unknowing ‘‘victim’’ of some as-yet-undefined forces 

of the marketplace. Mr. Lay, who was CEO for all of Enron’s history except the six 

months when Mr. Skilling held the job, claims to know even less. Yet both of these 

top officers ran a company which numerous former and current employees have described as ‘‘crooked,’’ a ‘‘pyramid scheme,’’ the home of ‘‘house of cards accounting,’’

a place where you ‘‘drank the Kool-aid’’ instead of questioning what was going on, 

and fed the earnings ‘‘monster’’ with more and more questionable deals. Moreover, 

the Board of Directors was asleep. For example, it never even bothered to find out 

how much Andrew Fastow, the company’s chief financial officer, was making on his 

side deals with the company. To this day, neither 

the board nor anyone at the top levels of Enron knows exactly how much Mr. 

Fastow made on those deals. Nor did the board bother to check if the controls it 

had ordered to keep these deals above-board were actually being carried out. 

Today, we will hear more disclaimers of responsibility. We will hear from lawyers 

who asked questions, but never followed up. And we will hear from lawyers who 

knew of problems, but never asked questions. For example, both the in-house and 

the outside lawyers who represented Enron in the related-party transactions involving Mr. Fastow and Michael Kopper, who worked for Mr. Fastow, will tell us that:

—It wasn’t their responsibility to make sure that Enron or its accountants knew 

about the side guarantee with Barclay’s bank that brought down the JEDIChewco deal. 

—It wasn’t their responsibility to make sure that Mr. Kopper’s interest in Chewco 

was approved by the Office of the Chairman and known by the Board of Directors, even though these lawyers knew it was a conflict of interest violation. 

—It wasn’t their responsibility to make sure the many deals made between Mr. 

Fastow’s LJM entities and Enron were actually at arm’s length and represented 

a fair deal for Enron in both the short and the long term. 

We will hear that most of these lawyers didn’t even know what controls were required by the Board of Directors to try to keep the related-party deals above-board. 

They were told that the board had approved the relationship with Mr. Fastow, and 

that was enough. Sometimes they relied on Mr. Fastow himself as justification. 

We will hear from lawyers who tried to find out how much Mr. Fastow made so 

it could be included in Enron’s proxy, but when Mr. Fastow refused to tell them, 

their response was—‘‘next year we’ll do it.’’ We will hear that lawyers were not responsible for asking about accounting decisions. And we will hear from lawyers who 

ignored, rationalized, or discounted problems brought to the company’s attention by 

Sherron Watkins and others. 

Maybe all the lawyers involved in the Enron mess were simply doing their job—

a most troublesome prospect. Until this fiasco, I had always thought of lawyers as 

more than just highly paid technicians. In this case, I apparently was wrong.

Mr. GREENWOOD. The Chair thanks the gentleman from Michigan and recognizes the gentleman from Florida, Mr. Stearns, for 3 

minutes. 

Mr. STEARNS. Good morning, and thank you, Mr. Chairman, for 

holding this hearing. And let me again commend the staff for the 

very significant and competent job they are doing in preparing us 

and getting the witnesses here. 

Mr. Chairman, over the course of the hearings we have had on 

this, we have learned of Enron’s collapse, that it was basically a 

complete failure and a meltdown of fundamental responsibilities 

and oversight. We have heard from a number of Enron and Andersen officials and have developed what we think is a very good 

record of all of these transactions. 

LJM, the Raptor, the Chewco, were developed and managed and 

hidden from scrutiny—this despite the numerous officials pleading 

the Fifth Amendment here in front of our committee in response 

to the subcommittee’s questioning. So this hearing is very pertinent. 

11

Mr. Chairman, I went on the internet to look up the American 

Bar Association’s website to get and understand its model rules for 

professional conduct. And it is interesting, the first rule for lawyers 

under the rules for professional conduct is competence. And, my 

colleagues, let me just read what it says. ‘‘A lawyer shall provide 

competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness, and preparation 

reasonably necessary for preparation.’’ So, Mr. Chairman, let us look at our hearing in perspective. In 

fact, let us get to the nitty-gritty. Our witnesses before us today are 

all attorneys. Their job was to be the legal watchdog for Enron’s 

transaction. From the information we have discovered we are faced 

with this question: was the failure of oversight and responsibility 

due to a lack of competence or to a measure of culpability? 

Mr. Chairman, Jan Avery was a woman who was an accountant 

at Enron in 1993. She put herself through college going at night. 

She didn’t have polo shirts on and khakis when she came to work. 

She came in a suit. In 1993, she was given a thin manilla folder 

containing three sheets of paper. On one there was a number, $142 

million. 

This was the routine loss. It was a staggering amount for this 

company and for this young accountant to understand. So she said, 

‘‘Where are the books for Enron Oil? How am I supposed to justify 

$142 million loss for State tax purposes?’’ Mr. Chairman, no one could answer her in Enron Company. So 

I go back. We have lawyers here whose responsibility was to be the 

watchdog and protect Enron. If this woman accountant at Enron 

knew in 1993 that there was a problem, surely the people at this 

front desk should have provided advice that was more competent 

than this young woman who put herself through night school as an 

accountant. 

So we are here today to find out what happened. And so, Mr. 

Chairman, I commend you and your staff. 

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes for 3 minutes for the purpose of an opening statement the 

gentlelady from Colorado, Ms. DeGette. 

Ms. DEGETTE. Thank you, Mr. Chairman. Mr. Chairman, this investigation has really seemed to me like piecing together a big jigsaw puzzle. And we have looked at a number of the pieces of the 

puzzle so far. We have heard from senior management from Enron 

of all different flavors. We have heard from the Board of Directors. 

We have heard from the auditors. We have heard from outside experts. And until today there has been a big piece of that puzzle 

right in the middle missing, and that is the attorneys who were advising Enron throughout the events that we all know so well at 

this point. 

I am looking forward to hearing what the attorneys have to say 

today. And, in particular, I am interested in Vinson & Elkins’ representation of their client, and, in particular there, I am interested 

in this preliminary investigation of allegations that Vinson & Elkins did from Sherron Watkins’ memo. The reason I am interested 

in this is I think it is almost a parable for what happened throughout Enron and for what happened from all of the experts that were 

advising Enron, because Ms. Watkins said in her memo to Mr. Lay, 

12

‘‘I am incredibly nervous that we will implode in a wave of accounting scandals. My 8 years of Enron work history will be worth nothing on my resume. The business world will consider the past successes as nothing but an elaborate accounting hoax.’’

So what does Vinson & Elkins do when Enron asked them to do 

a so-called independent investigation of these allegations? Vinson 

& Elkins says, ‘‘It was decided that our initial approach would not 

involve the second-guessing of the accounting advice and treatment 

provided by Arthur Andersen. There would be no detailed analysis 

of each and every transaction, and there would be no full-scale discovery-style inquiry.’’

If the allegation is that there are accounting problems, how on 

earth can you have any kind of analysis when you don’t look at the 

accounting in coming up with your assessment? 

These and many other questions I am sure will be made clear 

today, Mr. Chairman, and I am looking forward to hearing the testimony. 

Thank you, and I yield back the balance of my time. 

Mr. GREENWOOD. The Chair thanks the gentlelady and recognizes the gentleman from North Carolina, Mr. Burr, for 3 minutes 

for an opening statement. 

Mr. BURR. Thank you, Mr. Chairman. Let me take this opportunity to thank our witnesses today for their willingness to come 

in as we continue to peel the layers of the onion back and try to 

figure out exactly what happened. 

Mr. Chairman, let me commend you. The way that you have 

structured these hearings, the patience that you have shown, rather than to run out and grab headlines, we have tried to put people 

together that could provide facts. And I want to just turn to some 

testimony that we are going to hear today from one of the partners 

at Vinson & Elkins. 

And that testimony says the Enron bankruptcy filings—Enron 

listed more than 400 law firms as having represented them. Clearly, this was not a situation where Enron fell in trouble because 

they didn’t seek or have provided for them enough legal help. 

Enron’s legal affairs were directed by a highly sophisticated inhouse legal department consisting of approximately 250 in-house 

lawyers. Clearly, they had at their fingertips expertise that most 

companies don’t have. 

Enron recruited and employed experienced, highly capable and 

well qualified attorneys, many of whom had previously practiced in 

large law firms. There is experience within this company that certainly dispels any belief that maybe they were ill advised. 

And it goes on in the testimony to say about the report, specifically, the report that Vinson & Elkins was asked to prepare and 

to hand over to the company, it says, ‘‘The report did conclude that 

no further investigation was necessary because the appropriate 

senior-level officers of Enron were fully aware of the primary concerns of Ms. Watkins, that Ms. Watkins wanted Mr. Lay to address, and had, in fact, already addressed them.’’

Ladies and gentlemen that are here today, let me assure you 

that we have had some Enron officials who have sat before us and 

said they didn’t know, they can’t remember. Today I hope you will 

13

help us fill in those blanks of who knew, who should remember, 

and who was told. 

I thank you, Mr. Chairman. 

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentleman, Mr. Stupak, for 3 minutes for an opening 

statement. 

Mr. STUPAK. Thank you, Mr. Chairman. Over the brief President’s Day district work period, I held three town hall meetings in 

my northern Michigan district, just as I am sure many of my colleagues did. The No. 1 issue I heard about from my constituents 

was not the current budget proposals, not a desire for tax cuts, not 

even the war against terrorism, although they are very concerned 

about it. 

The No. 1 issue raised by people in my town hall meetings was 

the Enron collapse and their passionate desire to see that justice 

is served. 

My district is about as far away as you can get from Houston, 

Texas, without leaving the continental United States. But constituents seem to feel a bond with the Enron employees and their shareholders. 

Mr. Chairman, my constituents, like many of us, are saddened. 

They are angry, and they are frustrated. They are saddened to see 

the lives of so many Enron employees shattered. They are angry 

about the shredding of public trust by all the parties involved in 

the Enron debacle, and they are frustrated with the fact that many 

of those who have come before our committee, with maybe the exception of Ms. Watkins, have played dumb and had a memory that 

has faded away faster than Enron stock has dropped. 

Now, I hope that today’s panelists will be different. I hope they 

will answer our questions completely and honestly. I hope they will 

not have selective memory, and I hope they will provide us with 

answers. 

Mr. Chairman, I yield back the balance of my time. 

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentleman from New Hampshire, Mr. Bass, for 3 minutes 

for his opening statement. 

Mr. BASS. Thank you, Mr. Chairman. I really do appreciate your 

holding this hearing. I believe this is either the fourth or fifth hearing we have had on this. My friend from North Carolina said, ‘‘I 

believe it has been thoughtful and pragmatic and informational, 

helpful for us in understanding what is clearly one of the most 

complex financial catastrophes in recent U.S. history.’’ And I also appreciate the opportunity to hear from counsel of 

various capacities willingly, which is somewhat of a change, and I 

look forward to your testimony. And of particular interest to me, 

quite obviously, to other members of the subcommittee, as you have 

heard, are the views on the expectations of how you define fiduciary duty and conflict of interest. 

And I am certain at the end of the day we will have a greater 

understanding of Enron’s related party transactions and other 

agreements with those who were supposed to be protecting the 

company’s shareholders’ interests. But I hope we also have some 

sense of what these various counselors had in mind when they 

made decisions to engage in certain behavior and otherwise ignore 

14

what may appear to be rather clear rules of ethics and accepted behavior. 

Mr. Chairman, I yield back my time, so that we may proceed 

with the testimony and inquiry. 

[Additional statement submitted for the record follows:]

PREPARED STATEMENT OF HON. PAUL E. GILLMOR, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OHIO

Thank you Mr. Chairman for your continued efforts in sorting outEnron’s financial breakdown. In particular, I welcome this opportunity to seek the viewpoints of 

the company’s in-house and outside counsel. I am hopeful the witnesses today will 

shed even more light on how an irresponsible corporation misrepresented its financial condition and manipulated all who had an interest in them. 

I should also point out that in an effort to further increase corporate accountability and protect shareholders’ rights, I recently introduced H.R. 3745, the Corporate Charitable Disclosure Act of 2002. This legislation would require companies 

to make publicly available each year the total value of contributions made to nonprofit organizations during the previous fiscal year. 

Once again I thank the Chairman for my time and look forward to the witnesses’

testimony.

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

welcomes our witnesses today. 

Let me introduce them. They are Scott M. Sefton, Esquire, 

former General Counsel with Enron Global Finance. Good morning, 

sir. 

Rex Rogers, Esquire, Vice President and Associate General Counsel from Enron Corporation. Good morning, Mr. Rogers. 

James V. Derrick, Jr., Esquire, former General Counsel, Enron 

Corporation. Good morning, Mr. Derrick. 

Joseph C. Dilg, Esquire, Managing Partner, Vinson & Elkins. 

Good morning, sir. 

Ronald T. Astin, Esquire, Partner of Vinson & Elkins. Good 

morning to you. 

And Carol L. St. Clair, Esquire, former Assistant General Counsel, ECT Resources Group of Enron Corporation. Good morning, 

Ms. St. Clair. 

You are aware, all of you, that the committee is holding an investigative hearing. And in doing so, we have the practice of taking 

testimony under oath. Do any of you have objections to giving your 

testimony under oath? Seeing no such objection, I would also advise you that under the rules of the House and the rules of this 

committee, you are entitled to be advised by counsel. 

Do any of you—during your testimony, do any of you seek to be 

advised by counsel during your testimony? Seeing that none of you 

do, in that case, if you would please rise and raise your right 

hands, I will swear you in. 

[Witnesses sworn.] 

Mr. GREENWOOD. Okay. You may please be seated. You are now 

under oath. 

And let me begin with Mr. Sefton, and ask you, sir, do you have 

an opening statement? 

15

TESTIMONY OF SCOTT M. SEFTON, FORMER GENERAL COUNSEL, ENRON GLOBAL FINANCE, ENRON CORPORATION; REX 

R. ROGERS, VICE PRESIDENT AND ASSOCIATE GENERAL 

COUNSEL, ENRON CORPORATION; JAMES V. DERRICK, JR., 

FORMER GENERAL COUNSEL, ENRON CORPORATION; JOSEPH C. DILG, MANAGING PARTNER, VINSON & ELKINS, 

L.L.P.; RONALD T. ASTIN, PARTNER, VINSON & ELKINS, L.L.P.; 

AND CAROL L. ST. CLAIR, FORMER ASSISTANT GENERAL 

COUNSEL, ECT RESOURCES GROUP, ENRON CORPORATION 

Mr. SEFTON. Yes, I do. Chairman Greenwood—— Mr. GREENWOOD. Would you pull the microphone over to you? It 

is rather directional. It is the silver one that amplifies your voice, 

and the closer the better. 

Mr. SEFTON. Chairman Greenwood—— Mr. GREENWOOD. You have 5 minutes to give your opening statement. 

Mr. SEFTON. [continuing] and members of the subcommittee, 

good morning. I joined Enron Global Finance in the fall of 1999. 

I left Enron Global Finance about a year later in early October 

2000. 

I understand that this subcommittee—— Mr. GREENWOOD. I am sorry to interrupt you, Mr. Sefton. You 

probably want to pull that microphone—raise it up a little bit. 

There you go. And get that as close to you as possible. Thank you, 

sir. 

Mr. SEFTON. I understand that this subcommittee would like to 

discuss with me today certain matters relating to my time in Enron 

Global Finance. Please note that it has been over a year since I 

worked at Enron. That as a former employee I do not have access 

to my own Enron documents, and have not had access since I left 

the company, and that I have had a limited amount of time to prepare for this hearing. 

That said, I look forward to answering your questions today to 

the best of my ability. 

Mr. GREENWOOD. Thank you, Mr. Sefton. We will be mindful of 

those concerns. 

Mr. Rogers, do you have an opening statement, sir? 

TESTIMONY OF REX R. ROGERS 

Mr. ROGERS. I just have a short comment. Good morning, Mr. 

Chairman. 

Mr. GREENWOOD. Good morning, sir. 

Mr. ROGERS. I do not have a long prepared statement but want 

to thank the committee for inviting me here today. For the past 

161⁄2 years, I have been employed as an attorney for Enron Corp, 

currently managing several corporate attorneys in the fields of employment law, environmental law, information and technology, intellectual property, securities, mergers and acquisitions, and general corporate matters. I have neither a background nor expertise 

in accounting matters. 

Over the past several months I have cooperated fully with the 

Wilmer, Cutler & Pickering attorneys in preparation of the Powers 

Report, with the FBI who interviewed me on several issues, and 

with your staff members only a week ago. Now I hope to be able 

16

to assist the members in your inquiry of Enron Corp and am prepared to answer any and all of your questions. 

Thank you. 

[The prepared statement of Rex R. Rogers follows:]

PREPARED STATEMENT OF REX R. ROGERS, VICE PRESIDENT AND ASSOCIATE GENERAL

COUNSEL, ENRON CORPORATION

Mr. Chairman: I do not have a prepared statement, but want to thank the Committee for inviting me here today. 

For the past sixteen and one-half years I have been employed as an attorney for 

Enron, now managing several corporate attorneys in the fields of employment law, 

environmental law, information and technology, intellectual property, securities, 

mergers and acquisitions, and general corporate matters. I neither have a background nor expertise in accounting matters. 

Over the past several months I have cooperated fully with the Wilmer, Cutler & 

Pickering attorneys in preparation of the Powers Report; with the FBI who interviewed me on several issues; and with your staff members only a week ago. Now 

I hope to be able to assist the Members in your inquiry of Enron Corp. and am prepared to respond to any questions. 

Thank you.

Mr. GREENWOOD. Thank you, Mr. Rogers. We do appreciate your 

cooperation. 

Mr. Derrick, do you have an opening statement, sir? 

TESTIMONY OF JAMES V. DERRICK, JR. 

Mr. DERRICK. Yes, I do, Mr. Chairman. 

Mr. GREENWOOD. We can hear you, and, please, you have 5 minutes to make your opening statement, if you choose to. 

Mr. DERRICK. Good morning to each of you. I am Jim Derrick, 

and I, too, am pleased to be here with you today to answer any 

questions you may have for me. 

From the summer of 1991 until March 1 of this year, I had the 

great privilege of serving as the General Counsel for Enron Corp, 

and as a member of a legal team of more than 200 women and men 

for whom I had, and still have, the utmost respect and admiration. 

I graduated from the University of Texas School of Law in 1970, 

had the honor of serving as judicial clerk to the Honorable Homer 

Thornberry of the United States Court of Appeals for the Fifth Judicial Circuit, and then I practiced law at Vinson & Elkins for 20 

years until I was requested by Enron Corp, more than a decade 

ago, to become its General Counsel. 

First, I commend you in your efforts to examine the tragedy that 

has befallen Enron, so that the lessons learned here may help others avoid similar misfortune. 

Second, I wish to express my sincerest heartfelt sympathy to 

those members of the Enron family who have lost their jobs and 

suffered financially and otherwise, and to their loved ones who 

have also been affected. I also want to acknowledge with great 

gratitude the ongoing efforts of the more than 20,000 women and 

men who are still working at Enron and its affiliated companies. 

Finally, while, of course, I can’t anticipate all of the questions 

that you will want to ask me today, I do want to address very briefly the question that some of you have alluded to in previous hearings as to why we did not immediately institute a complete forensic 

investigation, as contrasted with a preliminary investigation, into 

the concerns expressed in the letter received by Mr. Kenneth L. 

17

Lay last August, utilizing firms that had no involvement in the 

transactions in question. 

When Mr. Lay received the August letter, we took the concerns 

expressed in it very seriously. We wanted to ascertain, as promptly 

as practical, whether the facts contained in the letter warranted a 

full-scale, forensic-type investigation. Because of the seriousness of 

the allegations, we believed it best to engage an outside firm to 

make this determination, rather than to rely on an internal inquiry. 

To have turned to firms with no knowledge of these complex 

transactions would necessarily have required them, we believed, to 

expend a very significant amount of time getting up to speed before 

they could provide us with recommendations. We turned, therefore, 

to Vinson & Elkins, a firm that possessed the institutional knowledge to commence the preliminary investigation quickly, and a firm 

that is widely regarded as one of the world’s very best legal institutions. 

Andersen, Enron’s independent accounting firm at that time, was 

widely regarded as one of the world’s foremost accounting institutions. That firm, we believed, had knowledge of the transactions 

and of the company, had repeatedly certified Enron’s financial 

statements, and had represented to the company’s Audit and Compliance Committee that it was comfortable with, and had signed off 

on, the company’s financial disclosures. 

To have immediately engaged another accounting firm to examine the allegations contained in the August letter, without first 

doing a preliminary investigation of the substance of the allegations, including Andersen’s position on them, would have been 

seen, we believed, in the context of the matters as they existed 

back in August, as an extraordinary act. 

As we have seen from our experience, when we did turn in October to an accounting firm and a law firm that had had no involvement in the transactions, it required them, despite their good faith 

Herculean efforts, several months to produce a report, and even 

now there seem to be a number of issues in respect of which the 

correct accounting and legal answers to these extraordinarily complex issues remain a matter of judgment. 

Of course, had I been blessed with the gift of clairvoyance, had 

I been permitted to gaze into the future and foresee the events that 

would unfold in respect of Andersen, I would have advocated the 

choosing of another path back in August. But that was a gift that 

I was not given. 

The decisions in which I participated had to be, and were, made 

in the context of the matters as they then existed. They were made 

in absolute good faith, with the sincere intent of ascertaining by 

means of a prompt preliminary investigation conducted by a truly 

world-class law firm, whether a broader investigation, including 

the engagement of another accounting firm, was warranted. 

Members of the committee, I very much appreciate your according me the time to make these remarks, and I look forward to answering the questions you have for me today to the best of my ability and recollection. 

Thank you very much. 

[The prepared statement of James V. Derrick, Jr. follows:]

18

PREPARED STATEMENT OF JAMES V. DERRICK, JR., FORMER GENERAL COUNSEL, 

ENRON CORPORATION

Good morning, Congressmen. I’m Jim Derrick, and I’m pleased to be here to answer the questions you may have for me. 

From the summer of 1991 until March 1 of this year, I had the great privilege 

of serving as the General Counsel of Enron Corp. and as a member of a legal team 

of more than 200 women and men for whom I had, and still have, the utmost respect and admiration. I graduated from the University of Texas School of Law in 

1970, served as judicial clerk to the Honorable Homer Thornberry of the United 

States Court of Appeals for the Fifth Judicial Circuit, and then practiced law at Vinson & Elkins for 20 years until I was asked by Enron Corp., more than a decade 

ago, to become its General Counsel. 

First, I commend you in your efforts to examine the tragedy that has befallen 

Enron so that the lessons learned here may help others avoid similar misfortune. 

Second, I wish to express my sincerest heartfelt sympathy to those members of 

the Enron family who have lost their jobs and suffered financially and otherwise, 

and to their loved ones who have also been affected. I also want to acknowledge 

with gratitude the ongoing efforts of the more than 20,000 women and men who are 

still working at Enron and its affiliated companies. 

Finally, while I can’t anticipate all the questions you will ask today, I do want 

to address briefly the question that some of you have alluded to in previous hearings 

as to why we did not immediately institute a complete forensic investigation—as 

contrasted with a preliminary investigation—into the concerns expressed in the letter received by Mr. Kenneth L. Lay last August, utilizing firms that had no involvement in the transactions in question. 

When Mr. Lay received the August letter, we took the concerns expressed in it 

very seriously. We wanted to ascertain, as promptly as practical, whether the facts 

contained in the letter warranted a full-scale, forensic-type investigation. Because 

of the seriousness of the allegations, we believed it best to engage an outside firm 

to make this determination, rather than to rely on an internal inquiry. To have 

turned to outside firms with no knowledge of these complex transactions would necessarily have required them, we believed, to expend a very significant amount of 

time getting up to speed before they could provide us with recommendations. Therefore, we turned to Vinson & Elkins, a firm that possessed the institutional knowledge to commence the preliminary investigation quickly and that is widely regarded 

as one of the world’s very best legal institutions. 

Andersen, Enron’s independent accounting firm at the time, was widely regarded 

as one of the world’s foremost accounting institutions. The firm, we believed, had 

knowledge of the transactions and of the company, had repeatedly certified Enron’s 

financial statements, and had represented to the Company’s Audit and Compliance 

Committee that it was comfortable with the Company’s financial disclosures. To 

have immediately engaged another accounting firm to examine the allegations contained in the August letter without first doing a preliminary investigation of the 

substance of the allegations, including ascertaining Andersen’s position on them, I 

believe would have been seen, in the context of matters as they existed back in August, as an extraordinary act. 

As we have seen from our experience, when we did turn in October to an accounting firm and a law firm that had had no involvement in the transactions in question, it required them, despite their good faith Herculean efforts, several months to 

produce a report, and even now there seem to be a number of issues in respect of 

which the correct accounting and legal answers to these extraordinarily complex 

issues remain a matter of judgment. 

Of course, had I been blessed with the gift of clairvoyance, had I been permitted 

to gaze into the future and foresee the events that would unfold in respect of Andersen, I would have advocated the choosing of another path last August. But that was 

a gift I was not given. The decisions in which I participated had to be, and were, 

made in the context as matters then existed. They were made in absolute good faith, 

with the sincere intent of ascertaining by means of a prompt preliminary investigation conducted by a world class law firm whether a broader investigation, including 

the engagement of another accounting firm, was warranted. 

I very much appreciate your according me the time to make these remarks, Congressmen. I am ready to answer your questions to the best of my ability and recollection. Thank you.

Mr. GREENWOOD. Thank you. 

Mr. Dilg, do you have an opening statement? 

19

TESTIMONY OF JOSEPH C. DILG 

Mr. DILG. Yes, sir. 

Mr. GREENWOOD. You are recognized for 5 minutes. 

Mr. DILG. Good morning, Mr. Chairman, and members of the 

committee. My name is Joe Dilg. I am the Managing Partner of 

Vinson & Elkins. My partner, Ron Astin, is here to assist me—to 

assist the committee in responding to its questions. We decided, to 

economize on time, that I would give the opening statement on behalf of both of us. 

Vinson & Elkins, which was founded in 1917, is now an international law firm. We have offices worldwide with approximately 

850 attorneys. Although Mr. Astin and I have each personally 

worked on many Enron matters, we were directly involved in only 

part of the firm’s work for Enron. We are testifying today only to 

our own personal knowledge. 

Since Enron’s bankruptcy, there have been reports and statements that have inaccurately described the role Vinson & Elkins 

played in the advice we gave to Enron. We look forward to responding to your questions, because we are confident a full exploration 

of the facts will show that our firm has met all of its professional 

responsibilities. 

First, let me say that the lawyers of Vinson & Elkins are greatly 

saddened by the financial collapse of Enron. Many outstanding and 

decent people who worked at Enron and their families have been 

greatly harmed. Likewise, many Enron investors have unfortunately lost a great deal of money. Many cities like Houston will be 

harmed by the loss of the very significant business and civic 

achievements of Enron. 

Our work for Enron consisted of a large number of specific 

projects for which we were selected by the Enron legal department. 

Enron listed in its bankruptcy filing hundreds of law firms as having represented Enron. Enron was a significant client for many 

major law firms. 

Enron’s legal affairs were directed by a highly sophisticated inhouse legal department of approximately 250 lawyers. Enron recruited and employed experienced, highly capable, well qualified attorneys, many of whom had previously practiced in large law firms. 

Pursuant to Enron corporate policy, Vinson & Elkins, as well as all 

other outside counsel employed by Enron, were employed by and 

directed to interface with Enron’s legal department, not Enron’s executives. 

Despite our sadness over the collapse of Enron, we remain proud 

to have served as Enron’s counsel in many matters. Our representation of Enron provided interesting and challenging legal work on 

highly visible transactions and other matters. It is a pleasure to 

work with their highly qualified in-house counsel. 

In representing Enron, our lawyers worked closely with the 

world’s leading investment banking firms, commercial banks, and 

other major law firms. We provided Enron with quality legal services, and we did so professionally and ethically. 

Much of the committee’s attention and the media’s coverage of 

the relationship between Enron and Vinson & Elkins has focused 

on the preliminary review conducted by Vinson & Elkins into alleVerDate Jun 13 2002 08:36 Jul 17, 2002 Jkt 010199 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 W:\DISC\78506 pfrm17 PsN: 78506
20

gations made by an Enron Vice President, Ms. Sherron Watkins. 

We are pleased to have the opportunity to discuss that matter. 

Ms. Watkins indeed raised serious issues. Contrary to some public reports and the implication of previous statements made in 

hearings conducted by this committee, Vinson & Elkins did not advise Enron that there were no problems. Our written and oral reports pointed out significant issues, including the credit problem in 

the Raptor vehicles, the aggressiveness of the accounting, conflicts 

of interest, litigation risks, and the risk of credibility-harming 

media attention. 

The report did conclude that no further investigation was necessary because the appropriate senior-level officers of Enron were, 

at that time, fully aware of the primary concerns expressed by Ms. 

Watkins, and, in fact, were taking actions to address them. 

Mr. Fastow had already resigned from his position with the LJM 

partnerships, eliminating the conflict of interest issues raised by 

Ms. Watkins in her letter, and earlier by Mr. McMahon to Mr. 

Skilling. Prior to the delivery of our final written report, the company had terminated the Raptor entities, which were the primary 

focus of Ms. Watkins’ concerns. The company reported in its earnings release for the third quarter of 2001 a loss of more than $500 

million associated with such termination. 

The bankruptcy of Enron in December of 2001, approximately 6 

weeks after we delivered our written report, appears to have been 

due to the convergence in the fall of 2001 of a number of factors, 

many of which related to investment decisions made years before 

in current events outside of Enron’s control. 

No one can deny that the adverse publicity associated with the 

related party transactions and the accounting errors related to the 

November restatement announcements contributed to the loss of 

confidence Enron experienced in the energy trading and financial 

markets. This confidence was critical to the continued success of 

Enron’s trading operations which accounted for a significant portion of their business. 

With regard to the related party transactions, it is important to 

consider the role of legal counsel. If a transaction is not illegal and 

has been approved by the appropriate levels of corporation’s management, lawyers, whether inside corporate counsel or with an outside firm, may appropriately provide the requisite legal advice and 

opinions about legal issues relating to the transactions. 

In doing so, the lawyers are not approving of the business decisions that were made by their clients. Likewise, lawyers are not 

passing on the accounting treatment of the transactions. 

In conclusion, I want to make it very clear that we are confident 

that Vinson & Elkins fully met its ethical and professional responsibilities in connection with our representation of Enron. We are 

pleased to assist in the committee’s deliberations and are happy to 

answer your questions within the constraints of our professional responsibility to our clients. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Joseph C. Dilg follows:]

21

PREPARED STATEMENT OF JOSEPH C. DILG, MANAGING PARTNER, VINSON & ELKINS

Good morning Mr. Chairman and members of the Committee. My name is Joe 

Dilg. I am the Managing Partner of Vinson & Elkins L.L.P. Vinson & Elkins, founded in 1917, is now an international law firm of approximately 850 lawyers. My partner Ron Astin is with me to assist in answering the Committee’s questions. 

From 1991 until December 2001, I served as the Vinson & Elkins partner primarily responsible for coordinating the firm’s relationship with Enron. In this role, 

I coordinated much of the legal work performed by Vinson & Elkins for Enron 

through all of our offices. Although Mr. Astin and I each personally worked on many 

Enron matters, we were directly involved in only part of Vinson & Elkins’ work for 

Enron. 

This statement, as well as the testimony that Mr. Astin and I will provide, is 

based solely upon our individual personal knowledge and best recollection of the 

events. We cannot purport to know and thus be able to speak to all of the knowledge 

and information possessed by all lawyers at our firm. 

Since Enron’s bankruptcy, there have been reports and statements that inaccurately describe the role Vinson & Elkins played and the advice we gave. We look 

forward to responding to questions as fully as possible because we are confident a 

full exploration of the facts will show that our firm fully met its professional obligations. 

First, let me say that the lawyers of Vinson & Elkins are greatly saddened by 

the financial collapse of Enron. Many outstanding and decent people who worked 

at Enron and their families have been greatly harmed. Likewise, many Enron investors have unfortunately lost a great deal of money. Many cities like Houston will 

be harmed by the loss of the very significant business and civic contributions of 

Enron and its employees. 

Our work for Enron consisted of a large number of specific projects for which we 

were selected by Enron’s legal department. In the Enron bankruptcy filings, Enron 

listed more than 400 law firms as having represented Enron. Enron was a significant client for a number of major law firms. 

Enron’s legal affairs were directed by a highly sophisticated in-house legal department consisting of approximately 250 attorneys. Enron recruited and employed experienced, highly capable, and well qualified attorneys, many of whom had previously practiced in large law firms. 

Pursuant to Enron corporate policy, Vinson & Elkins and other outside attorneys 

were employed by and directed to interface with Enron’s legal department, not 

Enron’s executives. 

Despite our sadness over the collapse of Enron, we remain proud to have served 

as Enron’s counsel in many matters. Our representation of Enron provided interesting and challenging legal work on highly visible matters, and it was a pleasure 

to work with their very able in-house counsel. In representing Enron, our lawyers 

worked closely with many of the world’s leading investment banking firms, commercial banks, and law firms. We provided Enron with quality legal services, and we 

fully met our professional and ethical obligations in rendering those services. 

Much of the Committee’s attention and the media’s coverage of the relationship 

between Enron and Vinson & Elkins has focused on a preliminary review conducted 

by Vinson & Elkins into allegations made by an Enron Vice President, Ms. Sherron 

Watkins, in a letter and supplemental materials delivered to Mr. Kenneth Lay in 

August of 2001. We are pleased to have an opportunity to discuss that matter. 

Ms. Watkins raised serious issues. Contrary to some public reports and the implication of some previous statements made in hearings conducted by this Committee, 

Vinson & Elkins did not advise Enron that there were no problems. Our written 

report pointed out significant issues, including the credit problem in the Raptor vehicles, the aggressiveness of the accounting, conflicts of interest, litigation risks, and 

the risk of credibility-harming media attention. 

The report did conclude that no further investigation was necessary because the 

appropriate senior level officers of Enron were fully aware of the primary concerns 

Ms. Watkins wanted Mr. Lay to address—and had in fact already addressed them. 

Mr. Fastow had resigned from his position with the LJM partnerships, eliminating 

the conflict of interest problems raised by Ms. Watkins and earlier by Mr. 

McMahon. Prior to the delivery of our final written report, the Company terminated 

the Raptor entities which were the primary focus of Ms. Watkins’ concerns. The 

Company reported in its earnings release for the third quarter of 2001 a loss of 

more than $500 million attributable to the termination. 

The bankruptcy of Enron in December of 2001, approximately six weeks after we 

delivered our written report, has been the subject of numerous published analyses 

which have made clear that Enron faced very significant business challenges. Enron 

22

had made major and highly publicized investments in the broadband, water, international infrastructure, and retail electric businesses, all of which had resulted in 

significant illiquid capital investments and large losses for the company. The price 

of Enron’s common stock had already declined approximately 60 percent from August 2000 to August 2001, when Mr. Skilling’s resignation created even more uncertainty about the company. At the same time, Enron’s online trading through Enron 

Online and the related dependency on trade credit from its counter-parties was experiencing explosive growth. 

In hindsight, there appears to be a consensus that these events, coupled with impending maturities of a significant amount of debt and the turmoil in the financial 

markets created by the tragic events of September 11, 2001, placed Enron in an extremely vulnerable position in the fall of 2001. No one can deny, however, that the 

adverse publicity associated with the related party transactions and the accounting 

errors related to the November restatement announcements contributed to the loss 

of confidence Enron experienced in energy trading and financial markets. This confidence was critical to the continued success of Enron’s trading operations, which 

accounted for a significant portion of Enron’s business. 

With regard to the related party transactions, it is important to consider the role 

of legal counsel. If a transaction is not illegal and it has been approved by the appropriate levels of a corporation’s management, lawyers, whether corporate counsel 

or with an outside firm, may appropriately provide the requisite legal advice and 

opinions about legal issues relevant to the transactions. In doing so, lawyers are not 

approving the business judgment of their clients. Likewise, lawyers are not responsible for the accounting treatment of the transactions. 

In conclusion, I want to make it very clear that we are confident that Vinson & 

Elkins fully met its professional responsibilities in connection with our representation of Enron. We are pleased to assist in the Committee’s deliberations and are 

happy to answer your questions, within the constraints of our professional responsibilities to our clients.

Mr. GREENWOOD. Thank you, Mr. Dilg. 

Mr. Astin, I understand that Mr. Dilg’s opening statement spoke 

for you as well? 

Mr. ASTIN. That is correct, Chairman. 

Mr. GREENWOOD. Very well. 

Ms. St. Clair, do you have an opening statement? 

TESTIMONY OF CAROL L. ST. CLAIR 

Ms. ST. CLAIR. Yes, I do. 

Mr. GREENWOOD. Okay. You are recognized for 5 minutes. 

Ms. ST. CLAIR. Good morning. Mr. Chairman, and members of 

the subcommittee, my name is Carol St. Clair. I start——

Mr. GREENWOOD. I am going to ask you to move that white notebook and then pull the microphone front and center there and get 

it nice and close. Thanks. 

Ms. ST. CLAIR. I started at Enron in 1994 working for the Liquids Group in the Legal Department of Enron North America Corporation. In 1995, after the Liquids Group was sold, I transferred 

to Enron North America’s Finance Group. I worked in Enron North 

America’s Finance Group until March 1999, when I transferred to 

the Financial Trading Group of Enron North America, where I remained until June of 2000. 

In January 2001, after a 6-month maternity leave, I joined Enron 

North America’s Power Trading Group, which along with the Gas 

Trading Group was sold in February in Enron’s bankruptcy proceeding. 

As you know, Mr. Chairman, I am appearing this morning voluntarily. To date, I have fully and freely cooperated with the subcommittee’s investigation, and intend to continue to do so. Mr. 

Chairman, I will, to the best of my ability, be glad to answer quesVerDate Jun 13 2002 08:36 Jul 17, 2002 Jkt 010199 PO 00000 Frm 00026 Fmt 6633 Sfmt 6602 W:\DISC\78506 pfrm17 PsN: 78506
23

tions you or any of the members of the subcommittee may have 

this morning. Thank you. 

[The prepared statement of Carol St. Clair follows:]

PREPARED STATEMENT OF CAROL ST. CLAIR, FORMER ASSISTANT GENERAL COUNSEL, ETC RESOURCES GROUP, ENRON CORPORATION

Good morning. Mr. Chairman and Members of the subcommittee, my name is 

Carol St. Clair. Last month, I accepted a new position as a trading attorney in the 

Legal Department of UBS Warburg Energy, LLC after working at Enron Corporation for more than seven years. I started at Enron in 1994, working for the Liquids 

Group in the legal department of Enron North America Corporation. In 1995, after 

the Liquids Group was sold, I transferred to Enron North America’s Finance Group. 

I worked in the Finance Group until March 1999 when I transferred to Enron North 

America’s Financial Trading Group where I served until June 2000. In January 

2001, after a six month maternity leave, I joined Enron North America’s Power 

Trading Group. 

As you know, Mr. Chairman, I am appearing this morning voluntarily. To date, 

I have fully and freely cooperated with the subcommittee’s investigation and intend 

to continue to do so. Mr. Chairman, I will, to the best of my ability, be glad to answer questions you or any other members of the subcommittee may have. 

Thank you.

Mr. GREENWOOD. We thank you, Ms. St. Clair, and appreciate 

your cooperation. 

The Chair recognizes himself for 10 minutes for purposes of inquiry. And let me address my first question to Mr. Dilg. Mr. Dilg, 

you are the Vinson & Elkins engagement partner for the Enron account, and you have worked on the account since 1990, when Jim 

Derrick handed over the account to you when he left V&E to become Enron’s General Counsel. 

Reportedly, Enron is V&E’s single largest client. V&E billed Enron over $36 million in 2001 and over $150 million during the 

past 5 years. By comparison, Arthur Andersen billed $54 million to 

Enron in 2001. V&E’s partners earned a reported average annual 

income of $655,000. Your first year associates, straight out of law 

school, salary starts at $122,000 per year. 

In August of 2001, Jim Derrick called and asked you to look into 

allegations regarding accounting improprieties and conflicts of interest at Enron. Sherron Watkins asked that Enron investigate her 

concerns and specifically recommended that V&E not be used, because V&E had done much of the legal work on the problematic 

transactions. 

Nevertheless, you and Mr. Derrick concluded that V&E could 

conduct a review of Ms. Watkins’ allegations. In brief, V&E took on 

the task of investigating its own work. The question is: was there 

not an inherent and obvious conflict of interest for V&E in taking 

on the investigation? 

Mr. DILG. No, sir, there was not a conflict of interest in Vinson 

& Elkins undertaking the investigation. Ms. Watkins raised a number of issues in her letter. Her primary concern was Mr. Lay being 

aware of the business issue that faced Enron that there were large 

losses in the Raptor partnerships that are large obligations under 

the derivatives written with the Raptor partnerships that would be 

backed up by Enron stock, and the issue of how to deal with that 

with the Enron shareholders going forward as far as the dilution 

that would occur. 

She raised issues of the conflict of interest created by Mr. 

Fastow’s participation in LJM and a number of other issues. She 

24

mentioned in her letter that Vinson & Elkins had written true sale 

opinions on some of the transactions, and, therefore, would have a 

conflict, but her allegations did not address the legal work provided 

by Vinson & Elkins. We were not being asked to review our own 

work. 

Mr. Derrick was aware that we had previously represented 

Enron on some of the transactions that she was talking about, but 

the appropriate standard, I believe, is whether or not our own interest would materially interfere with our work. We did not feel 

that we had a conflict of interest based on what we were being 

asked to do. 

Mr. GREENWOOD. Well, yes, but you certainly had an interest in 

keeping the client. And wouldn’t it seem to be the case that had 

V&E reviewed its own work and/or had V&E sought outside counsel to review its own work, that outside counsel recommended to 

V&E that—or advised Enron, I should say, that V&E had given it 

less than adequate counsel, that it certainly might have threatened 

your interest in keeping your largest client, would it not? 

Mr. DILG. Again, we were not being asked to review our own 

work. We were being asked to conduct a preliminary review to see 

whether a further, more extensive forensic review was necessary. 

Ms. Watkins was raising matters that were well known to a number of executives in the company and transactions that had been 

approved by the Board of Directors of the company. 

We were not being asked to review the quality of the legal work 

on any of the transactions, and I am not sure that there has been 

any—in any of the materials that I have seen any allegations that 

the legal work in putting the transactions together had any infirmities. 

Mr. GREENWOOD. Well, here is what the Powers Report notes. ‘‘The result of the V&E review was largely predetermined by the 

scope and the nature of the investigation and the process employed. 

The Powers Committee identified the most serious problems in the 

Raptor transactions only after a detailed examination of the relevant transaction, and, most importantly, discussions with our accounting advisors, both steps that Enron determined and V&E accepted would not be part of V&E’s investigation.’’

‘‘With the exception of Watkins, V&E spoke only with very senior 

people at Enron and Andersen. Those people, with few exceptions, 

have substantial professionalism and personal stakes in the matters under review. The scope and process of the investigation appear to have been structured with less skepticism than was needed 

to see through these particularly complex transactions.’’

That is what Powers said, which is quite different from what you 

have just said. How would you respond to the Powers Report’s assertions? 

Mr. DILG. I think it is important to understand the difference in 

the scope and purpose of the special committee formed by the 

Board of Directors shortly after our report was delivered. It was in 

response to an SEC inquiry as well as derivative suits being filed 

against the company and had a much broader scope as far as looking at overall related party transactions. 

We were making a preliminary review of the matters raised by 

Ms. Watkins, which both in her letter and when we subsequently 

25

interviewed her, primarily related to the Raptor transactions. I 

think that is consistent with what the Powers Report says that she 

told Mr. Lay. And to make sure that Mr. Lay, in coming back in 

as CEO, understood the serious business issues they had with the 

Raptor transactions. 

She raised questions as to the accounting. The company’s Audit 

Committee had chosen Arthur Andersen as their accountants. We 

wanted to make sure in our review that Arthur Andersen had the 

proper facts, that they had all of the facts that they needed to 

make the review, and that they were comfortable with their accounting decisions. But we were not in a position to second-guess 

Arthur Andersen’s ultimate professional judgment on the accounting issues involved. 

Mr. GREENWOOD. Well, you may not have been in a position to 

second-guess the details of the accounting firm, but you certainly 

had a responsibility to protect the company from liability, did you 

not? The company has faced 77 lawsuits as a result of these partnerships and the demise of the company, and I can’t quite understand why it is that V&E would take the position that it didn’t 

have some responsibility to its client to examine the potential risk 

that these transactions imposed in terms of civil liability. 

Mr. DILG. I think we, both in our oral conversations with Mr. 

Derrick and Mr. Lay, and in our written report, pointed out the 

risk that these transactions posed in connection with shareholder 

litigation, as far as the ability of a potential plaintiff’s lawyer, 

etcetera, to paint these transactions in a very bad light. I think we 

picked up references that we had had in some of our interviews to 

bad cosmetics, if you will. 

Again, the focus of the review was to determine whether there 

were additional facts that were not known at that time that warranted further investigation. We did not find that any of the individuals that Ms. Watkins said to check with to see if she was all 

wet had any additional facts, or felt that there were any additional 

facts that weren’t known at that time to make sure Mr. Lay knew 

how to address the transactions. 

Mr. GREENWOOD. Well, let us talk about bad cosmetics. During 

the course of your inquiry, you interviewed Jeffrey McMahon. In 

the summary of Mr. McMahon’s first interview on August 30, 2001, 

with you, you note that he indicated that some bankers thought 

there might be linkage between investing in LJM and future business with Enron. 

In his second interview with you conducted on October 18, 2001, 

a few days after you submitted your report, Mr. McMahon told you 

of specific instances where investment bankers complained to him 

of being pressured to invest in LJM transactions, or were promised 

Enron business if they invested in LJM. 

Mr. McMahon identified specific institutions—First Union, Merrill Lynch, Deutsche Bank, Chase Bank—and specific bankers, including Paul Riddle, and provided the names of Enron employees 

who could provide additional information on this subject—Ben 

Glisan, Tim Despain, Ray Bowen, and Kelly Booth. This subcommittee has learned of other individual bankers who have complained. 

26

In your October 15, 2001, letter to Mr. Derrick, you wrote, ‘‘The 

second potential conflict of interest identified by several individuals 

was that investors in LJM may have perceived that their investment was required to establish or maintain other business relations with Enron. Although no investors in LJM were interviewed, 

both Mr. Fastow and Mr. McMahon stated unequivocally that they 

had told potential investors that there was no tie-in between LJM 

investment and Enron business.’’ Your description of what you had learned appears to be highly 

misleading. Mr. McMahon clearly indicated in his first report that 

some banks—that there was a linkage, and that someone at Enron 

had made these promises. Presumably, given his position, it was 

Mr. Fastow. But you make it appear as if they are both shooting 

down this allegation when, in fact, it was Mr. McMahon who raised 

the allegation. And he clearly had names of individuals and banks 

as set forth in the summary of the second interview. 

Based on the facts you knew at the time you submitted the report, why isn’t your description misleading? 

Mr. DILG. I don’t believe our description is misleading, Mr. 

Greenwood. We did want to alert the company to the concerns 

raised, I think both by Ms. Watkins and Mr. McMahon, that they 

had heard that there was linkage. Mr. McMahon told us that he 

had told any banker that asked him that there was no linkage. Mr. 

Fastow also adamantly denied any linkage. 

The concerns we heard raised were some people within investment banking and commercial banking institutions grumbling because they didn’t get deals that they thought they were supposed 

to get because they invested in LJM, which indicated—— Mr. GREENWOOD. Did you ask those bankers if, in fact, they had 

been made promises or had threats made against them? 

Mr. DILG. We did not. 

Mr. GREENWOOD. Why is that? 

Mr. DILG. We did not interview anyone outside the company at 

this point in time. 

Mr. GREENWOOD. They just took the words of the—Sherron Watkins has these allegations about Fastow and other people wearing 

two hats, conflicts of interest. You go to them and basically say, 

‘‘Do you have conflicts of interest? There are allegations that bankers felt that you were squeezing them on these deals. Did you do 

that?’’ They say no. You go to the bankers and say, ‘‘We heard you 

had complaints. What was your experience with Fastow that 

caused you to complain?’’ You didn’t do that? 

Mr. DILG. We didn’t interview anyone outside of the company in 

connection with our preliminary review. Mr. McMahon had indicated to us in the initial interview that he was not aware of any 

situation where a banking arrangement looked unusual. Again, 

both Mr. McMahon and Mr. Fastow denied there was any linkage, 

or at least Mr. Fastow denied there was any linkage. Mr. McMahon 

said he told the banks there was no linkage. 

His information that he gave to us after we had submitted our 

report was more detailed. Within I think a week—I am not positive 

on the date—but within a very short period of time after that interview, Mr. McMahon was the chief financial officer of the company 

in charge of all of the banking relationships. 

27

Mr. GREENWOOD. My time has expired. But did you ask Mr. 

McMahon for the names of these individuals that he complained 

about to begin with, in the first interview? 

Mr. DILG. I can’t recall that we did. 

Mr. GREENWOOD. Didn’t that raise any red flags with you that 

would cause you—I mean, I am trying to understand why the first 

thing you wouldn’t have done, the next thing you would have done 

was say, ‘‘Oh, my God,’’ pick up the phone, call these bankers, and 

say, ‘‘I am supposed to protect this company from liability, and 

there is a lot of liability that could result from these allegations if 

these allegations are true.’’ I don’t understand why you didn’t feel a responsibility to Enron 

and stockholders to make those calls right away and find out what 

was really happening, not just taking Andy Fastow’s word for it. 

Mr. DILG. You have to understand, Mr. Chairman, that in the 

context that the preliminary review was conducted, Mr. Skilling 

had just resigned from the company. There was a great deal of 

speculation in the market and with Enron’s counter parties as to 

the reasons for Mr. Skilling’s resignation. We were trying to develop the facts that we could by talking with people inside the company so as not to create lots of speculation and rumors until we 

knew what we could report to Mr. Derrick. 

Again, the people that we interviewed indicated that they had 

seen no business arrangements that were contrary to Enron’s best 

interest coming out of this, or any indication that banks were getting more favorable deals than they should have gotten due to a 

linkage with LJM. And the person in charge of the banking relationships at that point in time denied there was any linkage. 

Mr. GREENWOOD. Well, it sounds like what you are saying is that 

the preliminary review also had, as part of its purpose, not just a 

preliminary review but you didn’t—this was to be a hushed review 

because of the concern that Skilling’s departure created a lack of 

confidence in the company. And if you took the review outside the 

walls of Enron, that to really get to the bottom of it, that it would 

have some negative short-term consequences for Enron when, in 

fact, what you might have done is prevented some very, very serious long-term consequences. 

My time has expired. The Chair recognizes the gentleman from 

Florida, Mr. Deutsch, for 10 minutes. 

Mr. DEUTSCH. Thank you, Mr. Chairman. I am going to read just 

a couple of sentences from Ms. Watkins’ letter. ‘‘Looking at the 

stock we swapped, I also don’t believe any other company would 

have entered into the equity derivative transaction with us at the 

same prices without substantial premiums from Enron. In other 

words, the $500 million in revenue in 2000 would have been much 

lower.’’

Which is really the contention that I have said in terms of the 

fact that these transactions did not serve a business purpose. And 

if we accept her premise, that is the issue. 

And, you know, as I mentioned in the introduction, Mr. Derrick, 

if you can comment, you know, on the Rhythms transaction, just 

the structure of it, as a general partnership set up to sell back to 

Enron the stock—I mean, the outside—if they had done that with 

an investment bank there would be no question that they can do 

28

it. But setting this up as an off balance sheet, were you personally 

involved with approving this or involved with understanding it? 

Mr. DERRICK. No, Congressman. I had no personal involvement 

in the structure. That would have been—in terms of the legal work 

with respect to that, that would have been done by the lawyers 

who I think at that time were in Enron North America. And, of 

course, the business aspects of that would have been handled by 

the business individuals who were part of structuring the transaction, but I had no personal involvement in that. 

Mr. DEUTSCH. So you—again, we are trying—today’s hearing 

was—the purpose of sort of trying to, you know, have the top dogs, 

you know, in front of us. So it would not have come to your attention. I mean, specifically, is there anyone here—you know, again, 

Mr. Astin, would you be aware of who would have approved this? 

And, Mr. Derrick, I mean, who specifically—so our staff at least 

can follow up. I mean, who specifically would have approved the 

structure of this transaction? 

Mr. DERRICK. Well, from the Enron side, Congressman, I can’t 

say with certainty. I would think that it would have been Ms. 

Mordaunt or someone in the legal group in which she was involved 

who was working with Ms. Mordaunt. 

And let me make it clear that I was at the Executive Committee—well, I am sorry. I was at the—I would have been at a 

Board meeting in which that was presented, so I don’t mean to say 

that I have not heard of this matter. But in terms of having any 

detailed knowledge about it, or having been personally involved in 

the structure of it, I was not. 

Mr. DEUTSCH. Mr. Sefton, as a former General Counsel as well, 

I mean, are you aware of the—who approved this transaction, or 

any—or the structure of it? 

Mr. SEFTON. This transaction was completed before I started my 

position in Global Finance. 

Mr. DEUTSCH. And Mr. Astin? 

Mr. ASTIN. Congressman, I had a very limited role in providing 

some initial securities disclosure-related advice to Ms. Kristina 

Mordaunt, with regard to this transaction. I did not work on the 

structuring of it. I did review the first draft or so of a partnership 

agreement, just to——

Mr. DEUTSCH. So who at Vinson & Elkins would have approved 

this transaction? 

Mr. ASTIN. No one. We didn’t work on the transaction except as 

I have described. 

Mr. DEUTSCH. And would that be typical, that in-house counsel 

would have basically—so now we are looking for Mrs. Mordaunt, 

and our staff at least can question her. I mean, is she, on her own, 

the person who basically said—you know, gave it the, you know, 

legal Good Housekeeping Seal of Approval that it is okay. Mr. Derrick? 

Mr. DERRICK. Well, again, I don’t—specifically, with respect to 

this transaction, I don’t know, Congressman. Let me say under our 

corporate governance rules, every transaction that would have constituted a binding obligation on the part of Enron would have required the signoff, and should have the initials of, the attorney who 

approved that transaction. 

29

Now, in many of our transactions, not literally every one, but in 

many of our transactions there would have been an outside firm 

also working with the in-house group. As Mr. Dilg just pointed out, 

Enron used a great many law firms. I don’t know whether another 

law firm was specifically involved in this transaction or not. 

Mr. DEUTSCH. All right. And, again, this is one of 4,000 partnerships. It is one of the largest. It is not the largest. As you well 

know, you booked—or Enron booked a $390 million gain on the 

Rhythms stock. So it is not a small, you know, transaction. I mean, 

it—so I guess I—if you are not aware, you are not aware. You are 

not aware of any specific outside counsel that would have been involved in this transaction. 

Mr. DERRICK. No, I am not. But that is not to say that that information is not available. It certainly should be. 

Mr. DEUTSCH. Do you understand this transaction and how it 

was set up? 

Mr. DERRICK. No, Congressman, I can’t explain the transaction, 

because, again, I had no personal involvement in it. 

Mr. DEUTSCH. I don’t know if I want to ask you to give a legal 

opinion, because maybe I can, you know, explain it a little bit. Let 

me go more specifically as part of this—Mr. Fastow, who obviously 

remained as the chief financial officer, was also the general partner. My understanding is that at the Board meeting it was the understanding of the Board that he was not to receive any compensation for his work as the general partner. Is that your understanding as well? 

Mr. DERRICK. Well, I would have to look at the minutes of that 

Board meeting specifically to truthfully answer that question. 

Mr. DEUTSCH. Was there any objection to him receiving compensation as general partner to these types of transactions? 

Mr. DERRICK. The only Board meeting at which I was in attendance related to the LJM1 transaction, which I believe was the 

hedge of the Rhythms transaction. And I do believe that there was 

a discussion by Mr. Fastow of the proposed compensation structure 

and that attached to the minutes of that meeting would be a slide 

which does explain whatever was explained at the meeting with respect to his proposed compensation. 

Mr. DEUTSCH. Were you aware of the conflict of interest role that 

Mr. Fastow had regarding his role in LJM partnerships? 

Mr. DERRICK. Yes. And the very purpose of presenting that—

well, let me say, as you undoubtedly know by now, under the 

Enron code of conduct, our code of ethics, conflicts of interest are 

not prohibited. It is provided—there is a procedure provided in the 

code of conduct that requires that a conflict of interest be presented 

to the chairman and chief executive officer. It actually is not required to be presented to the Board, although in this case it was. 

And the very purpose of having that discussion, as I recall——

Mr. DEUTSCH. All right. So, really, you were trying to put in a 

meaningful system to put in place to guard against potential conflicts of interest with Mr. Fastow. 

Mr. DERRICK. Exactly. That is right. 

Mr. DEUTSCH. And it was a serious conflict that you expected 

and a suitable system was supposed to be in place? 

30

Mr. DERRICK. Well, with respect to LJM1, I was not present at 

the Board meetings where the LJM2 structures were discussed. As 

I recall, LJM1, Congressman, was actually looked at as a—at the 

time as basically one transaction to put in place a hedge to protect 

the value of the company. 

Mr. DEUTSCH. How was the conflict system supposed to operate? 

Mr. DERRICK. Under our code, any employee who has a conflict 

of interest is required to present that to the chairman and chief executive officer. It is then up to that individual to make whatever 

decision he or she believes is appropriate. There is no formal requirement for it to be sent through—— Mr. DEUTSCH. I am asking questions because—again, I have 10 

minutes, so I really do need—— Mr. DERRICK. I am sorry. 

Mr. DEUTSCH. [continuing] to go relatively quickly. Let me just 

ask you, in the LJM deals, there was a structure where there is 

a multi-name signature block. Why was that set into place? And, 

again, the specific information we have now is that it was not followed through on a continuous basis. That Mr. Skilling specifically 

did not sign, you know, continuously those approval sheets, and yet 

the transactions were approved. 

Mr. DERRICK. I will have to defer, in large part, I think to the 

lawyers in the Enron Global Finance Group who were charged with 

that. I don’t recall having any specific involvement in setting up 

those approval sheets. And I don’t recall at the time that the 

Rhythms transaction was being discussed, Congressman, that there 

was such an approval sheet. 

Mr. DEUTSCH. Did you understand the system that it was supposed to include these approval sheets? 

Mr. DERRICK. At the time of the Rhythms transaction, there was 

no approval sheet. 

Mr. DEUTSCH. What about LJM2? 

Mr. DERRICK. As LJM2 was developed, my understanding is that 

the Enron Global Finance Group, in conjunction with——

Mr. DEUTSCH. The bottom line is, did you know that these approval sheets were part of the system that you had supposedly implemented to avoid conflict? 

Mr. DERRICK. Yes, at some point. 

Mr. DEUTSCH. Okay. And did you know that Mr. Skilling did not 

sign them on a continuous basis? 

Mr. DERRICK. My first awareness of that came in my conversations with Mr. Mintz, who raised the issue that there was not contemporaneous——

Mr. DEUTSCH. So who was guarding the store? Who was the cop 

watching what was going on? I mean, not internally, not externally. I mean, you set up a system which apparently no one followed. 

Mr. DERRICK. Well, I think that—I am not sure that that is correct, Congressman. There was a system that was set up, I think, 

designed in good faith to deal with these issues. The question that 

everyone was looking at is: was the system appropriately adhered 

to? But that responsibility was allocated by the Board to Enron 

Global Finance Legal, as well as to our chief accounting officer and 

our chief risk officer. 

31

Mr. DEUTSCH. Let me go back to the—do you have the chart 

again? Let me just go back to it. Just because, again, we are not—

sometimes I just have found it easy to focus on the specific transaction. I am going to do my best to try to explain this, that on the 

Rhythms transaction, as I said, the stock value went up about $390 

million is my understanding. Enron made a corporate decision to 

basically lock in the price, they wanted to buy it put to do that. 

Mr. Fastow set up the partnership to sell that put back to Enron. 

It was capitalized by Enron stock right here. As soon as he set up 

the general partnership, he took out a several million dollar general partnership fee. That was actually the first thing that he did. 

He then sold the put back—actually, the general partnership set 

up a swap as a subsidiary, which was actually done improperly, because by taking out the general partnership fee it had less equity 

than was needed for a 3-percent set-aside. But they sold it back. 

The problem with the transaction is two things. One is the general partnership never could have made good on the put. I mean, 

basically, Enron bought a put from itself in this transaction. And, 

effectively, that is what occurred. And that is the point of what I 

am saying that we—that at least in my opinion this transaction is 

illegal. It is illegal because a business purpose is not there. 

The business purpose—the purpose, as far as I can see, is, No. 

1, to enrich Mr. Fastow as the general partner to take the fee, No. 

1. No. 2, to basically manipulate the stock price, because what you 

have done is you have booked the gain, the $390 million gain. The 

liability that that stock might go down is not listed as a liability 

anywhere. 

So this is the point, you know, of why it is legal and where the 

problem comes in—is that an outside auditor, or someone—the 

public, an analyst—looking at the books, unless they can get inside 

of this transaction, does not understand what occurred. And I can’t, 

you know, for the life of me—and no one—and I have used this 

chart with other people to try to come up with, why is this a legitimate transaction? 

What is legitimate about this, except maybe, you know, if this 

was, you know, Goldman Sachs, then it would be legitimate, because they would be selling a put. But Mr. Fastow didn’t go to 

Goldman Sachs to buy the put. He bought the put from himself. 

And, in fact, what continues in this transaction is that it was capitalized, as I said, by Enron stock, literally given by Enron stock, 

when both the Rhythms net and Enron stock went down without 

consideration. 

Enron then gave, at Mr. Fastow’s request, an additional—I believe it is $150 million of additional stock to this general partnership without consideration. Without consideration. Without showing that as a liability on the balance sheets. And, again, what is 

significant about this, as we have delved into these partnerships, 

is basically this is one of many. I mean, this is one of the largest. 

It is not the largest. And this is the structure. 

Again, we talked about how Enron did all of these complicated 

things. This is not so complicated. It really isn’t that complicated. 

And this is the structure, apparently, that was continuously used 

by Mr. Fastow in the LJM partnerships. Very similar. There were 

32

different products. You know, it could have been a pipeline that 

had a value, and they locked in the pipeline. 

But essentially, I mean, our understanding is this was a game. 

And, I mean, from your perspective as general counsel, I don’t see 

how you weren’t aware that this was the game. And if it was the 

game, then try to explain to me why it was a legal game and why 

this whole thing was not a scam from day one, why it wasn’t, you 

know, basically thieves in blue suits and red ties. And, really, that 

is what this whole thing is about. 

And I think that is the question which is going on, because the 

issue that I think we go back to is Enron’s demise is not business 

as usual in America. There have been several companies since 

Enron’s bankruptcy in America that have gone bankrupt. K-Mart 

has gone bankrupt. Other companies have gone bankrupt. Big companies. Not as big as Enron, but the reality is that the public markets knew that there were problems with those companies. 

The reality is in the case of Enron, until Enron vaporized, the 

public markets did not really know of the level problem. So, Mr. 

Derrick, I really want to at least give you the opportunity, because 

if you can—if you can respond. 

Mr. DERRICK. Well, Congressman, I will attempt to respond to 

the best of my ability. As I mentioned earlier, I was not involved 

in the structure of that transaction, and I can’t speak to the details 

of it. I will say, to the best of my recollection, that it was certainly 

considered at the time that the Board approved that there was a 

legitimate business purpose, and that was to help ensure that the 

shareholders of Enron would be able to retain as much value as 

possible with respect to the investment that had been made in 

Rhythms. 

As to what later transpired, I can’t speak to that. I have not certainly been told, and was not aware, that these structures had been 

considered to be illegal. I know that there are great concerns with 

respect to the appropriate accounting treatment, but I was not 

aware that anyone had challenged the actual legality of the——

Mr. DEUTSCH. Is that within Enron or within your outside counsel, or am I the first person to suggest to you that they are illegal? 

Mr. DERRICK. Well, I don’t claim to have read everything that 

may be out there, Congressman. But my understanding is that the 

concern here has been primarily related to whether the appropriate 

accounting treatment was followed—— Mr. DEUTSCH. Is it an SEC violation to have a non-business purpose in terms of that? That that is a violation? That is a criminal 

violation? 

Mr. DERRICK. Well, again, my——

Mr. DEUTSCH. I mean, if it is a non-business purpose, it is a 

criminal violation. People will go to jail. 

Mr. DERRICK. My understanding at the time that the Board approved this was that it was certainly considered to have a legitimate business purpose—that is, to protect the value of the Enron 

shareholders and their investment in Rhythms. 

Mr. DEUTSCH. Okay. 

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

The Chair recognizes the Chairman of the full committee, Mr. 

Tauzin. 

33

Chairman TAUZIN. Thank you, Mr. Chairman. 

Mr. Dilg, on October 30 when Sherron Watkins met with Ken 

Lay and provided him with the memo that we have as a part of 

our record, she listed two mistakes, apparently. One was that Lay 

should have appropriately taken the matter seriously in the beginning of the investigation. However, mistake No. 2 she lists, ‘‘is that 

he relied upon V & E and Arthur Anderson to opine on their own 

work.’’ And she quotes your statement on October 16 to her when 

supposedly Sherron Watkins said to Lay that he should probably 

come clean and admit the problems and restate the 2000 Raptor in 

order to preserve his legacy and possibly the company. And your 

statement was, are you suggesting that Ken Lay should ignore the 

advice of his counsel and the auditors concerning this matter? She 

was apparently complaining when she went to Mr. Lay, he made 

the mistake and relied upon the very same law firm that had done 

the work on these transactions, to comment on their work and to 

comment on the criticisms of that work instead of hiring outside 

counsel and outside auditors and that you indicated to her that 

Ken Lay should simply continue to take the advice of his counsel 

and his auditors concerning this matter. 

Was that an accurate statement to Mr. Lay on October 30? 

Mr. DILG. I don’t have a copy, I don’t believe, of that memorandum Chairman Tauzin. 

Chairman TAUZIN. I’ll put it in front of you right now. 

Mr. DILG. Thank you very much. 

Chairman TAUZIN. I have the cite, but here’s an actual copy and 

you can see where I’ve underlined it. She’s basically saying it was 

a great mistake for him to end up relying upon your firm, to comment on your firm’s work. And that you said, are you telling me 

that Ken Lay shouldn’t rely upon his counsel and his auditors? Is 

that accurate? 

Mr. DILG. I don’t remember making that specific statement. 

Chairman TAUZIN. You do remember, however, filling a report 

out on October 15 that you and I believe Mr. Mark Hendricks, III, 

prepared for Mr. Derrick. Is that correct? 

Mr. DILG. Yes sir. 

Chairman TAUZIN. And in that report your conclusions are that 

your ‘‘preliminary investigation do not, in our judgment, warrant a 

further widespread investigation by independent counsel and auditors.’’ Is that correct? 

Mr. DILG. That’s correct. 

Chairman TAUZIN. Do you stand by that decision? 

Mr. DILG. Yes sir. 

Chairman TAUZIN. You also say that while there’s some bad cosmetics involved that your response to the response of Mr. Derrick 

should be to Ms. Watkins that ‘‘we should assure her that her concerns were thoroughly reviewed, analyzed and were found not to 

raise new or undisclosed information given serious consideration.’’

Is that correct? 

Mr. DILG. Yes sir. 

Chairman TAUZIN. But if we look at the beginning of your report 

and this is where I want you to comment, Mr. Derrick, because this 

is a letter to you, and obviously the ‘‘you’’ in this sentence refers 

to you, Mr. Derrick. 

34

In preliminary discussions, the second page of the report, in preliminary discussions with you, it was decided that our initial approach would not involve the second guessing of accounting advice 

and treatment provided by Arthur Anderson, that there would be 

no detailed analysis of each and every transaction and there would 

be no full-scale discovery style inquiry. Instead, inquiries should 

continue to determine whether the anonymous letter and supplemental materials raise new factual information that would warrant 

a broader investigation.’’ Isn’t it true, Mr. Derrick, that while Mr. Dilg is writing a report 

advising you to tell Ms. Sherron Watkins that you’ve given her 

complaints thorough—I want to quote you accurately, ‘‘thoroughly 

reviewed, analyzed’’ although you were being told by Mr. Dilg to 

tell Ms. Watkins that her complaints were thoroughly reviewed and 

analyzed. But nevertheless, you gave instructions to Mr. Dilg and 

Vinson & Elkins not to do that. You told them, according to his, 

letter, don’t look at the accounting treatment, don’t look at these 

transactions in detail and for heavens sake, don’t do a full style 

discovery. Isn’t that correct? 

Mr. DERRICK. Chairman Tauzin, if I understand your question 

correctly, this goes to the point that I was speaking to in my opening remarks which is in the context of last August, recall that as 

the Powers Report indicated, despite the fact that there were literally hundreds of people who were involved in these transactions 

and despite the fact that under the Enron Code of Conduct, there 

are three different ways of reporting anonymously any concerns 

that one may have to the company which does trigger an investigation. 

To the best of my knowledge, the only report that had been presented on this issue was that at the time it was an anonymous report. We took this extremely seriously. The question was at the 

time do we launch into—and this was not something I instructed 

Vinson & Elkins. This was part of our initial discussions. 

The question was how do we, as promptly, as practical——

Chairman TAUZIN. Mr. Derrick, Sherron Watkins met with Mr. 

Derrick and Mr. Rogers, 3 days before the 15th. You can’t possibly 

sit here and tell me that you thought this was still an anonymous 

complaint. 

Mr. DERRICK. I’m saying at the time that we received the initial 

report, it was an anonymous letter. Obviously, at some point and 

I can’t recall exactly which day that would have been, but yes, at 

some point we certainly understood it was Ms. Watkins, but I don’t 

know her. 

Chairman TAUZIN. I want you to explain to us, because I’m totally—I can’t understand for the life of me why the general counsel 

of this corporation, when he’s approached by Ken Lay, when 

Sherron Watkins meets with you, Mr. Rogers, to go over all this 

stuff, not anonymous any more, why you when asked to considered 

her request that outside counsel, she says this is our recommendation in an initial letter. Involve Jim Derrick and Rex Rogers to hire 

a law firm to investigate the Condor and Raptor transactions to 

give Enron attorney-client privilege on this work product, can’t use 

V & E due to conflict. They provided some true sale opinions on 

these deals. Why, when Mr. Lay comes to you and says I need to 

35

know whether all this is true, why you turn right around and get 

Vinson & Elkins to do this extraordinarily limited investigation 

and instruct them don’t look at the accounting treatment and don’t 

do a full-scale discovery style inquiry and by the way, I should look 

at the next paragraph where Mr. Dilg, you point out that you only 

looked at selected documents, provided you by Enron. 

It appears to me, Mr. Dilg, Mr. Derrick was severely limiting 

your ability to examine whether or not, No. 1, Sherron Watkins’ allegations were correct, because you were told not to look at them. 

And two, whether anybody else really ought to look over your 

shoulder and see whether or not Vinson & Elkins had done a good 

job in recommending these deals when you issued approval letters 

on them. 

Is that correct? 

Mr. DILG. I don’t believe that we were instructed to be limited, 

Chairman Tauzin. 

Chairman TAUZIN. I’m reading your statement, Mr. Dilg. Listen, 

let me read it again. ‘‘In preliminary discussions with you, Mr. Derrick, it was decided’’—sounds like both of you talked about it and 

decided together that our initial approach would not involve the 

second guessing of the accounting advice and treatment provided 

by AA. And there would be no detailed analysis of every transaction. And there would be no full-scale discovery style inquiry. 

And second, that you would only review selected documents. You’re 

trying to tell me that wasn’t an extraordinarily limited review of 

Sherron Watkins’ complaints? 

Mr. DILG. I think the sentence you read did talk about our initial 

approach and again the scope of our review was to determine 

whether a further, more detailed—— Chairman TAUZIN. How could you know whether a further review 

would be required if you wouldn’t even look at her allegation? How 

could you, the attorneys who advised the corporation on these 

deals, how could you possibly give the company objective information as to whether or not an outside counsel or an outside auditor 

ought to look at them if he never even looked at the deals again? 

Mr. DILG. Ms. Watkins was raising some very serious business 

concerns that she wanted Mr. Lay to review and be aware of. We 

didn’t feel that that involved and there is nothing in her letter—— Chairman TAUZIN. Did you even bother to interview Skilling? 

Mr. DILG. Mr. Skilling was no longer with the company. 

Chairman TAUZIN. But you never tried to interview him? 

Mr. DILG. No sir. 

Chairman TAUZIN. You never asked him about the so-called 

handshake deal where he promised that the partnership would be 

protected with Enron stock, they would never lose money? 

Mr. DILG. No sir. 

Chairman TAUZIN. You just asked Fastow about it, he denied it 

and that was enough? 

Mr. DILG. He denied it. If there was a concern from the company’s standpoint, Mr. Causey said that he was not aware, I believe Mr. Causey said he was not aware of any such transaction 

and——

Chairman TAUZIN. Ms. Watkins says that employees were asking 

this all the time, that people were saying that, that many similar 

36

comments are made when you ask about these deals. Employees 

quote our CFO as saying these are handshake deals. But Skilling 

and LJM will never lose money. Did you ever try to find out who 

these employees were who said that Fastow actually told them that 

he had such a handshake deal? 

Mr. DILG. We did interview Ms. Watkins and she said a lot of 

it was rumors that she had heard. She did give us some names of 

other people that we should talk to on this specific aspect. 

Chairman TAUZIN. Did you talk to them? 

Mr. DILG. We did not. 

Chairman TAUZIN. You didn’t bother chasing down that allegation. You didn’t talk to Mr. Skilling. You lived by Mr. Derrick’s and 

your agreement not to look at the deals, not to do any discoverystyle inquiry and you reported quite conveniently to Mr. Lay and 

Mr. Derrick that everything is okay, just cosmetic and tell Ms. 

Watkins that we looked at everything and she should go away. In 

fact, you did more than go away. This is a remarkable piece. This 

is a memo—Mr. Derrick, I want to ask you about this one. This is 

from someone who works in your office. This is from Ms. Sharon 

Butcher. It’s to Sharon Butcher from Vinson & Elkins from Carl 

Jordan, but the letter is per your request. Some way or another, 

someone who worked for you, Sharon Butcher, made a request to 

Vinson & Elkins and she made two requests apparently. ‘‘Per your 

request, the following’’——

Mr. GREENWOOD. It’s Tab 4 in your books in case you need to—— Chairman TAUZIN. Tab 4 in your books. From Carl Jordan, August 24, 2 days after—I mean this is right about the time all this 

is coming about, to Sharon Butcher in your office, Mr. Derrick. 

Which says, ‘‘per your request, Sharon’’, so Sharon must have 

asked for this information. ‘‘Here are some thoughts on how to 

manage the situation with the employee who made the sensitive report’’ and there are all kind of thoughts about how thank God she’s 

asking for reassignment herself. You can see she wanted a new job. 

And then the second one, you also ask that I include in this communication a summary of the possible risks associated with discharging or constructively discharging employees who report allegations of improper accounting practices. Did you, Mr. Derrick, instruct Sharon Butcher to make such a request on Vinson & Elkins? 

Mr. DERRICK. Yes, I did, Congressman. 

Chairman TAUZIN. Explain to me why. 

Mr. DERRICK. Well, under our Code of Conduct, any employee 

who makes an anonymous report is guaranteed that there will be 

no retribution by the company, that the company will not tolerate 

any form——

Chairman TAUZIN. Why did you need the lawyers to tell you 

what the risk of doing something you knew you couldn’t do? 

Mr. DERRICK. We wanted to be absolutely correct in every 

way——

Chairman TAUZIN. That’s a fine answer. You want to be absolutely correct. But let me ask you again what I asked you. If you 

already knew that your code of ethics prohibited you from discharging her, why on earth would you instruct one of your employees to ask Vinson & Elkins about what would happen if you did 

that, what the risks were to the company, including, for example 

37

the SEC might have some questions about that and that you might 

have problems with other oversight agencies of the government if 

you did that. Why would you even want to ask Vinson & Elkins 

to give you a list of all the horrible things that would occur if you 

knew you had no right under your own code of ethics to discharge 

this employee? 

Mr. DERRICK. That gives us any information that we would need, 

Congressman, as a legal department, in order to be in the best position to protect any potential harassment or intimidation of Ms. 

Watkins. We had absolutely nothing other than her interest and 

the company’s interest in acting properly in this regard. Not only 

was that the right thing——

Chairman TAUZIN. Mr. Derrick, you came from Vinson & Elkins, 

didn’t you? 

Mr. DERRICK. I certainly did. 

Chairman TAUZIN. So you’re the lead counsel for Enron. The guy 

Mr. Lay turns to to get help with these allegations. 

Mr. DERRICK. Correct. 

Chairman TAUZIN. Formerly with Vinson & Elkins. You turn 

back to Vinson & Elkins to investigate it, but you tell them don’t 

look too hard. That’s the common sense review of what I’ve just 

read to you. 

How do you explain that? 

Mr. DERRICK. I would respectfully disagree with that construction, Congressman. As I mentioned, Mr. Lay and I both proceeded 

in absolute good faith to take Ms. Watkins’ allegations extremely 

seriously. What you were pointing to as the downside of Vinson & 

Elkins was also the great strength of Vinson & Elkins——

Chairman TAUZIN. Why did you tell them not to look at the 

deals—why did you tell them not to do a thorough discovery-style 

inquiry? Why did you tell them not to do that? 

Mr. DERRICK. Let me say again I did not instruct them to do 

that. That was part of our initial discussion in how best to proceed 

with a preliminary investigation. It was always the purpose of this 

investigation that the recommendation to engage an additional accounting firm could well have been made. 

Chairman TAUZIN. My time is up, but I want to make it clear. 

You call this a preliminary investigation, but it’s the only one you 

did, right? It’s the only one Vinson & Elkins did, the only one you 

did, right? 

Mr. DERRICK. We followed the recommendation that we received 

from the outside firm——

Chairman TAUZIN. From Vinson & Elkins saying we don’t think 

anybody ought to overlook our work and check it. Did that surprise 

you that Vinson & Elkins would tell you we don’t think anybody 

has to look at what we did to see if it’s legally correct? 

Mr. DERRICK. I have the utmost faith in Vinson & Elkins and in 

their integrity. I believe that they had truly believed that we 

should have proceeded——

Chairman TAUZIN. You knew that Vinson & Elkins were the attorneys on the Raptor deal. 

Mr. DERRICK. As I said, Congressman, I don’t know that I was 

aware that they were attorneys on all the deals, but we were cerVerDate Jun 13 2002 08:36 Jul 17, 2002 Jkt 010199 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 W:\DISC\78506 pfrm17 PsN: 78506
38

tainly aware that they had been involved in the transactions which 

gave them the great ability to quickly start on the investigation. 

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

chair is about to recognize the gentlelady from Colorado, but before 

I do just one question, Mr. Dilg. Your preliminary investigation 

was not a cover up, was it? 

Mr. DILG. It was definitely not a cover up. 

Mr. GREENWOOD. In what ways would a cover up look different 

than your preliminary investigation? 

Mr. DILG. I’m not sure. I’ve never participated in a cover up, 

Chairman. Again, you need to take our preliminary report in the 

context of what Enron was doing at the time in terminating the 

Raptor transactions and having already removed Mr. Fastow from 

the conflict of interest position. 

Mr. GREENWOOD. The chair recognizes the gentlelady from Colorado for 10 minutes. 

Ms. DEGETTE. Thank you so much, Mr. Chairman. Mr. Derrick, 

I’m sure you didn’t mean to imply to the chairman that you gave 

any less shrift to the allegations being made by Ms. Watkins because they were initially made anonymously, did you? 

Mr. DERRICK. To the contrary, Congresswoman——

Ms. DEGETTE. I’m serious, didn’t you. 

Mr. DERRICK. We absolutely did. 

Ms. DEGETTE. Thank you. Now also, I’m sure that when you 

asked Vinson & Elkins to do an investigation, you yourself didn’t 

intend to have them do a cover up, did you? 

Mr. DERRICK. My integrity is not for sale, Congresswoman. I 

would not participate in a cover up. 

Ms. DEGETTE. Thank you. So you thought that they would do an 

independent investigation. 

Mr. DERRICK. Yes, I did. 

Ms. DEGETTE. Is that your testimony? 

Mr. DERRICK. Yes. 

Ms. DEGETTE. Thank you. Now Mr. Dilg, in your written testimony, you point out to us very helpfully that Enron’s legal affairs 

were directed by a highly sophisticated in-house legal department 

consisting of approximately 250 attorneys, some of which by the 

way, came from your organization, correct? 

Mr. DILG. That’s correct. 

Ms. DEGETTE. And so for most of the financial transactions, your 

lawyers would interface with the in-house attorneys and also, by 

the way, with Arthur Anderson who provided the auditing and accounting advice for Enron, correct? 

Mr. DILG. We would usually interface with the legal department. 

I’m not sure that we would interface with Arthur Anderson. 

Ms. DEGETTE. You assumed that the in-house lawyers were 

interfacing with Arthur Anderson for routine transactions, right? 

Mr. DILG. I’m not sure it would be the in-house counsel as much 

as it would be the in-house financial department or accounting department. 

Ms. DEGETTE. So you don’t even know if the in-house lawyers 

were working with Arthur Anderson on these issues? 

Mr. DILG. That’s correct. I do not know. 

39

Ms. DEGETTE. As far as you know, there may have been no lawyers working with Arthur Anderson? 

Mr. DILG. That could be. 

Ms. DEGETTE. Mr. Derrick, do you know if your lawyers worked 

with Arthur Anderson? 

Mr. DERRICK. I can only say that I personally did not work with 

Arthur Anderson. It wouldn’t surprise me——

Ms. DEGETTE. You were the head of the legal department. Do 

you know whether any of your lawyers worked with them? 

Mr. DERRICK. As I was going to say, Congresswoman, it wouldn’t 

surprise me that on some matters there was interface between 

some in-house lawyers and Anderson. I personally was not. 

Ms. DEGETTE. If you wouldn’t mind supplementing your answer, 

find out if anybody did, that would be helpful in this investigation. 

Now Mr. Derrick, the investigation of Sherron Watkins’ claims, 

that was kind of a different assignment than the normal assignments that you got, wasn’t it? 

Mr. DILG. Is that question addressed to me, Congresswoman? 

Ms. DEGETTE. I’m sorry. Yes, it is, Mr. Dilg. 

Mr. DILG. Yes, that was not a normal assignment as far as—I’m 

a transactional lawyer. 

Ms. DEGETTE. Did you understand that that was to be an independent investigation of these claims? 

Mr. DILG. I understood we were to make a preliminary review. 

We discussed——

Ms. DEGETTE. Did you think it would be an independent preliminary review? 

Mr. DILG. It depends on—it’s not an independent review such 

that you would have to respond to a derivative suit or if you were 

going to have an independent committee of the board directing 

their own counsel. 

Ms. DEGETTE. So you didn’t think it was particularly independent. The reason I’m asking this question is because and we’ve 

talked about this at length with the chairman and others, you limited the scope of the investigation right from the get go. You said 

that you’re not going to second guess Arthur Anderson’s accounting, right? 

Mr. DILG. We——

Ms. DEGETTE. Wasn’t that one of your premises in the investigation? 

Mr. DILG. In our preliminary review, we were not to review the 

accounting. 

Ms. DEGETTE. And in fact you never did review Arthur Anderson’s accounting, did you? 

Mr. DILG. No, we did not. 

Ms. DEGETTE. Okay, the investigation team was you and Mr. 

Hendricks only, right? 

Mr. DILG. That’s correct. 

Ms. DEGETTE. You didn’t use any associates, right? 

Mr. DILG. That’s correct. 

Ms. DEGETTE. You didn’t have any accountant helping you with 

the investigation, did you? 

Mr. DILG. That’s correct. 

40

Ms. DEGETTE. So you would really have no way—I mean do you 

have an accounting background? 

Mr. DILG. I do not. 

Ms. DEGETTE. I don’t know how you are, the way I am, before 

I went to law school I had one accounting course in college. I assume it’s probably pretty much the same with you, is that right? 

Mr. DILG. I believe I had two semesters of accounting in undergraduate school. 

Ms. DEGETTE. Okay. So you don’t really understand complicated 

accounting transactions or standards, do you? 

Mr. DILG. No ma’am. 

Ms. DEGETTE. Do you know whether Mr. Hendrick does? 

Mr. DILG. I do not believe he does. 

Ms. DEGETTE. So the two of you, you interviewed witnesses, just 

the two of you. You never reviewed these transactions, did you? 

Mr. DILG. No, we did not get into the details of the transaction. 

Ms. DEGETTE. Now you did know, didn’t you, that Sherron Watkins’ allegations were that the accounting scandals were the problem. Isn’t that correct? 

Mr. DILG. She raised a number of different things in her correspondence with Mr. Lay. 

Ms. DEGETTE. Right, but I mean basically she said we will implode in a way the accounting scandals and there’s an elaborate accounting hoax and then her supplemental information indicated 

she thought there were accounting problems with a number of the 

transactions, most particularly Raptor, correct? 

Mr. DILG. She was concerned about the Raptor transaction, primarily. 

Ms. DEGETTE. Right. 

Mr. DILG. Her main concern was that Mr. Lay, in coming back 

in as CEO, thoroughly understand the issues he had with the business issues of the vehicles unwinding 2 years hence and the problems that might cause. 

Ms. DEGETTE. If you’ll excuse me, I’ve looked at—I assume you 

reviewed all of her—both her letter of concern and also the attached specific concern she raised, didn’t you? 

Mr. DILG. Yes, we did. 

Ms. DEGETTE. Well, because she says here about Raptor, the accounting treatment looks questionable, and talks about equity derivatives. ‘‘The equity derivative transactions do not appear to be 

at arm’s length. There’s a veil of secrecy. Employees are questioning our accounting propriety’’ etcetera. Aren’t those all issues 

around accounting? 

Mr. DILG. Yes. All those statements relate to accounting. 

Ms. DEGETTE. Did you understand what those allegations were? 

Mr. DILG. We understood her base allegation to be concern about 

the fact that the Raptor vehicles were supported by Enron stock 

and that Enron had hedged investments made against those. 

Ms. DEGETTE. Right, and she had specific concerns about specific 

transactions. Did you ever have any independent accountant look 

at those transactions? 

Mr. DILG. We did not. 

Ms. DEGETTE. Now, why not? 

41

Mr. DILG. Our charge for the initial review was to determine 

whether there were facts sufficient for a further review. We were 

not to review the accounting advice given by the accounts that 

Enron’s audit committee had decided to use for accounting advice. 

Ms. DEGETTE. If the allegation is that the accounting is funny, 

and you rely on the accounting to come to your conclusion, how can 

you conclude that there’s not a problem with the accounting without any kind of outside analysis? 

Mr. DILG. We were concerned with making sure that Arthur Anderson had at their disposal all the material facts relating to the 

transactions and we did try to verify that. 

Ms. DEGETTE. And did you find that out? Did they? 

Mr. DILG. Yes. 

Ms. DEGETTE. How did you find that out? 

Mr. DILG. We gave them Ms. Watkins’ letter and walked through 

with their engagement partners point by point under Ms. Watkins’ letter and—— Ms. DEGETTE. Did they have the information, so, from that you 

concluded yes? 

Mr. DILG. They were very well aware of the issues that she was 

raising and that they felt very comfortable with the accounting decisions they had made in connection with the transaction. 

Ms. DEGETTE. Let me ask you this, did you ask Anderson to provide you a detailed analysis of the allegations that Ms. Watkins 

made in her memo, most specifically, the Raptor deals and the 

other deals? Did you ask them for a detailed analysis or did you 

just say, does this look okay to you and they said yes, and that was 

it? 

Mr. DILG. We gave them the letter, I believe, a day or so before 

a meeting that we had with Mr. Duncan and Ms. Cash. We did not 

ask for a detailed, written analysis. 

Ms. DEGETTE. So you don’t know to this day what Arthur Anderson’s analysis would have been of the transactions that formed the 

basis of Ms. Watkins’ concerns? 

Mr. DILG. Arthur Anderson had included those transactions in 

the scope of their overall audit of the company and they confirmed 

to us verbally that they were still comfortable—— Ms. DEGETTE. This seems like an incredible circle to me. She 

says well, there’s problems with the audit, so you go ask the people 

that did the audit. They say the audit was okay, so it just comes 

back to point one. 

How could you decide independently if it was true or not? 

Mr. DILG. We could not decide on whether the accounting was 

correct. We’re not in position to do that. We could decide whether 

the Big Five accounting firm that the company’s audit committee 

had decided to rely on for accounting advice were aware of the concerns and that they were still satisfied with their accounting advice. 

Ms. DEGETTE. But if the accounting—if the concern of the whistle blower is that the accounting is wrong, then how can you determine there’s not a problem if you’re relying on the people doing the 

accounting to give you the analysis? 

Mr. DILG. I think Ms. Watkins’ concerns, and I don’t want to 

speak for Ms. Watkins, but based on her letter and our interviews 

42

were not with the technical accounting side. She disagreed with the 

concept that you could support a transaction with your own stock. 

Ms. DEGETTE. Okay, let me ask you one more question. Now you 

said here there’s some problems with cosmetics. You thought it 

might look bad, right, in your report? 

Mr. DILG. We laid out—— Ms. DEGETTE. You used that word, you said that there’s some 

problems with cosmetics. 

Mr. DILG. We did use the word cosmetics. 

Ms. DEGETTE. But then you said you had some concerns that 

there might be litigation as a result of this, correct? 

Mr. DILG. We had concerns that we expressed both in the letter 

and in oral conversations that in the event of the litigation, these 

transactions could be portrayed very badly. 

Ms. DEGETTE. Well, actually, you said that you were concerned 

that there might be litigation. Right? You said, ‘‘there is a serious 

risk of adverse publicity and litigation.’’ That’s the last page, page 

9 of the October 15 letter. 

Mr. DILG. Yes. 

Ms. DEGETTE. She’s handing it to you right now. 

Mr. DILG. Thank you. 

Ms. DEGETTE. Did you undertake any other, any further risk 

analysis on behalf of your client, Enron, to let them know what 

those litigation risks were so that they could rely on your advice 

and conduct a narrow internal affairs? 

Mr. DILG. We did advise the company of the litigation risk. 

Again, these were transactions that had been entered into by the 

company some 18 months to 2 years before. There had been serious 

declines in the market value of the investments that had been 

hedged against them. The company terminated these vehicles 

shortly after our initial meeting with Mr. Lay and Mr. Derrick. 

Ms. DEGETTE. Can I just stop you? We don’t have any document 

that would indicate the advice you gave to Enron relating to the 

litigation risk. Does such a document exist or did you give that advice verbally? 

Mr. DILG. It’s here in the October 15 letter. 

Ms. DEGETTE. So there’s no additional documentation other than 

this? 

Mr. DILG. There was an outline, I believe that the committee has 

of our discussion of Mr. Lay and Mr. Derrick. 

Ms. DEGETTE. But there’s no additional memo about litigation 

risk? 

Mr. DILG. That’s correct. 

Ms. DEGETTE. Thank you very much, Mr. Chairman. 

Mr. GREENWOOD. The chair thanks the gentlelady from Colorado 

and recognizes the gentleman from Florida for 10 minutes for purposes of inquiry. 

Mr. STEARNS. Thank you, Mr. Chairman. Mr. Dilg, I saw in your 

opening statement, I just re-read it, you talked about that you felt 

the lawyers that you dealt with with Enron were highly capable, 

well qualified attorneys. Then you talked about your relationship 

with Enron and you were proud of it. I think that’s what you said 

in your opening statement? 

Mr. DILG. Yes sir. 

43

Mr. STEARNS. In hindsight, do you think there’s anything you 

would have done differently dealing with Enron? 

Mr. DILG. I do not think so. 

Mr. STEARNS. So you would not have changed an iota of anything 

that you did with Enron in your advising, in your consulting, in 

your procedures with them? 

Mr. DILG. We performed a great deal of work on very many 

projects for Enron over a long period of time. To my knowledge, 

there’s nothing that I’m aware of that we would change. 

Mr. STEARNS. Okay, so we’ve established the record that everything you did during that time with Enron, you would do it again, 

the same thing. Is that correct? 

Mr. DILG. From my personal standpoint, yes. 

Mr. STEARNS. This, to me is a little bit far fetched. If I were you, 

I would say look, we made some mistakes. We’re sorry, we could 

have improved. There are some areas we could have changed. But 

to come up here and say there’s absolutely nothing you would 

change, did you ever think about not continuing Enron as a client? 

Mr. DILG. No sir, not until after the bankruptcy. 

Mr. STEARNS. So it took you to the absolute meltdown of this corporation before you said we’ll just not have Enron as a client. Is 

that true? 

Mr. DILG. That’s correct. 

Mr. STEARNS. And all during that time, there were no indications 

to you that Enron was performing functions that were illegal in 

your opinion? 

Mr. DILG. Never had any information that would indicate to me 

that Enron was performing an illegal act. 

Mr. STEARNS. How much did you charge V & E for its investigation of the Watkins letter? 

Mr. DILG. How much did we charge Enron? 

Mr. STEARNS. How much did V & E charge Enron for the investigation of the Sherron Watkins letter? 

Mr. DILG. I don’t have the precise figures. I believe it’s around 

$60,000. We conducted that very quickly. 

Mr. STEARNS. In your testimony, you define the role of legal 

counsel. Let me just read from this. ‘‘If a transaction’’, you say, ‘‘is 

not illegal and has been approved by the appropriate levels of a 

corporate management, lawyers, whether corporate counsel or with 

an outside firm, may appropriately provide the requisite legal advice.’’

So if a transaction is not illegal, not illegal and it’s been approved by the corporate management, who determines whether a 

transaction is legal or not? Isn’t that your job? 

Mr. DILG. Based on the information we would have at the time 

we were rendering the legal services, that’s certain advice that we 

would give. 

Mr. STEARNS. That kind of answer gets me concerned. If I understand, the whole purpose of V & E is to take the facts that are 

given to you, figure out if there is a legally appropriate way to do 

it, isn’t that what your law firm does? Anderson comes to you, we 

want to do this, you show them how to do it legally. Isn’t that the 

whole purpose of your law firm? 

44

Mr. DILG. That is the type of advice we render on certain matters, when we’re asked. We do litigation matters. We do lots of different things. 

Mr. STEARNS. I think every law firm in America is trying to advise their clients what’s legal to do. And you’re saying that you, as 

the counsel for Enron, never saw anything egregious about anything they did during the entire relationship you had with Enron. 

That’s what you’re telling us today? 

Mr. DILG. Yes sir. 

Mr. STEARNS. Now when Mr. Skilling came here, he gave pretty 

much the same tact you have done, you know. I used the term with 

him ‘‘plausible deniability.’’

I don’t know if that term fits you, but the approach you’re taking 

here is total unrepentence, a feeling that you did nothing wrong 

and that you and your entire legal firm with all these high powered 

lawyers, never saw a red flag during the whole process and you 

never thought about separating your relationship with Enron until 

the meltdown and until the bankruptcy. That’s what you’re telling 

us today. 

Mr. DILG. I believe the earlier question was whether we ever saw 

anything illegal. That’s what we’re qualified to determine. Red flag 

is a term that I’m not sure that I feel comfortable with. But then 

again, it’s to my knowledge we never saw anything at Enron that 

we considered illegal. Our ethical obligations would require us to 

withdraw if we did and if they did not follow our advice in pursuing an illegal action. 

Mr. STEARNS. Mr. Sefton, prior to your coming here, I had the 

opportunity to question Mr. Mintz, your successor. He testified that 

when he saw virtually identical language that was in the LJM2, 

identical language in the PPM for LJM3 in late 2000, he became 

very concerned. He was alarmed, because it suggested that Fastow 

was promoting his access to inside information as a way to promote 

investment in his partnership. 

He raised his concern with Enron’s legal team and V & E. Mr. 

Dilg, did you know that he raised that? Mr. Mintz raised that with 

you folks about his concern about Fastow’s inside—promoting his 

access to inside information? Did you ever know about that? Just 

yes or no? 

Mr. DILG. I don’t believe I recall any specific conversations with 

Mr. Mintz. 

Mr. STEARNS. Mr. Sefton, did you know about Fastow and what 

he was doing? Because you prepared the LJM2 papers, didn’t you? 

Mr. SEFTON. No, I did not prepare those papers. 

Mr. STEARNS. Didn’t you review them? 

Mr. SEFTON. I saw some of the documents relating to LJM2. 

Mr. STEARNS. How can you see some and not the entire document? Do they come one page at a time? 

Mr. SEFTON. LJM2 was represented by Kirkland & Ellis which 

was their outside counsel. They did essentially all the work on putting that deal together. 

Mr. STEARNS. Well, did you review the private placement memorandum? 

Mr. SEFTON. Yes, I did. 

45

Mr. STEARNS. And there was no concern by you on this, even 

though your successor, Mr. Mintz, testified that he had great concern about the PPM for LJM3 and yet you had no concern, is that 

correct? 

Mr. SEFTON. I have never discussed with Mr. Mintz the reasons 

for his concerns. 

Mr. STEARNS. Mr. Skilling did not sign any of these documents. 

Should Mr. Skilling have signed some of these documents? 

Mr. SEFTON. His signature was called for on the form, yes. 

Mr. STEARNS. When I go to a closing on my home, if I don’t sign 

the document, my lawyers says, ‘‘Mr. Stearns, you better sign this 

document or the deal is not going to be credible.’’ Now your job was to review these partnerships, is that correct? 

Mr. SEFTON. No, that’s not correct. 

Mr. STEARNS. Okay. Did you see these partnership agreements? 

Mr. SEFTON. No, I did not. 

Mr. STEARNS. But you just told me earlier that you saw a part 

of LJM2? 

Mr. SEFTON. I saw the private placement memorandum. 

Mr. STEARNS. Okay, would you have discerned whether Skilling 

signed or not that? Could you recognize in that he did not sign it? 

Mr. SEFTON. I don’t believe his signature was called for in connection with the private placement memorandum. 

Mr. STEARNS. If you don’t mind, pull the mike a little closer. 

Mr. SEFTON. Sorry. 

Mr. STEARNS. Did you sign the approval sheets for the LJM2? 

Did you sign them? 

Mr. SEFTON. Yes, I did. 

Mr. STEARNS. Now if you signed them that meant that you were 

approving the LJM2 partnership, is that correct? 

Mr. SEFTON. That is not my understanding. 

Mr. STEARNS. So when you sign a document that’s the approval 

sheet, it’s your understanding that that does not mean it’s an approval sheet? 

Mr. SEFTON. The approval sheet requires approval by Mr. Buy 

and Mr. Causey. Those were the two senior executive officers of the 

company who were required to approve the transactions by the 

board of directors. 

Mr. STEARNS. Mr. Derrick, what was your role in helping the 

board of directors understand the LJM transactions? As general 

counsel, did you advise them on the controls they implemented to 

avoid conflicts in doing business with LJM and did you recommend 

that they implement any additional controls? 

Mr. DERRICK. Congressman, the only—best of my recollection, 

the only board meeting that I was at with respect to the LJM was 

the LJM1 transaction in which was viewed as simply a on-off 

transaction. There were no controls, as I recall the discussion at 

that point, because it was already a deal that they were looking at 

specifically with a fairness opinion. 

With respect to the other LJM matters, I did not personally participate in the controls and I was not at the meetings at which 

LJM2 was—— Mr. STEARNS. Mr. Derrick, I just have a little time left. All of us 

on this committee are just having a difficult understanding why 

46

Mr. Skilling didn’t sign these documents and why you, as a former 

general counsel of Enron didn’t get a concern when Skilling didn’t 

sign these documents because I would think part of your job as the 

former general counsel of Enron is to make sure all the documents 

are properly signed. 

Mr. DERRICK. Well, Congressman, as we have said, we had almost 250 lawyers in a decentralized department—— Mr. STEARNS. You had too many people to enforce the signing of 

the document? 

Mr. DERRICK. No, but the responsibility for that was allocated by 

the board to Enron Global Finance and their attorneys. Those were 

not documents that were toward me. 

Mr. STEARNS. Mr. Sefton, what’s your comment? 

Mr. SEFTON. With respect to what? 

Mr. STEARNS. Documents that Mr. Skilling should have signed, 

were not signed. Shouldn’t that raise some flags? 

Mr. SEFTON. Yes, and it did. 

Mr. STEARNS. I mean because Mr. Derrick is saying you’re supposed to have done it, so he’s bouncing—aren’t you, Mr. Derrick, 

bouncing the ball back to Mr. Sefton and saying Mr. Sefton was 

supposed to do that? Isn’t that what you just said? 

Mr. DERRICK. I don’t mean to be bouncing balls, Congressman. 

I’m just saying the board had allocated that responsibility to a particular group, a legal group in our organization. 

Mr. STEARNS. I would think the general counsel of Enron might 

be that particular group you’re talking about. So Mr. Sefton, at this 

point I’m finding it hard to believe that you wouldn’t be involved 

in making sure all these documents were properly signed. 

Mr. SEFTON. I’d like to just say that it was never my understanding that the board delegated this job to Enron Global Finance 

legal. That was never my understanding. 

Mr. STEARNS. Whose responsibility was it? If it wasn’t yours, 

whose responsibility? You ere the top poobah here, the former—you 

were the counsel for Enron. I mean if you’re not responsible, the 

Global Finance, who else could there be? 

Mr. SEFTON. I believe the approval process called for the business unit that was doing the transaction to complete the signatures 

and get the signatures on the form. 

Mr. STEARNS. Well, Mr.—— Ms. DEGETTE. Will the gentleman yield real quick——

Mr. STEARNS. I want to finish. The general counsel, Mr. Mintz, 

I mean he tried. He said I sent him a memo in May 2001. I gave 

him about a week to respond. This is Mr. Mintz saying. I didn’t 

hear from him. I asked my secretary to call his secretary to see if 

I could get him on the schedule. He tried and tried and tried. And 

Mr. Mintz was unable to get the signature on the approval sheets. 

I mean who should he have gone to? I mean aren’t you the responsible one to help out here? 

Mr. SEFTON. No, Mr. Mintz is my successor. 

Mr. STEARNS. Yeah. I mean you weren’t aware of this problem 

at all with Mr. Skilling? Are you saying today you had no knowledge about Skilling not signing these documents, is that your statement today? 

Mr. SEFTON. No, I’m not. 

47

Mr. STEARNS. You knew he didn’t sign the documents? 

Mr. SEFTON. I know that his signature wasn’t on all the forms. 

Mr. STEARNS. Okay, so if they weren’t on all the forms, should 

they have been on all the forms? Just yes or no? 

As a general counsel, should his name have been on the forms, 

yes or no? 

Mr. SEFTON. I understand that the—— Mr. STEARNS. No, just yes or no. Should they be on the forms? 

Mr. SEFTON. Well, I’d like to answer by saying that the approvals 

required by the board of directors required approval by Mr. Buy 

and Mr. Causey and that’s what the board said had to be done in 

order to approve these transactions because of the conflict of interest. 

Mr. STEARNS. No. I’m just asking your general, your legal opinion 

here as a general counsel. Should Skilling’s name have been on 

those forms? 

Mr. SEFTON. The board did not call for that. 

Mr. STEARNS. So they don’t have to be on the forms, is that what 

you’re saying? 

Mr. SEFTON. The board did not recall Jeff Skilling to sign those 

forms. 

Mr. STEARNS. But you just told me earlier that his name should 

have been on the forms. You just told me a moment ago. 

Mr. SEFTON. His signature was called for by the form itself, but 

it wasn’t required by the board procedures. 

Mr. STEARNS. Didn’t you create the form? Who created the form? 

Mr. SEFTON. I did assist in preparing the form. 

Mr. STEARNS. Assist, now wait a second. You created the form, 

Mr. Sefton. You asked that his name be on that form. You told me 

his name should have been on that form and it wasn’t on the form. 

Mr. SEFTON. No, I—— Mr. STEARNS. That’s the facts we’ve just established. 

Mr. SEFTON. No, I did not ask that his name be on the form. 

Mr. STEARNS. Who did, because you said his name should have 

been. And you prepared the form, so who else could there be? 

Mr. SEFTON. Mr. Fastow suggested that Mr. Skilling’s name be 

added. 

Mr. STEARNS. And did you make sure that that name was added 

in the nomenclature underneath saying blank line, Mr. Skilling? 

Mr. SEFTON. Yes, I did. 

Mr. STEARNS. So you had on the form that Mr. Skilling’s name 

should have been there. You prepared the forms. You said he 

should have been on there. Now tell me why didn’t you make sure 

it was not on the form? 

Mr. SEFTON. Well, what I haven’t mentioned to you is that when 

I became aware of the fact that some of the forms had not been 

signed by Mr. Skilling, I raised this issue with Mr. Fastow and told 

him that there was an issue here that we needed to deal with. 

Mr. STEARNS. Needed to deal with is probably a good way to 

summarize this. 

Mr. Chairman—— Ms. DEGETTE. Mr. Chairman, can I ask unanimous consent for 

15 seconds? 

Mr. GREENWOOD. Without objection. 

48

Ms. DEGETTE. Mr. Rogers, in your position, did you think that 

Mr. Skilling was supposed to sign those forms? 

Mr. ROGERS. Madame Chairman, let me reach over here. This is 

pretty uncomfortable. Congresswoman, excuse me. I’m getting off 

to a bad start. I think these processes for policies and procedures 

for ensuring that these transactions with LJM were not adverse to 

the best interest of Enron and that they were arm’s length——

Ms. DEGETTE. I asked a kind of a simple question. Can I get 

kind of a simple answer? Did you think Mr. Skilling was supposed 

to sign the forms? 

Mr. ROGERS. In the beginning, that was not my understanding. 

Ms. DEGETTE. Okay. 

Mr. ROGERS. That was an important factor for the Board. When 

I said earlier, as these processes evolved and the in-house counsel 

reviewed the policies and procedure to see how they could be refined and improved, it was clear to me through reading minutes of 

the board that the board considered Mr. Skilling’s approval to be 

important. 

Ms. DEGETTE. Thank you. And so you thought he was supposed 

to sign the forms as it went on? 

Mr. ROGERS. I did think he was supposed to sign the forms as 

it went on. 

Ms. DEGETTE. Thank you. 

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

chair would inform the witnesses and the members of the committee that we have what appears to be a relatively brief series of 

votes that we must address on the floor, so we will recess now for 

at least 20 minutes and I can’t give you a precise time because of 

the uncertainty of the votes, but it will be about 20 minutes. 

[Off the record.] 

Mr. GREENWOOD. The hearing will come to order. The chair recognizes the gentleman from Michigan, Mr. Stupak for 10 minutes 

for inquiry. 

Mr. STUPAK. Thank you, Mr. Chairman. Mr. Dilg, just to ask you 

some questions and you had indicated in your response that there 

was this litigation risk and then you went on and said that because 

of serious decline in the market that there would be a litigation 

risk. Is that some quick summary of what you said to Ms. DeGette, 

that there would a litigation risk because of serious decline in the 

market? 

Mr. DILG. Right, Enron shares dropped possibly 60 percent or so 

in the last year, at a point in time in August and in September 

when we were writing this report. 

Mr. STUPAK. So as long as the market stayed up, Enron would 

never be in trouble, is that correct? 

Mr. DILG. No sir, I don’t believe that was the rationale. 

Mr. STUPAK. There wouldn’t be any problem unless there was 

lawsuits. The only lawsuits are going to come when people start 

losing money. So all these transactions, partnerships, these SPEs, 

that’s okay, as long as the market stays up and Enron can cover 

the cost? Is that sort of the conclusion of the logarithm? 

Mr. DILG. No sir. The Raptor vehicles had had some very severe 

losses hedged against them. I think it was Mr. Causey that told us 

49

in our interviews that they were designed to deal with volatility, 

not a complete collapse of market. 

Mr. STUPAK. Sure, they’re supposed to hedge in case there’s a 

fall, and they’re supposed to hedge, right, or put says Mr. Deutsche 

likes to put it, right? 

Mr. DILG. That’s as I understood the purpose of the transactions. 

Mr. STUPAK. But puts and hedges are not legal, if you’re putting 

up your own company’s stock as Enron did, correct? 

Mr. DILG. I don’t believe that’s correct. 

Mr. STUPAK. What do you believe is correct, if my statement was 

incorrect? 

Mr. DILG. I believe there was a business purpose. The fact that 

the vehicles were supported by Enron stock, we saw in our review 

nothing that made them illegal because of that. 

Mr. STUPAK. So there was no business purpose to these SPEs, is 

that what you’re saying? That’s what made them improper? 

Mr. DILG. No, I didn’t say they were improper. The business purpose, as I understood from Mr. Causey during our review was that 

they were to hedge against volatility in some of the stock, some of 

the investments that Enron had made. 

Mr. STUPAK. You know everyone up here at the table at least all 

say I don’t have an accounting background. I’m not an accountant, 

you know. I only know the legal/technical merits. But none of us 

on this committee has accounting backgrounds. We’re not accountants. We can figure out a few things and it doesn’t take a lot for 

us to figure out. We’ve only had 4 or 5 hearings. You guys have 

spent more time, in fact, with Enron for many, many years. It 

seems to me, it seems to me that when you get the memo from Ms. 

Watkins, and if you just took a look at the letter, not even all the 

details. If you just read the letter. It said Skilling’s abrupt departure will raise suspicions of accounting improprieties. I’m on 14 if 

you care to follow along, second paragraph. ‘‘Will raise suspicions 

of accounting improprieties and valuation issues. Enron has been 

very aggressive in accounting, most notably in the Raptor transactions and the Condor vehicle. We do have valuation issues with 

our international assets and possibly some of our EES MTM positions.’’

So her letter is more than just Raptor and Condor. If you go 

down to the fourth paragraph, excuse me, fifth paragraph, second 

line it says ‘‘the value in the swaps won’t be there for Raptor. So 

once again, Enron will issue stock to offset these losses. Raptor is 

an LJM entity. It sure looks to laymen on the street that we’re hiding losses in a related company and will compensate that company 

with Enron stock in the future.’’

So she’s really just laying it out there. You don’t need to be an 

accountant. You don’t need to be a Member of Congress. She said 

a lay person on the street can understand this. The problem I’m 

having and some of my colleagues are as we’re talking at the votes, 

all these smart attorneys up here, they can’t figure it out, but the 

lay person on the street can figure it out. Our concern is what’s the 

relationship here? If you take a look at, if we just take a look at 

the table here, I believe what, Mr. Derrick worked for many years 

for Vinson & Elkins on the Enron account and you were at Enron, 

right? 

50

Mr. DERRICK. Right. 

Mr. STUPAK. So you have 25 years there at least. 

Mr. DERRICK. It was 20 years, Congressman. 

Mr. STUPAK. But Mr. Dilg, you replaced Mr. Derrick and Vinson 

& Elkins. It just seems like such a cozy relationship that even 

when you get a memo that says even the common lay person on 

the street can figure it out, none of you guys can figure it out. 

Mr. DILG. I’m not positive how to respond, Congressman. We did 

understand that the Raptor partnerships were supported largely by 

Enron stock. That was in Enron’s disclosures in the 10(k) and 

10(q)s, etcetera. 

What I don’t understand from your question is the assumed illegality of that. 

Mr. STUPAK. Well, okay, I’m not asking for a legal conclusion. You said you charged $60,000 to review the Watkins memo. Now 

with that $60,000, I’m sure it’s not just for your technical, legal 

merit. I’m sure whatever rate you charge is based upon reputation 

of the firm, common sense, knowledge. In fact, you didn’t go outside 

Enron because you guys had all the knowledge and therefore it 

would be easier to do a good review. 

I guess my concern is you bring all this experience and expertise, 

but when we get to a real question, it’s either I don’t have accounting experience or we didn’t see the technical/legal merit. You come 

and you’re hired and you bring other attributes with you as individuals, as attorneys and as professional people. It seems like to 

some of us up here that those other attributes were just a blind eye 

was cast when you looked at this memo because it’s all within the 

house. I would think when you look at this memo words like ‘‘aggressive accounting, creative accounting’’ would sort of send a signal to someone with all this experience not only within Enron and 

Vinson & Elkins, but even the lay person on the street, those are 

red flags and we should take a more serious in-depth look at it 

which you don’t even hire an accountant, where admittedly you say 

you’re not an accountant. I would then think, as Ms. DeGette was 

trying to say, you’d at least hire an account when you have these 

red flags out here and you’re charging this company. There seems 

to be a circle that you don’t want to connect here. 

Mr. DILG. I do think our October 11 and our earlier conversations with Mr. Lay and Mr. Derrick pointed out that the accounting, even though Arthur Anderson said they stood by it and still 

felt that it was proper, was aggressive and creative. We did see 

that as a red flag and we did put that in our letter to make sure 

that people understood that. 

I think Mr. Lay and I’m not sure all the reasons that went into 

it, but that may well have been one of the reasons they terminated 

the Raptor transactions in the third quarter of 2001. 

Mr. STUPAK. Well, okay. Let me ask Mr. Rogers. You were certainly throughout this year the vice president, associate general 

counsel. Have you ever heard the words aggressive or creative applied to any Enron accounting before? 

Mr. ROGERS. By anyone? I certainly heard of it——

Mr. STUPAK. No, no. I mean before this whole mess started. Is 

creative and aggressive accounting, is that proper terminology you 

use? 

51

Mr. ROGERS. That’s not terminology that I would use. I hadn’t 

heard that referred to with Enron’s accounting practices. 

Mr. STUPAK. What does aggressive and creating accounting 

mean? 

Mr. ROGERS. I don’t know what it means. 

Mr. STUPAK. How about Mr. Derrick, Mr. Dilg? Mr. Rogers 

doesn’t know what it means, but yet you guys used it in your report. So what does it mean, aggressive and creative? Mr. Derrick? 

Mr. DERRICK. Well, it actually was not my report, Congressman, 

but no, I can’t——

Mr. STUPAK. It was a report to you from Vinson & Elkins. 

Mr. DERRICK. Right, I can’t explain what aggressive and creative 

accounting——

Mr. STUPAK. What did you think of it then when they sent you 

this report. You paid $60,000. They send you a report and it says 

‘‘aggressive and creative.’’

Mr. DERRICK. I think the comfort that we took from the report 

was that they had discussed these very things with Anderson that 

we paid millions of dollars——

Mr. STUPAK. Let’s back to the words though. What did it mean 

to you? What did it mean to you when you saw on page 7, you got 

this report and you’re anxious because there’s some allegations 

being made. You read it. You get to page 7, there’s ‘‘aggressive and 

creative accounting.’’ Did you take great comfort in that? 

Mr. DERRICK. It was, I believe, the following sentence where it 

was no one had any reason to believe that the accounting was not 

technically correct and they had discussed these very issues with 

the firm that our audit committee had determined was the appropriate accounting firm for the company. 

Mr. STUPAK. So even though you saw the words aggressive and 

creative, you thought, oh, it’s no big deal because Anderson said it 

was okay? 

Mr. DERRICK. If the next sentence it says ‘‘and by the way, Anderson does not believe it’s okay’’ that would have been obviously 

a great cause of concern. 

Mr. STUPAK. Mr. Dilg, you wrote the memo then. What did aggressive and creative mean in accounting? What does that mean? 

Mr. DILG. I’m not sure that we put a terminology on it, Representative. We were reporting what we’d been told during our 

interviews. I think Mr. Buy used the word aggressive. 

Mr. STUPAK. Mr. Buy did? 

Mr. DILG. I’m not sure. I need to look back through the interview 

memos to see exactly where, but those words, obviously, were 

things that we felt like we needed to convey, even though Arthur 

Anderson said they were still satisfied with the accounting and had 

reviewed Ms. Watkins’ letter and the allegation she made. 

Mr. STUPAK. But you’d agree that those aren’t generally accepted 

terminology we used in accounting, right? 

Mr. DILG. Uh——

Mr. STUPAK. Again, you don’t have to be an accountant to answer 

this one. 

Mr. DILG. I don’t believe they’re part of generally accepted accounting practices, but I understand that Arthur Anderson was 

52

very convinced that these met generally accepted accounting principles. 

Mr. STUPAK. All right. If you take a look at the report there. Let 

me get the exact report here, the Powers Report. And if you take 

a look on page 176, again, The Rogers Commission, Report or whatever you want to call it, sees this very different. If you look on page 

176, it talks about the shared Watkins letter. I’m quoting now, ‘‘provided a road map to a number of the troubling issues presented 

by Raptors.’’ It goes on next paragraph, ‘‘We identified the most serious problems in the Raptor transactions only after detailed examination of the relevant transaction and most importantly discussions with our accounting advisors. Both steps at Enron and V & 

E excepted, would not be part of B & E’s investigation. With the 

exception of Watkins, B & E spoke only with the very senior people 

at Enron and Anderson. Those people, with few exceptions, had 

substantial professional and personal stakes in the matter under 

review.’’ That’s the part that’s probably troubling most of us. This 

circle, as I spoke of, will you take a look at these transactions, 

who’s the approving legal counsel but Vinson and Elkins? And you 

were asked to look at these transactions that you had previously 

approved and yet you never even had an accountant when you all 

say you’re not accountants even look at it. The closeness, the coziness of the relationship is the part that’s bothering a lot of us on 

this committee. 

Do you care to add anything to that? 

Mr. DILG. Only that we were asked to do a preliminary review 

and we did talk to the people that Ms. Watkins laid out in her letter to check with. I think she said to see if I’m all wet. 

Mr. STUPAK. But preliminary review, I mean you did nothing further after this. 

Mr. DILG. I’m sorry? 

Mr. STUPAK. You used the word ‘‘preliminary review’’ as been established early. You really did nothing after this. 

Mr. DILG. Our preliminary review was to determine whether a 

further review was necessary. 

Mr. STUPAK. And you determined there was no further review. 

Mr. DILG. And we believed at the time we gave the report, no 

further review was necessary. 

Mr. STUPAK. Not even by accountants? 

Mr. DILG. I’m sorry? 

Mr. STUPAK. Not even by an accounting firm outside of Arthur 

Anderson? 

Mr. DILG. Arthur Anderson, again, was one of the Big Five accounting firms that had been chosen by the Audit Committee at 

Enron. 

Mr. STUPAK. Right. All in-house, right? All in-house. Arthur Anderson, in-house. They had attorneys in-house. They had accountants in-house, right? And you never talked to any of those people. 

Mr. DILG. We talked to the leading engagement partner for Arthur Anderson. 

Mr. STUPAK. Head guy at Anderson. Those people had substantial professional and personal stakes in the matter under review as 

it says in the Powers Report, right? Those were the people that 

were talked to. 

53

Mr. DILG. I don’t know how they characterized the personal 

stakes they had in it. They had the credibility of their veracity on 

the line. 

Mr. STUPAK. They had a dog in the fight, let’s put it like that. 

Mr. DILG. We had no reason to believe that we couldn’t believe 

them. 

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

chair recognizes the gentleman from North Carolina, Mr. Burr for 

10 minutes to inquire. 

Mr. BURR. Thank you, Mr. Chairman. Mr. Sefton, let me ask you, 

I would take for granted everybody at the table has kept up with 

the hearings that have happened in the house and with the publicity that exists around Mr. Skilling’s testimony, I think most of 

you probably know that he lacked the ability to remember a lot of 

things and in some cases suggested that he had no relation to the 

involvement of the partnership. 

Let me ask you, Mr. Sefton, do you believe that Mr. Skilling was 

accurate in his testimony in front of Congress? 

Mr. SEFTON. During my time in Enron Global Finance, I don’t 

believe I had any conversations with Mr. Skilling at all. So I have 

no basis on which to judge. 

Mr. BURR. But you did leave some handwritten notes about your 

understanding of the makeup of the partnerships and the need for 

Mr. Skilling’s signature to accompany the approval, didn’t you? 

Mr. SEFTON. I’m not sure that my notes talk about his—— Mr. BURR. Who replaced you? 

Mr. SEFTON. Jordan Mintz. 

Mr. BURR. And didn’t Mr. Mintz testify to us that it was, in fact, 

the notes that you left when you served in his role that sort of 

guided him as to what everybody’s involvement was and who had 

to sign off? 

Mr. SEFTON. I didn’t hear Mr. Mintz testify to that. 

Mr. BURR. Was that the intention of any of the notes that you 

wrote, if they referred to the need for Mr. Skilling’s signature, is 

that something that you understood was needed? 

Mr. SEFTON. As I explained earlier, I did not understand that it 

was required by the Board when they waived the conflict of interest. 

Mr. BURR. Mr. Derrick, do you believe that from what you know, 

Mr. Skilling was completely candid with his testimony in front of 

Congress? 

Mr. DERRICK. Well, Congressman, as you can appreciate, I have 

no way of knowing, in fact, what Mr. Skilling did or did not know. 

If your question relates to whether it was my view that his signature was required on the documents, certainly based on my conversations with Mr. Mintz, that would have been my understanding. 

Mr. BURR. Did Mr. Mintz dream this up? Was it printed somewhere or did he get it from the notes that Mr. Sefton left? 

Mr. DERRICK. I don’t know where Mr. Mintz received his information. I do recall though that at one of the Audit Committee 

meetings that it was presented as a control mechanism by Mr. 

Causey, as I recall, and Mr. Mintz was there. But as to the basis 

for where that came from, I don’t have personal knowledge of that. 

54

Mr. BURR. There was one thing that I know was printed at 

Enron and that was the Code of Conduct, correct? 

Mr. DERRICK. Correct, yes sir. 

Mr. BURR. The Code of Conduct was waived by the board in at 

least two instances for Andy Fastow, am I correct? 

Mr. DERRICK. You are correct. 

Mr. BURR. Were you ever consulted as counsel on whether that 

was a smart thing for Enron to do? 

Mr. DERRICK. Congressman, I don’t ever recall being consulted. 

Mr. BURR. Did you ever supply a recommendation on whether as 

counsel the board should waive the Code of Conduct? 

Mr. DERRICK. I don’t recall being consulted on that. 

Mr. BURR. Mr. Dilg, was your law firm consulted on the board’s 

decision whether they should waive the Code of Conduct? 

Mr. DILG. We did not advise the board. 

Mr. BURR. It’s a very reputable law firm nationally. Is it common 

for companies to have a Code of Conduct that is waived the way 

that Enron has waived this Code of Conduct or waive a Code of 

Conduct at all? 

Mr. DILG. I could speak to what’s common, Representative, by 

companies that have Codes of Conduct have them there for a purpose which is to make sure they know where there is a conflict of 

interest and they feel that they’ve dealt with it appropriately. 

Mr. BURR. That’s my understanding from CO’s as well and they 

have also expressed to me in my conversations that they can’t 

imagine that it would take an unbelievable circumstance within 

their company for a Code of Conduct to be waived. 

Let me go back to you, Mr. Sefton. I think the LJM2 approval 

sheet was your creation and I just want to ask you because as I 

go down the sheet from that sheet it says the persons negotiating 

for Enron, Ben Glisson. Excuse me, this is for Raptor. Persons negotiating for LJM, Michael Kopper. Both who work for Fastow, correct? 

Mr. SEFTON. Yes. 

Mr. BURR. In the 2000 Proxy, as it relates to it, it says these 

transactions occurred in the ordinary course of Enron’s business 

and were negotiated on an arm’s length basis with senior officers 

of Enron other than Mr. Fastow. 

Is the term ‘‘at arm’s length’’ in this proxy statement an accurate 

depiction of the negotiations that took place between Mr. Glisson 

and Mr. Kopper, in your opinion? 

Mr. SEFTON. I believe the reference to senior officer is to Mr. 

Causey and Mr. Buy. 

Mr. BURR. I’m reading off the sheet. Listen, persons negotiating 

for LJM, Michael Kopper. As counsel, how did you monitor the negotiations or did you? 

Mr. SEFTON. I don’t believe I monitored the negotiations. 

Mr. BURR. Mr. Sefton, on June 28, 2000 you signed this approval 

sheet. So I would take for granted it was your understanding that 

at that time what was on this sheet was accurate, that the negotiations took place between Glisan. He also signed the sheet. In addition, Mr. Rogers, is your name Rex? 

Mr. ROGERS. Yes sir. 

Mr. BURR. You signed this sheet too. 

55

Mr. ROGERS. Yes sir, my signing those deal approval sheets were 

for the limited purpose of Section 4(a) which was——

Mr. BURR. Just share with us, if you will, since there’s some confusion. Who negotiated for Enron and who negotiated for the partnership? 

Mr. ROGERS. On this particular transaction or any transaction? 

Mr. BURR. This one. 

Mr. ROGERS. I don’t know the answer to that. 

Mr. BURR. Mr. Derrick, on October 17, Enron was informed by 

the SEC of an inquiry, correct? 

Mr. DERRICK. That is correct. 

Mr. BURR. And what date was the first memo that went company-wide to Enron relative to a change in the document protection 

of rules at Enron? 

Mr. DERRICK. If memory serves me correctly, Congressman, I believe it was on October 25 with respect to the litigation that had 

been filed. 

Mr. BURR. Share with me with all the concerns that didn’t start 

with October 17, what transpired in an 8-day period at Enron and 

specifically in the legal counsel’s office that would delay for 8 days 

a memorandum to protect all documents given that you knew that 

there was an SEC inquiry? 

Mr. DERRICK. As you know, Congressman, we sent out a number 

of e-mails with respect to document presentation, preservation. I 

think with respect to the limited time that you’re referring to, following the communication from the Securities and Exchange Commission, Mr. Rogers became involved in that as our representative, 

having been a former member of the SEC’s organization. 

If your point is were we concerned about any document destruction at that time——

Mr. BURR. Was this the first SEC inquiry that had been presented to Enron? 

Mr. DERRICK. I’ll have to refer to Mr. Rogers. I don’t personally 

recall another SEC inquiry. 

Mr. BURR. Mr. Rogers, is an SEC inquiry, given that you’ve got 

some SEC experience, is that a serious thing? 

Mr. ROGERS. Very serious. 

Mr. BURR. Would you as with your knowledge of SEC and law 

background, is that something that would immediately send off a 

signal we need to protect everything that’s here? 

Mr. ROGERS. Yes sir. 

Mr. BURR. And what would take 8 days in your opinion to determine it’s time to send out a company-wide memo to say don’t throw 

anything away, this is serious. 

Mr. ROGERS. I don’t know the answer to that. I think in those 

first several days after the notice or the inquiry from the SEC, 

there was a lot of activity at Enron through responses to media requests. 

Mr. BURR. But you served in a legal capacity, correct? 

Mr. ROGERS. That’s correct. 

Mr. BURR. And in a legal capacity with an SEC background, you 

couldn’t have been distracted by media requests, given the seriousness that you knew this inquiry weighted? 

56

Mr. ROGERS. No sir, our immediate reaction was to respond to 

the SEC request for documentation, for information. That was the 

immediate response. 

Mr. BURR. Is part of an SEC inquiry and the request that goes 

along with it the protection of documents? 

Mr. ROGERS. I don’t recall that being part of the request, but certainly anyone at the company, certainly anyone in the legal staff 

is going to—— Mr. BURR. Knows that document destruction after that inquiry 

is noticed to be a serious, serious thing, right? 

Mr. ROGERS. Yes sir. 

Mr. BURR. And let me ask you, were you aware of any document 

destruction that took place at Enron? 

Mr. ROGERS. I am not aware of any document destruction at 

Enron Corp. 

Mr. BURR. Mr. Derrick, are you aware of any document destruction that took place at Enron? 

Mr. DERRICK. I’m not aware of any relevant document—if you 

mean literally any document destruction, there are various things, 

trade secret issues that, of course, would legitimately be being disposed of, but in terms of any relevant document destruction, Congressman, I am not, and as you recall, later when there was a report which was widely publicized with respect to potential concerns 

about that, the response of Enron was to request the FBI to come 

in. We opened our doors and cooperated fully with them. 

Mr. BURR. Clearly, you did, and I think there was a lag and I’m 

truly concerned on the 8 days. And my time has run out, but I 

would like to ask Mr. Dilg, short answer if you will, for the chairman’s indulgence. 

Were there legal opinions and/or work provided by Vinson & Elkins that were ignored by Enron? 

Mr. DILG. Again, as I stated earlier——

Mr. BURR. You have advised them on numerous legal opinions. 

You’ve stated that. 

Mr. DILG. We’ve advised on numerous legal matters. As I mentioned earlier, there’s never a situation that I’m aware of where we 

advised the company that something would be illegal that they ignored that advice. We give advice on a daily basis to our clients as 

far as things that we think may be a better way to do something 

or often offer even business advice that companies may decide not 

to follow. That is sort of a normal occurrence, but when it comes 

to whether something is illegal, I’m not aware of Enron ever not 

following our advice in that connection. 

Mr. BURR. I once again would like to thank all of you for your 

testimony today. I hope in the end, we’re able to go back and read 

the transcripts and understand a little bit better what happened, 

but I’ve got to share with you that is frustrating from this end to 

actually hold documents that were at Enron that named partners, 

that named negotiators, that named participants. Nobody can remember whether they were involved or not, that from the top of 

Enron to the legal counsel at Enron that it seems like the only person that knew what was going on was Sherron Watkins. And I 

question whether she was taken seriously by anybody, including 

the review. It’s quite honest that Enron probably got what they 

57

paid for, $60,000 you said, was—I thought that was a drop in the 

bucket for the degree of the accusations that were made. But I 

think that gives me some idea of exactly the extent of what you 

were asked to review. I thank you. 

Mr. GREENWOOD. The gentleman’s time has expired. The committee is joined by two members who are members of the full committee, but not the Subcommittee and I’m going to recognize them 

in one moment for inquiry. Before I do, I’m going to exercise the 

prerogative of the chair to follow up on something here. 

I’m looking at an LJM2 approval sheet. It’s Tab 20 in your notebooks. You may all want to refer to this. And it’s about halfway 

through the set of documents in your notebooks in Tab 20. And this 

describes a deal between Talon, which is a Special Purpose Entity 

organized for the purpose of entering into certain derivative transactions. LJM2 says—it says that LJM2 through its 100 percent voting control, Talon has unilateral ability to make investment decisions for Talon. Now—it’s the Raptor deal. 

It indicates in the person negotiating for Enron in this case is 

Ben Glisan. The person negotiating for LJM is Michael Kopper. Obviously, both of these gentleman work for Mr. Fastow and each 

working for him under one of his different hats that he wore. 

A number of you folks signed the approval deal. These transactions were negotiated by Enron employees who were working for 

both Enron and LJM2 at the same time. Enron’s Year 2000 proxy 

statement reads, ‘‘These transactions occurred in the ordinary 

course of Enron’s business and were negotiated on an arm’s length 

basis, that senior officers of Enron other than Mr. Fastow’’ and 

that was signed by, among others, Mr. Rogers and Mr. Sefton. 

My question is Mr. Sefton and Mr. Rogers, beginning with you, 

how did you ascertain that, in fact, these were arm’s length—these 

negotiations were at an arm’s length basis? 

Mr. ROGERS. I’ll respond first. Again, my signing off on all of 

these deal approval sheets was for the limited purpose of Section 

4(a). Will this transaction require disclosure as a certain transaction in Enron’s proxy statement? And the answer is yes. If any of the transactions has a value of $60,000 or more it will be disclosed in the proxy statement. 

Mr. GREENWOOD. Were you aware that these two gentlemen were 

negotiating against one another? 

You signed a document that said that you knew that they were, 

but that you knew that it was arm’s length. 

Mr. ROGERS. Again, I was signing for the limited purpose of Section 4(a). 

Mr. GREENWOOD. Did you know that they were negotiating 

against one another? That’s—let’s take it one question at a time. 

Did you know that these two gentlemen were negotiating against 

one another? 

Mr. ROGERS. I don’t recall. 

Mr. GREENWOOD. But you signed a form that said that you did 

and that, in fact, not only did you know that they did, but you 

knew that it was arm’s length. 

Mr. ROGERS. Well, signed for the purposes of Section 4(a). 

Mr. GREENWOOD. Mr. Sefton, how about you? Did you know that 

these individuals were negotiating against one another? 

58

Mr. SEFTON. Yes. 

Mr. GREENWOOD. And did you sign a form saying that you knew 

that they were negotiating at this negotiation was at arm’s length? 

Mr. SEFTON. I signed the form. 

Mr. GREENWOOD. Did you in signing that form, in fact, certify 

that they were negotiating at arm’s length? 

Mr. SEFTON. No, I did not. 

Mr. GREENWOOD. What is the significance of your signature on 

the form? What were you certifying? What were you proving? 

Mr. SEFTON. I think the important thing to remember is that this 

transaction is being approved by Mr. Buy and Mr. Causey, and 

that is the procedure that the board had put in place to ensure that 

the transactions were being done at an arm’s length basis. 

Mr. GREENWOOD. And how did you know that it was approved by 

Causey? 

Mr. SEFTON. Because they are signing the form as well. 

Mr. GREENWOOD. So in other words, your role when you get this 

form is to look on it and see if Mr. Causey’s signature is on it and 

then certify that his signature is on it and put your signature on 

it to certify that his signature is on it. Is that right? 

Mr. SEFTON. What? The board required—— Mr. GREENWOOD. Is that—just answer that question. When you 

signed these approval forms, what you were doing was saying, yup, 

I see Causey’s signature on here. It’s right above mine. I’ll sign 

mine name to certify that I see Mr. Causey’s signature. Is that 

what you did? 

Mr. SEFTON. No. 

Mr. GREENWOOD. What did you do? 

Mr. SEFTON. I would also review the form and make sure it had 

been completed, all the blanks filled in. That it was properly filled 

out. Since I had been involved in creating the form, I was—— Mr. GREENWOOD. Whose job was it to—who certifies that, in fact, 

these transactions occurred in the ordinary course of Enron’s business and were negotiated on an arm’s length basis with senior officers of Enron’s, other than Mr. Fastow? Whose job was that? 

Mr. Derrick, can you tell us whose job it was to certify this was 

arm’s length? This goes right to the core of the conflict of interest? 

Mr. DERRICK. Well, I believe that it was Mr. Causey and Mr. Buy 

who were charged with the responsibility on the business side of 

that, in determining that. If there had been matters that were unlawful, I think that the lawyers would have been signing this. And 

let me say I did not create this form, but that would be my understanding, Mr. Chairman, is that the lawyers were there to ensure—— Mr. GREENWOOD. You were aware that they were negotiating 

against one another? 

Mr. DERRICK. No, this is not a form that came to me, Mr. Chairman. 

Mr. GREENWOOD. Would you have considered it improper if you 

knew that they were negotiating against one another? 

Mr. DERRICK. At the time of this, again, I’m not sure what the 

date here was, but I don’t think that we became aware that Mr. 

Glisan had any interest that was not tantamount to Enron’s interest until after the investigation began. 

59

Mr. GREENWOOD. The private placement memorandums list the 

principals. It says the day to day activities of the partnership will 

be managed by Mssrs. Fastow, Kopper and Glisan. So Mr. Sefton 

saw this form. Mr. Astin saw this form. Mr. Rogers saw this form. 

You all reviewed it and that didn’t tell you that there was something less than an arm’s length negotiation going on here? 

Mr. ROGERS. I’m sorry, what form are you referring to? 

Mr. GREENWOOD. It’s the LJM2 co-investment LP. It’s the private 

placement memorandum. 

Mr. ROGERS. That’s not an Enron document. 

Mr. GREENWOOD. That’s 21. 

Mr. ROGERS. Okay. It’s a private placement memorandum. 

Mr. GREENWOOD. Right. 

Mr. ROGERS. Of LJM. I reviewed a draft of it. I didn’t see the 

final version of it. 

Mr. GREENWOOD. Do you think the draft of it indicated that the 

partners were—that the day to day activities of the partnership 

will be managed by Fastow, Kopper and Glisan? 

Mr. ROGERS. It was my understanding that Glisan was not in the 

final draft. I didn’t see the final, but it was my understanding that 

wasn’t going to be Glisan’s role. 

Mr. GREENWOOD. You can remember that? 

Mr. ROGERS. I do remember that. 

Mr. GREENWOOD. You remember that—why do you think that 

sticks out in your mind? Why would you have recalled that? 

Mr. ROGERS. I recall that because—— Mr. GREENWOOD. Had it been otherwise, you would have been 

concerned? 

Mr. ROGERS. I recall it because we had a senior corporate securities lawyer at Vinson & Elkins review the memorandum. Again, it’s 

not a memorandum. 

Mr. GREENWOOD. Who was that? 

Mr. ROGERS. It was Bob Baird. It wasn’t a memorandum. It’s not 

an Enron Corp. memorandum. It was prepared by LJM and their 

counsel. And the draft that I saw had, among other things, Ben 

Glisan, my understanding, I didn’t see the final draft, but it wasn’t 

my understanding that Ben Glisan was going to be acting on behalf 

of LJM. 

Mr. GREENWOOD. Would you have thought it proper for these 

guys to be negotiating against one another, one on behalf of the 

partnership and one on behalf of the company? Could that ever 

have been proper? 

Mr. ROGERS. My understanding at the time is that Mr. Glisan 

was the treasurer of Enron Corp. and that he would have been acting on behalf of Enron Corp. 

I didn’t have any information at the time that indicated otherwise. 

Mr. GREENWOOD. The chair recognizes the gentleman from Massachusetts, Mr. Markey for 10 minutes. 

Mr. MARKEY. Thank you, Mr. Chairman, very much. Mr. Derrick, 

I want to recap where we are right now in this hearing. You’ve testified that when Sherron Watkins’ allegation came to your attention Enron and Vinson & Elkins designed (1) to ignore her warnings, that Vinson & Elkins and Arthur Anderson had conflicts and 

60

shouldn’t be used to investigate the allegations; (2) you also decided 

to limit the nature and scope of Vinson & Elkins inquiry so that 

it didn’t examine the underlying accounting, didn’t employ full discovery and investigative techniques; (3) you also decided notwithstanding this blistering, scalding indictment of a memo which Ms. 

Watkins delivered to Mr. Lay and to you, subsequently, you also 

decided, No. 3, not to interview any former employees, like Jeff 

Skilling or Cliff Baxter who might have been able to shed some 

light on the transaction; (4) not to follow-up on leads Sherron Watkins provided with respect to other employees who could substantiate her allegations, notwithstanding the fact that she has almost 

been completely vindicated in retrospect; and (5) to largely limit 

your inquiry to interviewing individuals like Andy Fastow and 

Doug Duncan who were responsible for putting together these 

transactions or reviewing and approving them and who would 

therefore be likely to defend these transactions as appropriate and 

lawful. 

So Mr. Derrick, what I’d like to do is just go back to the beginning of the process which you put in place. According to your testimony to the Powers Committee, you first learned of the Sherron 

Watkins letter when Ken Lay gave it to you. What did Mr. Lay say 

to you when he gave you this letter? 

Mr. DERRICK. I don’t recall the specific conversation, and I don’t 

recall whether, as I think I made it clear there, whether he walked 

it over, whether he sent it over, but immediately upon receiving it 

I distributed the copies of that memorandum to what I thought at 

the time were the appropriate people, which included Sharon 

Butcher, who keeps care of our tracking log, to Mr. Fastow, 

Mr.——

Mr. MARKEY. So you are saying you cannot remember if Mr. Lay 

handed this to you personally? You cannot remember that. 

Mr. DERRICK. Congressman, all I can testify to is what I personally recall. 

Mr. MARKEY. This is a bombshell. He handed you dynamite that 

could blow up the Corporation or he did not. You don’t remember 

if he did. 

Mr. DERRICK. I don’t recall whether it was carried over or whether he brought it over. No, I’m sorry, I just don’t. 

Mr. MARKEY. That is hard to believe. Now, let me ask you this: 

Did you and Mr. Lay discuss whether the issues raised in the letter 

might arise at an all-employee meeting scheduled to be held in a 

few days? 

Mr. DERRICK. There was an all-employee meeting, and the question was——

Mr. MARKEY. You discussed that subject with Mr. Lay. 

Mr. DERRICK. I think we did, yes. I can’t say that it was the time 

that I received the letter. 

Mr. MARKEY. You told the Power Committee that in fact you did 

discuss subject with——

Mr. DERRICK. Yes, but the question, Congressman, is whether it 

was at the time I received the letter. I don’t recall whether it was 

at the time I received the letter. 

Mr. MARKEY. Subsequent to the receipt of the letter, within the 

next several days, did you discuss it with him? 

61

Mr. DERRICK. Yes. 

Mr. MARKEY. You did. Now, you and Mr. Lay discussed the need 

to have an investigation done into these allegations. Who proposed 

selection of Vinson & Elkins, you or Mr. Lay? 

Mr. DERRICK. I believe—well, it was a mutual discussion, but I 

think it would have been me who proposed Vinson & Elkins. 

Mr. MARKEY. Okay. Did you discuss with Mr. Lay the potential 

conflict of interest which Vinson & Elkins had with Enron? 

Mr. DERRICK. Yes, we did. We discussed the possible downside 

because they had been involved in it. On the other hand, there 

was, as I’ve said before, the great strength that they had the background, and following up on that—but the question ultimately 

would be for the law firm to determine whether in fact there was 

a conflict of interest. 

Mr. MARKEY. Did Mr. Lay suggest that Vison & Elkins’ investigation be limited in scope and that it not examine the accounting 

and that it not be a full-scale inquiry with discovery and interviews 

with both current and former employees? Did he ever suggest that 

to you? 

Mr. DERRICK. We discussed it. I don’t recall that Mr. Lay proposed that. The question was how do we, as quickly as practical, 

get an investigation that will enable us to have recommendations 

as to whether to launch a full-scale investigation. 

Mr. MARKEY. So did Mr. Lay say to you that it would preferable 

if we did not have to go outside of Vinson & Elkins or Arthur Andersen? 

Mr. DERRICK. To the best of my knowledge, he never expressed 

that. 

Mr. MARKEY. He did not. 

Mr. DERRICK. He did not. 

Mr. MARKEY. Okay. Did you and Mr. Lay discuss potential adverse publicity that would result if Ms. Watkins’ allegations became public? 

Mr. DERRICK. To the best of my recollection, there was never a 

discussion with respect to that. 

Mr. MARKEY. Did you and Mr. Lay discuss the potential litigation that could result if these allegations became public? 

Mr. DERRICK. To the best of my knowledge, we never had a discussion. Our sole purpose was to address these as quickly as—— Mr. MARKEY. You are saying absolutely not. Mr. Lay never 

raised the public relations aspect of this, the consequences to the 

corporation if this ever became public. He never said that to you 

during any of these meeting? 

Mr. DERRICK. I believe that you are referring to the initial meetings we had. 

Mr. MARKEY. I am referring now to all of the meetings up to the 

point at which ultimately we have a release of this report by Vinson & Elkins. Did he ever mention at any time his great concerns 

about—remember now, you are a former partner of Vinson & Elkins now dealing with the managing partner of Vinson & Elkins, so 

we are very concerned about this conflict that exists, at least in 

your mind, to preexisting loyalty to a firm that basically gave you 

the opportunity to work at Enron. So what about any conversation—did Mr. Lay at any time ever have any conversations with 

62

you about the publicity consequences if this report was devastating? 

Mr. DERRICK. Congressman, the only recollection I have would be 

at the time that Vinson & Elkins presented their presentation to 

us, pointing out the possibility of adverse publicity and litigation, 

but I don’t recall Mr. Lay ever raising that as an issue. 

Mr. MARKEY. Did you ever discuss with Mr. Lay whether Ms. 

Watkins could or should be dismissed? 

Mr. DERRICK. No, I do not recall ever having a conversation with 

Mr. Lay. He mentioned that she had requested that she be reassigned from Mr. Fastow, but there was never any indication in any 

conversation I had with Mr. Lay with respect to any firing of Ms. 

Watkins. 

Mr. MARKEY. Okay. Now, Mr. Dilg, did Mr. Derrick at any time 

say to you that he would prefer that you resolve this question in 

a way in which you did not have to recommend another firm do the 

investigation? 

Mr. DILG. No, sir. 

Mr. MARKEY. He never did. 

Mr. DILG. No, sir. 

Mr. MARKEY. Did you ever recommend to him that you would 

prefer that it stay in-house and that another firm not be called in 

to do an independent investigation? 

Mr. DILG. No, sir. Our final recommendation in the October 15 

letter was that there was no further investigation. 

Mr. MARKEY. When Mr. Lay—did you ever talk to Mr. Lay about 

this case, Mr. Dilg? 

Mr. DILG. We had one meeting with Mr. Derrick and Mr. Lay I 

believe—I think the date was September 21, but I am not positive. 

Mr. MARKEY. And at that meeting, did Mr. Lay say to you that 

he would prefer if you did the investigation, that is Vinson & Elkins, and not some outside firm? 

Mr. DILG. No, sir. We were reporting on the investigation we had 

done thus far. 

Mr. MARKEY. And at that point, you had not reached any conclusions that would indicate that the accounting practices or other 

practices would cause problems for the firm? 

Mr. DILG. We reported on what we had heard from Arthur Andersen with respect to the accounting. 

Mr. MARKEY. And you were satisfied that there were no problems? 

Mr. DILG. I am not an accountant, so we alerted him to the references to creative and aggressive, et cetera, that we had heard 

during our interviews, but we did tell him that Arthur Andersen 

was fully comfortable with their accounting treatment. 

Mr. MARKEY. You know, I have a real problem with all of this. 

Obviously, the Powers Committee conducted a real investigation. 

Enron and Vinson & Elkins did not in fact conduct a real investigation. When the ordinary investor or employee at Enron thinks that 

an investigation is being done, they think that people, that is the 

investigators, are acting like Columbo, asking all the questions 

that no one else would think of in order to make sure that the 

truth was obtained. In fact, what you did was act more like Inspector Clueso, stumbling over obvious evidence, not interviewing obviVerDate Jun 13 2002 08:36 Jul 17, 2002 Jkt 010199 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 W:\DISC\78506 pfrm17 PsN: 78506
63

ous suspects or witnesses, and in fact coming to conclusions that 

delayed the point at which a real reckoning was in fact possible. 

And I think if you had not conducted this phony investigation, 

that it might have been possible that we would not have seen the 

collapse of Enron, that we would have had enough time to take the 

types of actions, not we, but rather the corporation and others, in 

order to save that corporation, the employees’ jobs, the investors’

savings. And so I have absolutely no question in my mind that 

there was a decision made here. I wish I knew definitively who 

made the decision that this was going to be too dangerous. We 

don’t know that at this point. 

I disagree with Ms. Watkins. She rules out Mr. Lay. I don’t think 

that this committee should rule him out. I don’t think yet we know 

what took place in those conversations initially after he received 

this memo from her. It is such a blistering, scalding indictment of 

the practices at the firm that ultimately have been almost completely vindicated, that much more is going to have to be found by 

this committee. I thank you once again, Mr. Chairman. 

Chairman TAUZIN. I thank my friend from Massachusetts, and I 

am pleased now to recognize a round of questions my friend from 

Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman, and I appreciate the opportunity to wave in on the subcommittee, and I have an opening 

statement that we have submitted. And I guess before I go into 

questions, the frustrations that someone—particularly someone 

from Houston for 30 years had the utmost respect for Arthur Andersen and Vinson & Elkins and the last 16 for Enron, even if we 

are on a different sides of a political issues oftentimes, and to see 

what has happened. And that is the frustration that we see, and 

you see if from other members who maybe aren’t directly related 

to what has happened in Houston. 

Mr. Rogers, first, who did Mr. Glisan report to at Enron? 

Mr. ROGERS. He reported to Mr. Fastow. 

Mr. GREEN. Okay. So he wasn’t independent of Mr. Fastow? 

Mr. ROGERS. I am sorry? 

Mr. GREEN. So he was not independent of Mr. Fastow if he reported to Mr. Fastow. 

Mr. ROGERS. When you say independent, I mean he reported to 

Mr. Fastow, that was his superior officer, that is correct. 

Mr. GREEN. Okay. Mr. Sefton, according to your notes, and they 

are under Tab 18, and it is actually 24309, on September 29, 1999, 

shortly after you arrived in Houston to begin working for Mr. 

Fastow, you had a meeting with Mr. Fastow, is that correct? 

Mr. SEFTON. These notes would indicate that I did, yes. 

Mr. GREEN. Okay. And he explained the LJM deals to you, didn’t 

he? 

Mr. SEFTON. I don’t recall that meeting. My best recollection of 

what happened at that meeting is in these notes. 

Mr. GREEN. Okay. And your notes reflect LJM1, and without 

having to read all the notes from September 29, they reflect LJM 

just some of the highlights, without having to go into them because 

I only 10 minutes, but your notes reflect discussion on LJM, is that 

correct, these notes that we have in Tab 18? 

64

Mr. SEFTON. Yes. These notes were taken, I believe, during a discussion. I don’t know what each individual means, whether it reflects a statement made by Mr. Fastow or whether it is sort of an 

observation on my own part. 

Mr. GREEN. Well, assuming they were your notes and they were 

observations of your meeting, one of the purposes of LJM1 that 

your notes directly mention was to hedge Enron’s investment in 

RythmsNet stock, which was very volatile. Enron’s investment had 

gone from $10 million to $150 million in less than 6 months after 

RythmsNet went public; is that correct? 

Mr. SEFTON. I don’t know that. 

Mr. GREEN. Okay. 

Mr. SEFTON. I wasn’t involved in the LJM1 transaction, that took 

place before I arrived. 

Mr. GREEN. Okay. Well, but your notes that we are going from 

talk about your discussion with him, and maybe I need to read the 

notes to you, because they are there. ‘‘Two things led to LJM1: forward contents to purchase Enron stock, prices below market. Buying shares back would have increased equity, but we would have 

had to borrow money which would cause problems. Had the 

Rhythm stock position, huge volatility. We want to hedge the 

Rhythm stock position but couldn’t do it in market.’’ Those are your 

notes. 

Mr. SEFTON. Yes. 

Mr. GREEN. Okay. I would appreciate it if you would at least familiarize yourself with your notes. Then when I ask you the question, instead of me having to take up my 10 minutes in reading 

your notes to you. 

Mr. SEFTON. I am sorry. That wasn’t—— Mr. GREEN. Enron could not sell its Rhythm stock for another 6 

months; is that correct? 

Mr. SEFTON. Is that in my notes? 

Mr. GREEN. No, it is not, but I am asking you from other knowledge other than these notes. Your notes reflect the volatility of the 

Rhythms stock position and the huge volatility. Do you know that 

Enron couldn’t sell their investment in it for 6 months? 

Mr. SEFTON. I am sorry, but I did not work on that transaction. 

I am not familiar with what happened there. 

Mr. GREEN. Okay. That is what Vince Kaminski told the Powers 

Committee, though, that Vince Kaminski was the head or Enron’s 

research group at the time, told the Power Committee that could 

not buy such a hedge in the market because it prohibitively expensive, obviously very volatile from your notes. In fact, yesterday the 

analyst from PricewaterhouseCoopers who valued that stock for 

Enron told our staff that the volatility was off the charts. So, again, 

reflects your notes from 1999. 

According to your notes, Mr. Fastow told you that Enron couldn’t 

hedge Rhythms in the market. Was it also your understanding that 

no outside third party would have taken the hedge at the price 

LJM did? 

Mr. SEFTON. All that I recall from this meeting are these notes. 

Mr. GREEN. Okay. Your notes, again, seem to refer to the 

Rhythms stock position had huge volatility, and your notes reflect, 

‘‘We wanted to hedge the Rhythms stock position but couldn’t do 

65

it in the market.’’ So that agrees with what Mr. Kaminski shared 

with us yesterday, and also the analyst from 

PricewaterhouseCoopers. 

It is very interesting in the 1999 annual report, footnote 16, that 

states that, ‘‘Management believes that the terms of the transactions related with the representative terms that would be negotiated with an unrelated third party.’’ Did you see any evidence 

from your notes or from your memory other than your notes that 

that was an independent third party? 

Mr. SEFTON. I am sorry, you are referring to what document? 

Mr. GREEN. Okay. The annual report for Enron was 1999. 

Mr. SEFTON. The annual report? 

Mr. GREEN. Footnote 16. Just trust me I am——

Mr. SEFTON. Okay. 

Mr. GREEN. [continuing] saying that footnote 16 states that, 

‘‘Management believes that the terms of the transactions with related parties are representative of terms which would be negotiated 

with unrelated third parties.’’ That is in that report. Do you have 

any evidence of that from your notes or your memory that that was 

really unrelated third parties in LJM1? 

Mr. SEFTON. Well, I am not sure if I am answering your question, but I wasn’t involved in the preparation of that annual report 

footnote. I am not familiar with——

Mr. GREEN. I know, but I am asking you do you have any information that would show that that footnote was correct from your 

notes here and any information at all, other than your recollection 

from these notes? 

Mr. SEFTON. No, I don’t think there is anything in my notes that 

would speak to that. 

Mr. GREEN. Okay. The proxy says that same thing, the proxy 

statement. It states that, ‘‘Management believes that the terms of 

the transactions were reasonable and no less favorable than the 

terms of similar arrangements with unrelated third parties.’’ Mr. 

Sefton, Mr. Derrick and Mr. Astin, tell me what basis you had on 

signing off on the statement, and what was the due diligence that 

these representations called for? 

Mr. DERRICK. Congressman, speaking for myself, I didn’t have a 

personal involvement in that. We had in place what we considered 

to be a large team of qualified people who would have been looking 

at that and preparing the proxy statements. And it would have 

been on the basis of what they did that would have been the basis 

for that statement. 

Mr. GREEN. Who was in charge of making sure this proxy statement was correct then within the Enron legal team? 

Mr. DERRICK. Well, internally, Mr. Rogers was leading our securities effort. 

Mr. GREEN. Okay. Mr. Rogers, the statement that, ‘‘Management 

believes that the terms of the transactions were reasonable and no 

less favorable than the terms of similar arrangements with unrelated third parties,’’ did you sign off on that statement to be in the 

proxy? 

Mr. ROGERS. I was part of the team that was charged to gather 

the information. I did not do the personal due diligence on that. 

66

Mr. GREEN. What was the due diligence from the team, if not 

yourself? 

Mr. ROGERS. The due diligence were lawyers and accountants 

within Enron were assigned to gather the information. I didn’t 

draft the proxy disclosure. 

Mr. GREEN. But you signed off on it. 

Mr. ROGERS. Well, when you say signed off on it, I reviewed it, 

and based on the information that was presented to us, we agreed 

with it. 

Mr. GREEN. What information was presented to you from the 

lawyers and accountants to show that this was no less favorable 

than unrelated third parties? 

Mr. ROGERS. The internal legal team that worked on the underlying transactions. My team did not work—was not assigned to 

work on any of the LJM or any of the structured finance transactions. So we had no personal knowledge of them. The parties that 

were assigned to draft the proxy disclosure were the parties that 

worked on the transactions and the lawyers and accountants that 

worked on the transactions that would have done the due diligence. 

Mr. GREEN. Can you give us some names of who that would be, 

the lawyers that worked for your team—or that worked for that? 

Mr. ROGERS. I don’t know the specific lawyers and accountants. 

It would have been lawyers in the Enron Global Finance Unit and 

the accounting team that reports to Rick Causey who also signs off 

on all of the LJM transactions, along with the chief risk officer who 

was reviewing these transactions in terms of fairness to Enron. 

Mr. GREEN. So someone told you in those teams that this statement was correct, and you signed off on it. 

Mr. ROGERS. Based on that compilation of due diligence, correct. 

Mr. GREEN. Mr. Rogers—and Mr. Chairman, I know—let me just 

ask, on the statements on the LJM approval sheet where you 

signed—in previous questions, you answered that you only signed 

off relating to 4(a). 

Mr. ROGERS. That is correct. 

Mr. GREEN. Is that 4(a) on the compliance sheet of this or is that 

some other—— Mr. ROGERS. No, it is 4(a) on this sheet. It is 4(a), does it require 

proxy disclosure, and the answer is yes, because Andrew Fastow, 

as the chief financial officer of Enron, is a related party. There is 

a clear conflict; it is required to be disclosed. 

Mr. GREEN. It was required to be disclosed. I guess just as a lawyer, whenever I always sign for something that was specific only 

for, for example, 4(a) or whatever, I always wanted to make sure 

that was under my signature, and I think most documents I used 

to sign with Vinson & Elkins, if there was limited responsibility, 

I always spelled that out. 

Mr. ROGERS. I wish I had done that. 

Mr. GREEN. I understand. Thank you, Mr. Chairman. 

Chairman TAUZIN. The Chair thanks the gentleman; his time has 

expired. The Chair recognizes the gentleman from California, Mr. 

Waxman, for a round of questions. 

Mr. WAXMAN. Thank you very much, Mr. Chairman. Since the 

very first hearing on the Enron scandal before this committee, I 

have sought information about Enron’s Special Purpose Entities. 

67

What we know about these entities is very disturbing. While Enron 

employees made millions with no apparent risk, Enron shareholders and employees lost their shirts. And due to Enron’s remarkable political clout, not a single regulator was in a position to 

prevent this debacle. 

We are now 3 or 4 months into this investigation, yet we appear 

no closer to having a complete list of the partners and investors in 

Enron’s many partnerships. Amazingly, in previous hearings, neither Enron’s executives nor its accountants could tell us who the 

partners and investors were. Well, testifying before us today are 

the lawyers who actually worked on many of these partnerships. 

Surely it will help that you witnesses will be able to shed some 

light on these important questions. 

Let me start with you, Ms. St. Clair. You worked on the legal aspects of the Jedi/Chewco transaction. How can we find out who the 

partners and investors were in Enron’s many partnerships? Can 

you tell us who has this list and what the documents the committee should request to obtain this list? 

Ms. ST. CLAIR. With respect to Jedi/Chewco? I mean that is the 

only transaction that I am familiar with. 

Mr. WAXMAN. Well, how about any of the partnerships? 

Ms. ST. CLAIR. I am not familiar with, other than looking at the 

partnership agreement itself and who signed it and whether it has 

a list of partners. 

Mr. WAXMAN. Who signed it—I am sorry, I didn’t hear what you 

said. You looked at the partnership agreement and who signed it. 

Ms. ST. CLAIR. What partner signed it and whether or not it has 

a list of partners. Some partnership agreements do. 

Mr. WAXMAN. Okay. And where would we be able to get a copy 

of those lists that were in those agreements, of partners? 

Ms. ST. CLAIR. With respect to—I can only address with respect 

to the Chewco partnership. 

Mr. WAXMAN. Well, let us go to Jedi/Chewco. 

Ms. ST. CLAIR. Jedi/Chewco? 

Mr. WAXMAN. Yes. Did that have a list of partners? 

Ms. ST. CLAIR. I think the Chewco partnership agreement is in 

the files and has been available, yes. 

Mr. WAXMAN. Okay. And do you know whether that has been requested by this committee? 

Ms. ST. CLAIR. I don’t know. 

Mr. WAXMAN. Well, I am going to make a request to the chairman that he—Mr. Chairman, I would request since Ms. St. Clair 

believes the names of the partners are on the Jedi/Chewco—are in 

their files, that we request that information for the committee. 

Chairman TAUZIN. My understanding, Mr. Waxman, is that request is already before Enron and its counsel, and I don’t think we 

have yet received all of our responses. We have not received all the 

records, and if there is a need yet under that inquiry, that request 

for documents, to satisfy that, it has not been met, either by Vinson 

& Elkins or by the firm, I would renew it here today, and we will 

renew in writing if we need to. 

Mr. STEARNS. Point of information, Mr. Chairman. 

Chairman TAUZIN. The gentleman is recognized for a point of information. 

68

Mr. WAXMAN. Mr. Chairman, this won’t go against my time, will 

it? 

Chairman TAUZIN. It will not go against your time. Depends how 

long his information is. 

Mr. STEARNS. I think the gentleman’s request is a very pertinent 

one, not only Chewco but for the other ones. As I understand from 

our staff, we have requested these documents to find out who the 

investors were for all these partnerships. And I think the question 

is, Mr. Chairman, how long ago did we request this information to 

find out who the partners were of these Special Purpose Entities? 

Just how long ago has it been, just approximately? 

Chairman TAUZIN. My understanding it has been since December. 

Mr. STEARNS. Okay. 

Chairman TAUZIN. And we are still literally receiving documents 

from Enron as we speak. As you know, we are still trying to understand whether the documents we requested are available, or were 

they part of any potential shredding that went on at Enron, and 

that is still an open question. 

Mr. STEARNS. And the last question I have for Mr. Chairman, 

would these gentlemen—was it asked of the law firm these documents or Enron? And if we are having a difficult time from Enron, 

can we ask the gentlemen here for the same set of documents, because surely they kept a copy? 

Chairman TAUZIN. My understanding is the inquiries were directed to Enron itself, and obviously if we don’t come into possession of that information from Enron, we will make a request upon 

Vinson & Elkins for that information. In fact, as I said, I am lodging that request publicly today that information be provided to us 

voluntarily, because we apparently are having some trouble getting 

it from Enron itself. 

Mr. STEARNS. Thank you, Mr. Chairman. 

Chairman TAUZIN. Thank the gentleman. 

Mr. WAXMAN. Thank you, Mr. Chairman. 

Chairman TAUZIN. Again, the gentleman has 8 minutes and 17 

seconds to go. 

Mr. WAXMAN. Well, I appreciate my colleague’s very helpful line 

of inquiry, because we are trying to get this information, and we 

have gone all these months without getting it. And I would hope 

the law firms that have it would submit it to us. 

Mr. Sefton, you were general counsel of Enron’s Global Finance 

Unit. You worked on certain aspects of the LJM partnerships. Can 

you tell us where we can obtain a list of the partners and investors 

in the LJM partnerships or other partnerships? Let us say the LJM 

partnerships first. 

Mr. SEFTON. It is my understanding that the partners in LJM 

are not known to Enron, because LJM was an outside entity, and 

I don’t believe that information has been made available to the 

company. 

Mr. WAXMAN. Who would have that information? 

Mr. SEFTON. I believe Mr. Fastow would or I guess maybe now 

Mr. Kopper. 

Mr. WAXMAN. And, Mr. Chairman, if I might ask whether that 

information has been requested from Mr. Kopper? 

69

Mr. SEFTON. I believe that would be the correct person to ask. 

Mr. GREENWOOD. I am sorry, would the gentleman from California reiterate which specific material? 

Mr. WAXMAN. Well, I have asked Mr. Sefton about the LJM partnership, and he thinks that the investors and names of the LJM 

partners are with Mr. Kopper. So I don’t know if this has been requested, but I think we ought—since he has identified where we 

can get that information, I would hope—rather than take up my 

time now, I will ask the Chair to get that information subpoenaed. 

Mr. GREENWOOD. For the gentleman’s information, we have requested those documents. We have some documents, and we will 

work with you to make sure that you have the opportunity to review them. 

Mr. WAXMAN. Thank you very much. Mr. Sefton, so you think it 

is there. Who is Mr. Kopper? 

Mr. SEFTON. Mr. Kopper is a gentleman who purchased Mr. 

Fastow’s interest in LJM2, I understand. 

Mr. WAXMAN. Do you know who else might have a copy of the—

or a list of the investors in LJM? 

Mr. SEFTON. Mr. Fastow, possibly. 

Mr. WAXMAN. Okay. How about the other partnerships, do you 

have any information about the names of the partners and investors in any of the other partnerships? 

Mr. SEFTON. I would think that the corporate secretary at Enron 

would have information about all of the entities that Enron has an 

ownership interest in, and I believe the records reflect who all the 

other owners are, if it is not entirely owned by Enron. But others 

here can possibly clarify that in case I am wrong. 

Mr. WAXMAN. Does anybody want to make a clarification of that? 

Mr. Derrick? 

Mr. DERRICK. Well, I could—I think it is—it would certainly be 

true that the Enron corporate secretary will have a list of all the 

Enron entities and in terms of the Enron ownership would certainly have that. Now, as to a third party, for example, LJM, which 

is not an Enron entity, it is unlikely, in my judgment, that that information would be available within the Enron corporate secretary’s office. 

Mr. WAXMAN. And where would that information be available? 

Mr. DERRICK. Well, again, I assume, with respect to any of these 

third party entities, it would be that entity itself. In the same way 

that Enron would have knowledge of its side of the ownership, the 

third party ought to have records which will identify who their 

owners are. 

Mr. WAXMAN. So would it be fair to say that Enron would have 

a list of all these entities, but then we have to go to the entities 

to get the names of the investors? 

Mr. DERRICK. I think it would be fair to say, Congressman, that 

Enron would have a list of the entities in which it has an ownership interest and could identify the Enron side of that equation. 

The other side of the transaction would be, by definition, not an 

Enron entity, and I think it is unlikely, though I can’t say with any 

certainty, but unlikely that the Enron record would disclose who 

the owners of that other entity are. And so my thought would be 

70

that a request to that other—that third party entity would produce 

the information that you are requesting. 

Mr. WAXMAN. And do we have a complete list of all the third 

party entities? 

Mr. DERRICK. I don’t know the answer to that. 

Mr. WAXMAN. Does Enron have a list of all the third party entities? 

Mr. DERRICK. Well, Enron should have a list of all of the entities 

in which it, Enron, has an interest, which I hope is responsive to 

your question, I am not sure. 

Mr. WAXMAN. And what third party entities are there that Enron 

wouldn’t have an interest but are connected to the Enron issue? 

Mr. DERRICK. Well, for example, there could be several tiers 

within the third party entity. I don’t pretend to—I wasn’t involved 

in these transactions in any detail, but, for example, some of the 

charts that have been shown disclosed that there are multi-tiers, 

and that is what I am referring to. 

Mr. WAXMAN. So if we are trying to find all the information, we 

start with all the third parties where Enron had an interest. Then 

we would go to each of those separate entities and ask them about 

other entities that they may have dealt with. 

Mr. DERRICK. Well, that would be my thought, yes. 

Mr. WAXMAN. Okay. 

Mr. STEARNS. Would the gentleman yield just for a second? 

Mr. WAXMAN. I am afraid to yield to you because I have so little 

time, but I know you probably will get your own time in a minute. 

Mr. Derrick, you were Enron’s general counsel. Can you tell the 

committee where we would find the necessary documents to obtain 

the list of partners and investors? 

Mr. DERRICK. Well, I don’t think I have much to add to what I 

just said, Congressman, on that point. 

Mr. WAXMAN. Okay. Mr. Rogers, you are the only lawyer testifying today who still works for Enron, and you also worked on aspects of the LJM transactions. Can you tell us where we can obtain 

a list of the partners and investors in LJM? 

Mr. ROGERS. Actually, Congressman, I did not work on the LJM 

transactions, but I think part of the problem here is that LJM, despite Mr. Fastow’s relationship to it, is not an Enron entity; it is 

a separate entity. And I think that is part of the problem is that 

Enron doesn’t have access to the records of LJM and the investors 

in LJM. And I think part of the problem is the people that would 

have that information, I don’t know if it is going to be very helpful 

to you, as Mr. Sefton said, would be Andy Fastow, Michael Kopper, 

who I understand was the individual to whom Mr. Fastow sold his 

interest, the law firm representing LJM, which I am sure they attorney/client privilege issues. But a lot of the information that you 

want on investors into these other entities, if they are not Enron 

subsidiaries or subsidiaries that Enron controls or has ownership 

interest in, I think that is part of the delay in getting this information. I am not sure Enron has that information. 

Mr. WAXMAN. Well, let me ask this of anybody at the table, because you are all Vinson & Elkins lawyers. Does anybody have 

anything else to tell the committee where and how we can obtain 

71

a list of the partners and investors in all these Enron special entities? Anything more to add? Yes? 

Mr. ASTIN. Congressman, the only thing I would add is that I 

have read news reports that indicate there is litigation I believe in 

the State of Delaware regarding LJM2 that might disclose the 

names of the partners. 

Mr. WAXMAN. Let me ask each of you, if you would, to respond. 

Are you personally aware of the names of any of the investors in 

the Special Purpose Entities or other partnerships? And why don’t 

we start with you, Mr. Sefton? 

Mr. SEFTON. I am sorry, am I aware of—— Mr. WAXMAN. Are you personally aware of any of the names of 

the investors or partners in this Special Purpose Entities? Can you 

tell us any that you know of and some of the figures that are in 

those entities? 

Mr. SEFTON. Well, I know that Enron has formed several different—many subsidiaries that I think would be classified as Special Purpose Entities, and they may have investors ranging from 

institutional investors, investment banks, pension funds. 

Mr. WAXMAN. I am really asking now what are the categories 

what your personal knowledge is of the participants in these special entities? 

Mr. SEFTON. I can’t identify any, sitting here right now. 

Mr. WAXMAN. Mr. Chairman, my time is—I would like to have 

this as a request for the witnesses to respond in writing of their 

personal knowledge of the names of any of the special entities and 

participants or investors in those special entities. And I will be 

pleased to hear—— Mr. GREENWOOD. We will make Mr. Waxman’s request an official 

request from the committee. Did the witnesses understand Mr. 

Waxman’s request? We are asking you to supply—— Mr. WAXMAN. Your personal information——

Mr. GREENWOOD. Reiterate your request, please. 

Ms. ST. CLAIR. Which entities are——

Mr. WAXMAN. So whatever Special Purpose Entities you know 

about and whatever investors or partners in those entities that you 

know about, I would like you to submit to the committee in writing 

that information. 

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

go to a second round now, and we will just take 5 minutes for questions for each of us for the second round, and I will begin. 

Let me address some questions to you, Ms. St. Clair, and I would 

refer you to Tab 25. This is the mysterious document that surfaced 

in November of last year about the—that refers to the $6 million 

side agreement to the Jedi/Chewco revolving loan agreement, dated 

December 30, 1997. This was the reason that Chewco and Jedi had 

to be consolidated onto Enron’s books and prior year financial 

statements revised back to 1997. If you look at the document, you 

will see on page 2 that there are initials next to the Enron signature line. Are those your initials, Ms. St. Clair? 

Ms. ST. CLAIR. Yes, they are. 

Mr. GREENWOOD. Okay. Did you draft this side agreement? 

Ms. ST. CLAIR. I don’t recall, but there is a footer on the second 

page that doesn’t look like an Enron footer. 

72

Mr. GREENWOOD. Say that again. 

Ms. ST. CLAIR. At the bottom of the signature page to the left, 

it doesn’t look like an Enron footer to——

Mr. GREENWOOD. So you don’t think you drafted this document. 

Do you know who drafted it if it was not you? 

Ms. ST. CLAIR. I don’t recall. 

Mr. GREENWOOD. Mr. Astin, have you looked at this document? 

Mr. ASTIN. I haven’t right now, but I have seen it before. 

Mr. GREENWOOD. Okay. Do you know who drafted the document? 

Mr. ASTIN. I am not certain, but our records indicate that it was 

likely drafted by Vinson & Elkins. 

Mr. GREENWOOD. Okay. Ms. St. Clair, do you know why this 

amendment was made to the Jedi/Chewco revolving loan agreement in a separate document, given that it was dated the same day 

as the principal agreement it was amending? 

Ms. ST. CLAIR. I don’t know. 

Mr. GREENWOOD. What do your initials signify? Why did you put 

your initials on that document? 

Ms. ST. CLAIR. They signify that as the lawyer that was in 

charge of representing Enron’s side in the Chewco transaction, that 

the document satisfied the legal criteria, that it was okay for the 

officer to sign from a legal perspective. 

Mr. GREENWOOD. Okay. But you don’t know why it was drafted 

in a separate document. I mean you looked at it and you decided 

that it was okay for the executive to sign. You had done your legal 

scrub of it——

Ms. ST. CLAIR. Right. 

Mr. GREENWOOD. [continuing] but in so scrubbing, you didn’t ascertain why it was a separate document. 

Ms. ST. CLAIR. I don’t recall now why it was a separate document; no, sir. 

Mr. GREENWOOD. Do you recall any discussions in the fall of 

1997 about this side agreement or the creation of reserve accounts 

to benefit Barclay’s who was lending money to Big River and Little 

River, which in turn was providing the 3 percent outside equity in 

Chewco? 

Ms. ST. CLAIR. At this time, I have no independent recollection 

of that, but as a result of reviewing my notes during that time period, there appears to be meetings where reserve accounts were 

discussed. 

Mr. GREENWOOD. And your notes are those that we find in Tab 

17 of the binder? 

Ms. ST. CLAIR. That is correct. 

Mr. GREENWOOD. Okay. As you read through these notes, they 

seem to reflect discussions regarding these reserve accounts and 

how they would be funded from distributions to Chewco to benefit 

the Big River/Little River lender, Barclay’s. Now, you do acknowledge that this subject was discussed in the meetings at the time 

and that this side agreement with your initials on it didn’t just 

come out of thin air. 

Ms. ST. CLAIR. That is correct. 

Mr. GREENWOOD. Okay. Who was at these meetings? 

Ms. ST. CLAIR. I don’t have——

73

Mr. GREENWOOD. Let me help you. Your notes reflect that Mr. 

Astin was in at least three of these meetings. 

Ms. ST. CLAIR. That is correct. 

Mr. GREENWOOD. Mr. Glisan, who handled the accounting aspects of this transaction for Enron, was in at least two. 

Ms. ST. CLAIR. Correct. 

Mr. GREENWOOD. Okay. Was it your understanding that such individuals, including Mr. Astin, Mr. Glisan, Mr. Brown and other 

Enron employees and V&E attorneys, were aware of these reserve 

accounts at the time of their creation back in 1997? 

Ms. ST. CLAIR. I can’t speak for Vinson & Elkins, Bill Brown and 

Ben Glisan, because they were—Ben was heading up the accounting team, and Bill was on the commercial team would have had the 

knowledge of the reserve accounts. 

Mr. GREENWOOD. Who do you know that had—to your knowledge, who had knowledge? 

Ms. ST. CLAIR. To the best of my knowledge, Ben Glisan and Bill 

Brown. 

Mr. GREENWOOD. How about Kristina Mordaunt? 

Ms. ST. CLAIR. At that time, I reported to her, and she was my 

supervisor on this deal. I don’t recall whether she was present at 

any of the meetings, but I did report to her on this particular deal, 

but I was handling the day-to-day activities as the lawyer—— Mr. GREENWOOD. You told the committee in your interviews prior 

to today that you were aware that a key aspect of the Chewco deal 

was that there needed to be 3 percent outside equity in the deal. 

Weren’t you at all concerned when you reviewed this side agree- ment, which in effect transferred $6 million from Enron Jedi to the 

purported outside equity holders, Big River and Little River? 

Weren’t you concerned about that, that it would undo the 3 percent 

requirement? 

Ms. ST. CLAIR. I don’t recall that I was concerned. I would have 

looked to Ben Glisan who was interfacing with Arthur Andersen to 

make sure that it would pass all the accounting tests. And in looking at the side agreement now, I am not sure that it actually says 

that the accounts were funded, it just allocates a different distribution scheme to funds that Chewco may be receiving. As to how the 

reserve accounts worked themselves, we did not have access to 

those particular documents. 

Mr. GREENWOOD. How about you, Mr. Astin, can you shed any 

light on this? 

Mr. ASTIN. I would like very much to be helpful to you, Congressman, but I don’t have any independent recollection of these meetings. I was in meetings at which the partnership allocations of the 

Chewco side of the transaction were discussed. I was primarily responsible for another aspect of the transaction, which was Jedi II 

and was devoting most of my attention to that. This was the first 

transaction involving this accounting issue on which I had worked, 

and I was not familiar with its significance in 1997. 

Mr. GREENWOOD. You understood the 3 percent rule, right? 

Mr. ASTIN. I understood, I believe, that the intention of the parties was to have 3 percent equity. I did not——

Mr. GREENWOOD. Did you understand why they would pick 3 percent? 

74

Mr. ASTIN. My understanding coming into this transaction was 

primarily as a private equity and mergers and acquisitions lawyer. 

I thought that the principal purpose, and I still believe one of the 

principal purposes, of the leverage was to maximize the potential 

returns from the Jedi portfolio of assets since it was a mature portfolio of assets that was not expected to greatly increase in value so 

that for it to become an attractive equity investment by a third 

party, which was the original plan, it would require additional leverage in order to maximize the possibility of return on the investment. 

Mr. GREENWOOD. Do you know why the side agreement was written to begin with, why it was a separate document, why it wasn’t 

incorporated in the original document? 

Mr. ASTIN. I have no memory of having seen it in 1997. I only— I mean we have internal files that indicate a copy was sent to me, 

but I was primarily working on another aspect of the transaction. 

Mr. GREENWOOD. You weren’t aware that Barclay’s had insisted 

on this agreement. 

Mr. ASTIN. No, I was not. 

Mr. GREENWOOD. And how about you, Ms. St. Clair, were you 

aware of that? 

Ms. ST. CLAIR. No, I was not. 

Mr. GREENWOOD. My time has expired. The Chair recognizes the 

gentleman from Florida, Mr. Deutsch. 

Mr. DEUTSCH. Thank you, Mr. Chairman. Mr. Derrick, if you 

could go to page 8 of the Vinson & Elkins report addressed to you, 

and on that page, under the title—I will read it to you if you can’t 

get to it, but on the page, under the title, ‘‘Potential Bad Cosmetics,’’ the report states, ‘‘Concern was recently expressed that 

the transactions involving Condor and White Wing and Raptor 

could be portrayed very poorly as subjected to a Wall Street Journal expose or class action lawsuit.’’ What were your thoughts when 

you read that statement? 

Mr. DERRICK. Well, my thoughts were of being concerned, but 

there was nothing that I know of that could have been done at this 

stage to have addressed that issue. It was something that if it 

came, when it came, we would simply have to address. 

Mr. DEUTSCH. So it didn’t surprise or shock you that type of activity—— Mr. DERRICK. No, as I expressed, it was a concern to me. The 

issue was given the concern, what at that point could the company 

do about it? It was something that would happen or wouldn’t happen, and based on what happened we would have to address it. 

Mr. DEUTSCH. Do you recall what Mr. Lay’s reaction was? 

Mr. DERRICK. I am sorry, I don’t recall his reaction. 

Mr. DEUTSCH. Mr. Dilg, these were your words, at least my understanding is that you participated in the letter. Even though it 

wasn’t under your signature, it was under your supervision. What 

did those words mean to you? 

Mr. DILG. We were conveying—concerns had been expressed to 

us during our interviews, and we wanted to make sure the company was aware of those concerns. Again, there wasn’t—the company was taking action or had taken action at the time this letter 

was written to terminate the Raptor vehicles. 

75

Mr. DEUTSCH. I mean is there a difference between the term ‘‘bad cosmetics’’ and ‘‘unethical behavior’’ or ‘‘illegal behavior?’’ Mr. DILG. I definitely think so. I think we were trying to convey 

that there were aspects of these transactions that in hindsight 

could be portrayed very badly. 

Mr. DEUTSCH. And, Mr. Derrick, would that be your opinion as 

well or a different take on it? You know, it is described as potential 

bad cosmetics. 

Mr. DERRICK. Yes. Congressman, I did not take that to mean 

that there had been unethical conduct or illegal conduct but rather 

that it was simply what it was, that it could be portrayed in a very 

unflattering light, and normally litigation would follow that kind of 

publicity. 

Mr. DEUTSCH. And Mr. Dilg, if you could try to, in your own 

words, describe the difference between bad cosmetics and unethical 

behavior? 

Mr. DILG. I think unethical behavior, in my words, in going into 

the transaction, if people had an illegal motive or something of that 

nature not fully disclosed, the motives, et cetera. The bad cosmetics 

arose primarily because of the large losses that had been incurred 

on the assets that were hedged against the Raptor vehicles. That 

had nothing to do with the intent of the parties at the beginning 

of the transactions. It was a market factor that happened in the 

retail electric business as well as the broadband business, et cetera, 

that highlighted a lot of the cosmetic issues here. It was just the 

amount of loss that was involved. 

Mr. DEUTSCH. Mr. Rogers, do you want to add anything to this? 

Mr. ROGERS. Are you asking my opinion of the report or just 

the——

Mr. DEUTSCH. Well, I mean really in terms of this specific thing, 

because, again, someone reading this—you know, I mean I read the 

words exactly, and I think what we have just heard is it portrayed 

in the best possible light, and was that accurate? I mean saying 

that—even this report is saying that exposure of what occurred 

could subject an expose or class action lawsuit, and is this something that convinces you that there was unethical or, for that matter, illegal activity occurring? 

Mr. ROGERS. I can’t make a determination that there was unethical or illegal activity from that; no, sir. 

Mr. DEUTSCH. I mean in hindsight, does anyone think that these 

activities or any of these partnership agreements were unethical? 

Do any of you? I mean in the light of hindsight, in light of what 

we know at this point. 

Mr. DERRICK. Well, I think let me say first I am sure all of us 

would agree that while the investigation is still ongoing and not 

every side has been heard from, that everyone does deserve presumption of innocence. To the extent that it is finally determined 

that in fact there was wrongdoing here, then certainly I think we 

would agree there would have been unethical conduct. 

Mr. DEUTSCH. Right. I mean but no one at this point, based on 

what we know, and particularly—again, I hate to keep focusing on 

Mr. Fastow, but, again, I mean in hindsight, looking at his activities as a general partner, my understanding is he was telling the 

board or the board was looking the other way or winking that he 

76

was not getting compensation. I mean it was clear he was getting 

compensation. 

I think Mr. Waxman’s line of questioning is we still don’t know 

who else made money. We know for a fact that he made money and 

that tens of millions of dollars in terms of these outside partnerships, and yet with his fiduciary responsibility as the CFO of the 

organization and it appears as if misrepresenting to the board or 

the board looking the other way or sticking their heads in the sand 

at that issue. 

Mr. GREENWOOD. Time of the gentleman has expired. The Chair 

recognizes the chairman of the full committee, Mr. Tauzin, for 5 

minutes. 

Chairman TAUZIN. Thank you, Mr. Chairman. We do know from 

Enron who some of those investors were. They reported to us in 

some cases. Ben Glisan, managing director and treasurer of Enron 

Corporation, was an investor in South Hampton Place. Kristina 

Mordaunt was an investor. She was managing director and general 

counsel of an Enron division. Kathy Lynn, vice president of an 

Enron division; Ann Yaeger, an officer employee of the company 

were investors. 

We do know now that they invested rather sums. Kristina 

Mordaunt, $5,800; Ben Glisan, $5,800; Ann Yaeger, $2,900; Kathy 

Lynn, $2,300. As a return on their investments in 6 weeks, 

Kristina Mordaunt made $1 million and Ben Glisan made $1 million and Ann Yaeger and Kathy Lynn each made $500,000, approximately, on their investment. Any of you folks know that that 

was going on before you wrote your October 15 report to Mr. Derrick and to Mr. Lay? Mr. Dilg? 

Mr. DILG. Chairman Tauzin, we were not aware of the investors 

in South Hampton at the time we wrote our report. I believe I became aware of that early in November. 

Chairman TAUZIN. If you would have known that then, might 

you have written a different report? 

Mr. DILG. Yes, sir. 

Chairman TAUZIN. I would think so. And yet I asked you a while 

ago if you stood by your report, and you said you did. Everything 

was honkey dory and that we didn’t need to have anybody outside 

look at this business. 

Mr. DILG. Based on the facts we knew at the time, I stand by 

that submission. 

Chairman TAUZIN. Under the facts you knew at the time, you 

stand by your report. Under the facts you know now, would you 

have advised Mr. Derrick and Mr. Lay differently? 

Mr. DILG. I think if we had known of the South Hampton investors, that would have raised a serious concern. We were——

Chairman TAUZIN. Would you advise them then to get an outside 

counsel, an outside auditor to come look at things? 

Mr. DILG. I am not sure on the auditor point, Chairman, but we 

would have definitely advised further investigation into——

Chairman TAUZIN. Let us talk about what you did know when 

you wrote that report. You did know, did you not, that Michael 

Kopper was running Chewco? 

Mr. DILG. I did not. We did not look at Chewco. 

77

Chairman TAUZIN. Now, wait a minute, wait a minute. You say 

in your report, and I am going to quote from it, that, ‘‘Based on 

our review of the LJM deal approval sheets and accompanying 

checklist, it appears the approval procedures were generally adhered to.’’ I am looking at one of them. It says Michael Kopper negotiating for LJM. It says that Ben Glisan is negotiating for Enron. 

You didn’t see this? 

Mr. DILG. Could you refer me to which one you are looking at? 

Chairman TAUZIN. I am looking at Raptor, Tab 20. While you are 

looking for that, I am going to quote Mr. Skilling to you. I was asking Mr. Skilling at a previous hearing with reference to Chewco, 

and I asked him then if he had informed Mr. Lay that Mr. Kopper 

was involved with Chewco and with LJM, and he said, ‘‘I don’t recall.’’ We got a lot of that. Then I asked him—he is not aware of 

what Ken knew, he said. But Mr. Kopper’s participation was wellknown throughout the company. 

And I started to go to Mr. Jaedicke, and he interrupted me. He 

said, ‘‘By the way,’’ this is Mr. Skilling talking, ‘‘it was known by 

Vinson & Elkins who would have had responsibility,’’ and I said, ‘‘I am sorry, I didn’t hear that. Say that again.’’ And he said, ‘‘His 

participation in Chewco was also known to Vinson & Elkins, to my 

knowledge. It is my understanding that Vinson & Elkins knew that 

he was involved. I believe that they would have identified, to the 

extent there was a conflict of interest, that a waiver needed to be 

received.’’ I asked did Vinson & Elkins report to Mr. Lay or to you after 

they researched the issue following Ms. Watkins’ letter that Mr. 

Kopper might require such a waiver. So at least Mr. Skilling believed you knew. I am looking at an approval sheet you say that 

you reviewed in your investigations that shows Mr. Kopper is negotiating for LJM. Do you want to tell me now you didn’t know? 

Mr. DILG. We did not look—in the investigation that Mr. 

Henderick and I undertook, we did not look at Chewco. I don’t believe this approval sheet—— Chairman TAUZIN. This is a Raptor sheet. 

Mr. DILG. Yes. I don’t believe it relates to Chewco. 

Chairman TAUZIN. Did you know that Kopper was working for 

Raptor and LJM? 

Mr. DILG. We knew Mr. Kopper, based off of the approval sheet, 

was negotiating on behalf of LJM. 

Chairman TAUZIN. Absolutely. In fact, when you flip the approval 

sheet over, there is a question, was the transaction done strictly at 

an arm’s length basis, yes or no? It says yes. You have got Kopper 

on one side negotiating for LJM, and you have got Glisan on the 

other side negotiating for Enron, and the documents says it is an 

arm’s length transaction. It goes on further to say, have all Enron 

employees’ involvement in the transaction, on behalf of LJM, been 

waived by the Enron Office of Chairman, in accordance with the 

Enron’s conflict of business affairs policy? It is checked off, ‘‘yes.’’ Can you tell us today whether in fact Mr. Kopper got a waiver? 

Mr. DILG. For working on this transaction? 

Chairman TAUZIN. For working on any transaction on the other 

side of Enron. Apparently Mr. Fastow got such a waiver for the 

conflict of interest rule somewhere, did he not? 

78

Mr. DILG. Mr. Fastow got a waiver from the Office of the Chairman. It was approved by the full board, as I understand it from 

the board minutes. 

Chairman TAUZIN. Right. And what is the procedure for that? 

The Office of the Chairman approves the waiver first, then the 

board approves it after, right? 

Mr. DILG. I believe that was the procedure followed in terms of 

Mr. Fastow. 

Chairman TAUZIN. Mr. Derrick, is that correct? 

Mr. DERRICK. Yes. I wanted to clarify that. Under the Code of 

Conduct, actually there is no required approval for anyone by the 

board of directors. There is a—— Chairman TAUZIN. But there is by the Office of the Chairman. 

Mr. DERRICK. By the Office of the—well—— Chairman TAUZIN. So the Office of the Chairman approved Mr. 

Fastow. Did the Office of the Chairman approve Mr. Kopper, Mr. 

Derrick? 

Mr. DERRICK. Was that directed to me, Congressman? The answer—— Chairman TAUZIN. Did the Office of the Chairman ever approve 

a waiver for Mr. Kopper? 

Mr. DERRICK. I am not personally aware of such an approval. 

Chairman TAUZIN. So as counsel, you don’t know, and you are 

the general counsel. You don’t know whether Mr. Kopper, who is 

negotiating on LJM for LJM, against his own company, you don’t 

know whether he got a waiver? 

Mr. DERRICK. I don’t because there is no requirement that waivers come through the Legal Department, Mr. Congressman. 

Chairman TAUZIN. You signed the form, didn’t you? Didn’t Mr. 

Sefton sign it? I am sorry, Mr. Sefton, could you help me here, sir. 

You signed this form. Were you aware Mr. Kopper had or did not 

have a waiver? 

Mr. SEFTON. My recollection is that Mr. Fastow advised me that 

he was taking care of the waivers for the LJM people. 

Chairman TAUZIN. That is very nice. You can tell he took care 

of it. Did you personally assure yourself before you signed this document—you signed yes that the waiver was given. You signed yes 

it was an arm’s length transaction. Did you take care to assure Mr. 

Kopper had a waiver? 

Mr. SEFTON. I had no reason to believe that Mr. Fastow was not 

telling me the truth on that. 

Chairman TAUZIN. So you, as counsel, just took his word? 

Mr. SEFTON. I relied on his assurances. 

Chairman TAUZIN. And you, Mr. Dilg, when you investigated this 

on behalf of the corporation for Mr. Derrick took the word of the 

folks who signed this document that everything was okay, even 

though you knew Kopper was—at that time you had to know—was 

working for LJM and for Enron at the same time. 

Mr. DILG. We were given the board of directors’ minutes that approved the participation by Mr. Fastow. They designated Mr. Buy 

and Mr. Causey to guard against the conflict of interest. There was 

a service—— Chairman TAUZIN. But what about Kopper? I am not asking 

Fastow. 

79

Mr. DILG. Excuse me, there was a service agreement that provided for the services of certain employees of Enron that would be 

utilized on behalf of LJM. Mr. Kopper was listed in that service 

agreement. That service agreement was signed by Mr. Causey. 

Chairman TAUZIN. But you see what is troublesome for me is 

that you are telling me if you would have known all these corporate 

executives were investing in and playing on the other side of the 

board, at the same time working in very responsible positions for 

the corporation and earning all these amazing amounts in 6 weeks, 

that you would have found that very troubling, you would have 

written a different report. Knowing what you know now, you might 

not stand by that report you wrote. 

But what I am troubled by is that you did know that Mr. Kopper 

was involved. You had the approval sheets, you claimed you reviewed them. And according to you, this is a report you have given 

to Mr. Derrick and Mr. Lay who have just received a report saying 

that they are running a corporate corporation. They have just received a report—I will quote some of the things that Ms. Watkins 

reported again. 

Jeff McMahon was highly vexed over it and he heard conflicts of 

LJM. He complained mightily to Jeff Skilling. Cliff Baxter, who, as 

we know, ended up committing suicide, complained mightily to 

Skilling and to all who would listen about the inappropriateness of 

the transactions with LJM. This was a report that you had in your 

hands that at least you were going to look at. You weren’t going 

to look at the accounting, you were told not to do that, but you 

were going to look at the conflicts. 

Mr. DILG. Yes, sir. 

Chairman TAUZIN. And you had this report from Ms. Watkins, 

you have got these documents that show a very important officer 

in the corporation negotiating for the outside partnership and documents that say this is an arm’s length transaction. You didn’t look 

behind any of these documents in this so-called investigation to 

find out whether Ms. Watkins was telling Mr. Lay the truth? 

Mr. DILG. The board had established procedures to guard against 

the conflict of interest that they recognized with Mr. Fastow’s position in LJM. Those were to have the transactions signed off by Mr. 

Buy and Mr. Causey. There was a service agreement that we were 

provided that provided for Mr. Kopper to work on behalf of LJM. 

That agreement was signed by Mr. Causey. 

Chairman TAUZIN. Now, we have to press again with this hearing because we are checking with some banks. Because according 

to Mr. McMahon, some of these banks were threatened or promised 

other business if they didn’t invest in these partnerships. You knew 

about that, didn’t you? 

Mr. DILG. Yes, sir. Mr. McMahon raised that in his initial interview. 

Chairman TAUZIN. Did you interview any one of these banks? 

Mr. DILG. We did not. 

Chairman TAUZIN. You didn’t interview the banks. You didn’t 

check on these transactions to see if Mr. Kopper had a proper waiver from conflict of interest. Wasn’t it your job? 

Mr. DILG. We were conducting a preliminary review to determine 

whether an additional investigation was necessary. 

80

Chairman TAUZIN. Mr. Derrick, wasn’t that your job? Wasn’t it 

somebody’s job? Mr Sefton, wasn’t it one of your jobs to make sure 

that these people negotiating on the other side of the table from 

their own corporation had been properly cleared to do so? Whose 

job was it? According to Skilling, he is throwing the blame at you 

pretty heavily right here. He is saying,‘‘It was their responsibility.’’ He says, ‘‘I left the company. I don’t know what they did after I 

left, but it was their responsibility to report to the board and Mr. 

Lay that this man needed a waiver. So don’t blame me; blame Vinson & Elkins’’ is what he is saying. Should we blame Vinson & Elkins? 

Mr. DILG. No, sir. 

Chairman TAUZIN. Who should we look to? Who should Enron, 

who should Mr. Lay look to when he asked the question of, ‘‘Why 

weren’t we told Mr. Kopper was in a conflict of interest position, 

that he wasn’t negotiating at arm’s length, that he never received 

a waiver to do this.’’ Who should bear the responsibility for having, 

No. 1, known that and not done something about it, and No. 2, 

checked on it when Sherron Watkins went to the president of the 

corporation and said, ‘‘You have got a corrupt company; check into 

it’’? 

Mr. DERRICK. I think, initially, Congressman, the responsibility 

lies with, in this case, Mr. Kopper. Under our Code of Conduct, 

each employee is required to certify—— Chairman TAUZIN. You have got to be kidding me, Mr. Derrick. 

Any employee could go negotiate against a company and it was up 

to them to come and get a waiver? And you guys were signing 

these documents that said they had gotten waivers and you never 

checked to see if they did? 

Mr. DERRICK. I am not saying that I have signed a document—— Chairman TAUZIN. I have got your Code of Conduct in front of 

me. You are not supposed to engage in any outside activity or enterprise which would interfere in any way with job performance. 

You don’t think Mr. Kopper was engaging in enterprises that interfered with his performance? You don’t think these employees who 

were investing $5,000 and reaping $1 million reward in 6 weeks 

were in a conflict of interest position? 

Mr. DERRICK. Well, that is exactly my point. They were, and 

under our Code of Conduct, each of those individuals were required 

to approach the chairman and chief executive officer to seek an approval. 

Chairman TAUZIN. Lawyers of the company had to know they 

were doing that. You admitted that to us. You have admitted to us 

that you knew Kopper was doing that. Whose job was it to tell 

them, ‘‘You are in violation of the Code of Ethics. You are fired.’’

Or go to the president and say, ‘‘Get rid of these people. They didn’t 

have the courtesy of complying with your Board of Ethics requirements—your Code of Ethics requirements.’’

Mr. DERRICK. Well, initially—— Chairman TAUZIN. Whose job was that? 

Mr. DERRICK. Well, in my judgment, it was initially the employee’s. To the extent that people in the company became aware that 

no conflict had been received, that was something that they should 

have reported. But there isn’t a way that I know of for a company 

81

to, other than relying on the good faith of its employees, under a 

Code of Conduct, who are required to report conflicts of interest. 

That is where it all starts. 

Chairman TAUZIN. But what is a requirement of a lawyer who 

is a counsel for the corporation who knows that an employee is violating the Code of Ethics? 

Mr. DERRICK. Well, if—— Chairman TAUZIN. What is the requirement of a counsel? 

Mr. DERRICK. If a lawyer knows that—— Chairman TAUZIN. Yes. 

Mr. DERRICK. [continuing] as well as any other employee of the 

company, if they know that, they should have reported it. 

Chairman TAUZIN. And you knew that Mr. Kopper was working 

for LJM and had not received a waiver. 

Mr. DERRICK. I am sorry, Congressman, I wasn’t working on 

these transactions. I wouldn’t know Mr. Kopper if he walked in the 

conference room today. 

Chairman TAUZIN. Mr. Sefton, did you know Mr. Kopper was 

working for LJM, and you don’t think you had any responsibility 

to do anything except Mr. Fastow’s word, and Mr. Fastow got his 

waiver, he is already working and making millions. 

Mr. SEFTON. At the time that I received those assurances, I felt 

justified in relying upon them. 

Chairman TAUZIN. Mr. Chairman, you know what we have? We 

have got the same kind of situation we had with Arthur Andersen 

when they said the lawyers let the accountants make the decisions 

about what their legal responsibilities were. I can’t believe that the 

lawyers at a great American corporation would let the employees 

decide whether they could be in conflict of interest like this and 

make these investments and reap these benefits out of the very 

company that it was supposed to have a fiduciary responsibility for. 

These are major offices of your corporation. They are not workers 

at the bottom of the ladder; they are workers at the top of the ladder. 

It is amazing to me that you guys could write a report to the 

chairman of the corporation after Ms. Watkins put herself way out 

on a limb to tell you all that this was going on, and you never bothered to talk to the banks, you never bothered to call in Mr. Kopper 

and say, ‘‘Did you get a waiver? Are you operating in conflict of interest? Are you operating in a way detrimental to the corporation 

when you owe your fiduciary obligation to the corporation?’’ It is 

amazing to me that you could issue that paper to Mr. Lay, which 

basically said, ‘‘Don’t believe that lady; everything is fine. Everything is find. Don’t hire any other outside lawyers. Look at what 

we did? For heaven’s sake, don’t hire any more accountants. Everything is okay. Now, just tell that lady we looked at it real carefully 

and everything is good.’’ That is basically what you did. 

Mr. DILG. Can I respond? 

Chairman TAUZIN. Please respond. Yes, sir, please. 

Mr. DILG. I think there are two things with regard to Mr. Kopper 

that are different. One, his investment in the Chewco matter, 

which was not raised by Ms. Watkins’ letter and was not at all 

within the scope of our inquiry, as far as looking at Chewco. Mr. 

Kopper did negotiate on behalf of LJM and was reflected as doing 

82

so in the LJM approval sheets that were signed off on by the two 

people that the board had established to make sure that the deals 

were done on a basis that was favorable to Enron. There was a 

service agreement that was signed by Mr. Causey on June 30, 1999 

that recognized Mr. Kopper’s participation——

Chairman TAUZIN. But Causey and Buy are in the Office of the 

Chairman, you know that. They can’t give waivers, you know that. 

You just testified, or Mr. Derrick did, that the Office of the Chairman was the only one that could give a waiver, not Causey and 

Buy. Is that right? 

Mr. DILG. That is correct. We did not check on the waiver of the 

Code of Ethics issues. There was an agreement signed by the person that the board had designated to look after Enron’s side on 

this. 

Chairman TAUZIN. What do you think—and this is my final question, Mr. Chairman, I apologize—what do you think when you reviewed these approval sheets and you wrote a letter to Mr. Derrick, 

extensively to him, and to Mr. Lay, saying, ‘‘We checked the approval sheets, and everything looks okay’’? What do you think 

when you saw a blank signature place for Mr. Skilling? Didn’t that 

alert you that something is maybe amiss here? 

Mr. DILG. We did note in our letter that the Office of the Chairman had not signed except on rare occasion. We wanted to bring 

that to their attention. The board minutes that we——

Chairman TAUZIN. Well, no, you said it differently. You said that 

in most instances there was no approval signature for the Office of 

the Chairman except for several significant transactions. And that 

sort of leaves the impression the only time he had to sign was for 

significant transactions. What was your understanding of the approval process? Did the Office of the Chairman have to approve 

these transactions? 

Mr. DILG. The board minutes that we had that approved the 

LJM2 transaction and set up the approval process required Mr. 

Buy and Mr. Causey to approve matters on behalf of Enron. There 

was nothing in the board minutes that we had that required a signature by the Office of the Chairman. 

Chairman TAUZIN. Mr. Jaedicke testified that his understanding 

of the controls was that approval was required of the Office of the 

Chairman, or at least a review was required. We got into whether 

or not approval and review, but at least review by the Office of the 

Chairman. You don’t believe that is true? 

Mr. DILG. I understand from the Powers report, which was the 

first time that I was aware of the information, that at a Finance 

Committee meeting in the fall of 2000, I believe, there was discussion of approval by the Office of the Chairman, and that was put 

in. Those minutes were not part of the minutes we were given in 

connection with our review. I think those minutes basically related 

to the formation of a new entity called LJM3 that didn’t go forward. I am presuming that is why we didn’t see them. We were not 

present at that meeting. 

Chairman TAUZIN. But you did see a blank space. 

Mr. DILG. We did, and we noted that in our report. 

83

Chairman TAUZIN. What do you think? What do you think when 

you saw a blank space from the chief executive of the corporation 

on the approval forms? 

Mr. DILG. We felt that it was worth noting in our report that 

those spaces had not been filled in. 

Chairman TAUZIN. Wasn’t it a red flag? 

Mr. DILG. It was enough of a flag that we felt like it should be 

brought to Mr. Derrick’s attention. 

Chairman TAUZIN. But you never, never, never tried to talk to 

Mr. Skilling. 

Mr. DILG. We did not try to talk to Mr. Skilling. 

Chairman TAUZIN. Thank you, Mr. Chairman. 

Mr. GREENWOOD. Thank you, Mr. Chairman. It is amazing how 

much inquiry you can squeeze into a 5-minute period. 

The Chair recognizes the gentlelady from Colorado for 5 minutes. 

Ms. DEGETTE. Thank you, Mr. Chairman. And Chairman Tauzin, 

when you were asking about the Code of Conduct, it occurred to me 

we have reached new heights now, because it is not just the fox 

guarding the hen house that we used to think about a week ago, 

now it has become clear it is the fox guarding the fox. I mean—— Chairman TAUZIN. The hen is guarding the fox. 

Ms. DEGETTE. Yes, or something. You know, the exact same people who are the evildoers, who are committing these acts, are the 

ones that are supposed to go somehow to the chairman and say, 

‘‘Oh, by the way, I have these conflicts of interest.’’ It is unbelievable to me. 

But I actually have a different line of questioning. What I want 

to talk about is Mr. Fastow’s compensation, because as I read the 

Powers report and also some of the board committee minutes, it 

looks to me like the Compensation and Management Committee 

and also the Finance Committee told Enron that they should figure 

out what Mr. Fastow’s compensation was from LJM1 and LJM2. Is 

that correct, Mr. Derrick? In your view, were you guys supposed to 

figure out how much Mr. Fastow was making? 

Mr. DERRICK. I don’t recall a specific instruction from the committee, Congresswoman. I think the compensation would come up 

in terms of what is disclosed in the proxy statement. I think what 

you may be referring to—— Ms. DEGETTE. But do you think that you should have found out 

how much Mr. Fastow was making? 

Mr. DERRICK. Well, the teams that were working on the proxy 

disclosure issues did examine that question, and my understanding——

Ms. DEGETTE. Did you know how much Mr. Fastow was making? 

Mr. DERRICK. Pardon me? 

Ms. DEGETTE. Did you know how much Mr. Fastow was making 

from the LJM transactions? 

Mr. DERRICK. I did not. I was——

Ms. DEGETTE. Did anybody at Enron, to your knowledge? 

Mr. DERRICK. Not to my knowledge. My understanding is that 

the team that was working on it had concluded it was simply not 

practical to ascertain what the compensation was. But I will need 

to——

Ms. DEGETTE. Did anybody ever ask Mr. Fastow? 

84

Mr. DERRICK. I can’t speak to that. 

Ms. DEGETTE. Who was running this team that was supposed to 

be finding it out? 

Mr. DERRICK. Well, it would have been initially, I think, Mr. 

Mintz, in the Global Finance Group, and other people working with 

him. 

Ms. DEGETTE. Okay. Do you know if Mr. Mintz tried to find out 

from Mr. Fastow what his compensation was? 

Mr. DERRICK. I don’t personally have knowledge of that. 

Ms. DEGETTE. Mr. Rogers, do you think that management should 

have obtained Mr. Fastow’s compensation while he was at LJM— or involved with LJM? 

Mr. ROGERS. Yes, ma’am; it is my understanding they did try to 

find that out. 

Ms. DEGETTE. And did you think they were supposed to find that 

out? 

Mr. ROGERS. Yes. 

Ms. DEGETTE. And in fact when you were interviewed on January 20 by Wilmer Cutler you talked to them about discussions that 

you had in a meeting in early 2001 whether anybody knew the 

amount of compensation that Mr. Fastow was receiving from the 

LJM transactions. Do you remember that meeting in early 2001? 

Mr. ROGERS. I don’t remember the date, but, yes, I remember 

asking that. 

Ms. DEGETTE. Okay. And did you ask anybody to find that information out? 

Mr. ROGERS. Yes. 

Ms. DEGETTE. You were concerned about that issue, weren’t you? 

Mr. ROGERS. I knew it was a disclosure issue, yes. 

Ms. DEGETTE. And is that why you were concerned about it? 

Mr. ROGERS. Yes. 

Ms. DEGETTE. Okay. And wasn’t there a lot of conversation 

around Enron that Mr. Fastow might need to disclose this compensation from LJM on the 1999 and 2000 proxy statements? 

Mr. ROGERS. Not a lot of conversation that I was a party to, but, 

yes, I understand it was discussed. 

Ms. DEGETTE. Okay. But you were a party to conversations that 

that information had to be obtained. 

Mr. ROGERS. Yes. I have read a lot of memos relating to that, 

yes. 

Ms. DEGETTE. You have read a lot of memos relating to that? 

Mr. ROGERS. Yes. 

Ms. DEGETTE. Okay. And do we have those memos, do you know? 

Mr. ROGERS. I believe you do. 

Ms. DEGETTE. Okay. 

Mr. ROGERS. I am confident you do. 

Ms. DEGETTE. Did you ever try to get Mr. Fastow’s compensation 

from LJM? 

Mr. ROGERS. I didn’t personally. 

Ms. DEGETTE. Did you direct someone else to get that compensation? 

Mr. ROGERS. I didn’t direct someone, but someone undertook to 

do so, yes. 

Ms. DEGETTE. Who did? 

85

Mr. ROGERS. Mr. Mintz. 

Ms. DEGETTE. Mr. Mintz. And do you know what Mr. Mintz did 

to try to get his compensation, to get Mr. Fastow’s compensation 

from the LJM transactions? 

Mr. ROGERS. It is my understanding that he met with Mr. 

Fastow, at least according to his memos, at some length. 

Ms. DEGETTE. And as far as you know, Mr. Mintz was never successful in getting those compensation figures from Mr. Fastow, was 

he? 

Mr. ROGERS. I don’t know if he was or was not. What Mr. Mintz 

reported was that the compensation was not determinable after his 

conversations with——

Ms. DEGETTE. Did Mr. Mintz say why? 

Mr. ROGERS. He makes references to it in his memo. I don’t remember the exact reasons. I believe it had something to do with—

well, first of all, a number of the transactions in that year had not 

closed, so it was not determinable. With one of the other transactions, there was an agreement between, as I understand it, between Mr. Fastow and LJM, which rendered whatever he had been 

paid something that was not a final number that could be adjusted. 

Ms. DEGETTE. Well, okay, you didn’t have the final numbers, but 

did you ever try to get a ballpark figure? Do you know if Mr. Mintz 

ever got a ballpark figure? 

Mr. ROGERS. I don’t know if he did or not. 

Ms. DEGETTE. Didn’t that concern you that Mr. Mintz was unable to get this information that was supposed to be on the financial statements? 

Mr. ROGERS. I don’t think it is on the financial statements. 

Ms. DEGETTE. Okay. 

Mr. ROGERS. It may be on the proxy statements. But Mr. Mintz 

is an outstanding lawyer. He undertook to get the information. 

Ms. DEGETTE. He testified in front of us, so, yes, we all love him, 

but that is not my question. 

Mr. ROGERS. Well, what he reported back to——

Ms. DEGETTE. My question is did he ever try to get at least a 

ballpark figure of what Mr. Fastow was making? 

Mr. ROGERS. I wasn’t a party to the conversation between Mr. 

Mintz and Mr. Fastow, but what Mr. Mintz reported back was the 

number was not determinable at that time. 

Ms. DEGETTE. Okay. Have you ever gotten that figure, to this 

date? 

Mr. ROGERS. I have not personally gotten the number. The only 

number I am aware of is the $30 million number that has been 

published. 

Mr. GREENWOOD. Time of the gentlelady has expired. 

Ms. DEGETTE. So that is the number that—I would ask unanimous consent for 1 additional minute. 

Mr. GREENWOOD. Without objection. We are trying to be sensitive 

to the members’ travel schedules. 

Ms. DEGETTE. Thank you. I have one too, Mr. Chairman. 

Mr. ROGERS. I am sorry, is there an open—is there a question? 

Ms. DEGETTE. Yes. The question I was asking was that is the figure you read in the newspapers, the $30 million? 

86

Mr. ROGERS. I believe that number first was reported in an 8K 

current report that Enron filed subsequent to the SEC investigation, in response to the SEC’s questions. And my understanding, if 

my recollection is correct, that the members of the board spoke 

with Mr. Fastow. 

Ms. DEGETTE. Okay. If you had known that $30 million at that 

time in 2001, would you have been concerned about the red flag 

that might raise as to these transactions? 

Mr. ROGERS. If I had known at the time that——

Ms. DEGETTE. Yes. 

Mr. ROGERS. [continuing] the number was $30 million? 

Ms. DEGETTE. That was $30 million. 

Mr. ROGERS. Absolutely. 

Ms. DEGETTE. Do you know to this day how much the real number ever was? 

Mr. ROGERS. I do not. 

Ms. DEGETTE. Mr. Derrick, did you know at that time how much 

Mr. Fastow was making from the LJM transactions? 

Mr. DERRICK. No. I had been told by the team that it was not 

practical to ascertain that because of these various open positions. 

Ms. DEGETTE. And have you ever yet found out how much he 

made from those transactions? 

Mr. DERRICK. The only thing I can add is, what Mr. Rogers referred to, was when the board elected or chose two of its members 

to sit down with Mr. Fastow and ask that question. And the number that has been referred to is, I believe, the number that Mr. 

Fastow told to those two members of the board. 

Ms. DEGETTE. And that was in the Powers report? 

Mr. DERRICK. I believe that is in the Powers report. 

Ms. DEGETTE. Okay. And if you had known at least that $30 million at the time, would that have raised a red flag for you? 

Mr. DERRICK. Yes, Congresswoman; it certainly would have. 

Ms. DEGETTE. And to this day——

Mr. GREENWOOD. The time of the gentlelady——

Ms. DEGETTE. [continuing] do you have any idea how much Mr. 

Fastow made from LJM? 

Mr. DERRICK. The only information I have is what I have just reported. 

Ms. DEGETTE. Thank you. 

Mr. GREENWOOD. The Chair recognizes the gentleman from Florida for 5 minutes. 

Mr. STEARNS. Thank you, Mr. Chairman, and let me just say to 

the witnesses you came here voluntarily and we appreciate what 

you are doing, and we understand that you haven’t had lunch and 

so we are very sensitive to that. But I think what we are all having 

trouble with is that people were making large sums of money and 

no one on this panel has any concern or doesn’t stop to blow the 

whistle. It is like the three monkeys who see no evil, hear no evil 

and speak no evil. And you folks are unfortunately communicating 

that kind of sense to us that you would not have changed a thing 

and you did nothing wrong. I mean in retrospect, Mr. Derrick, do 

you think there has been any corporate malfeasance at all during 

this whole process? 

87

Mr. DERRICK. Well, you say change nothing. In my opening testimony, I have said that had I been given the gift of clairvoyance, 

had I been able to foresee these events, I certainly would have done 

things differently. In fact, if it were within my power to go back 

and change anything, whatever it may be, that would have prevented us from being where we are now, certainly, Congressman, 

I would have done that. 

But in terms of corporate malfeasance, I have no reason to believe that—when the board considered this, it honestly believed 

that it was taking decisions that it thought was not adverse to the 

best interest of Enron and put in place procedures that they honestly believed would protect those interests. 

Mr. STEARNS. So today, Mr. Derrick, do you think there has been 

any corporate malfeasance, just yes or no? 

Mr. DERRICK. Well, if the allegations that have been made at the 

end of the day prove to be true, then the answer is yes. 

Mr. STEARNS. Mr. Dilg, do you think there has been corporate 

malfeasance based upon what you have seen? 

Mr. DILG. We were very disheartened to see some of the things 

that came out in November. The participants in South Hampton 

was a great surprise to us. 

Mr. STEARNS. So you see things today that would indicate, if 

true, it is corporate malfeasance. 

Mr. DILG. The ownership of and interest in a company doing 

business with Enron without going through the proper Code of 

Conduct waivers, et cetera, raises grave concerns to me. 

Mr. STEARNS. The question has come up of a $40 million that Mr. 

Fastow, the CFO, made. Mr. Derrick, you met with 10 members of 

our staff, one of those was on a telephone hookup. And per that discussion they had with you, you left a message with Lay and 

Skilling that it was not practical to determine Fastow’s compensation but that it would be disclosed in the year 2002 and that you 

were not aware of Fastow’s compensation at that point. But for the 

September 1 board meeting, you said you wrote a list of questions 

for the board to ask Mr. Fastow, and ultimately it was decided the 

chairman of the Executive Committee, John Duncan, and the Compensation Committee would sit down with Mr. Fastow outside the 

meeting, which they did, you said. At a board meeting after that, 

they reported that Fastow made $40 million. Is that true? Do you 

still stand by your statements to our staff? 

Mr. DERRICK. With respect—yes, I do, with one exception. I believe I made it clear that as to the $40 million I can’t be clear as 

to whether that was the amount. It may have been $30 million. 

But as to the other things you said, yes, I do, Congressman. 

Mr. STEARNS. So you did not know that he made—let us say $40 

million just for the discussions—that he made $40 million on these 

business transactions, and you did not know that before the September 1 board meeting. Is that true? 

Mr. DERRICK. I am taking your word it is September 1, but, yes, 

that board meeting. Yes, that is correct. 

Mr. STEARNS. Mr. Sefton, did you know that before September 1 

board meeting that Mr. Fastow was making $40 million? 

Mr. SEFTON. No. And was that September 1, 2001? 

Mr. STEARNS. Yes, 2002. 

88

Mr. SEFTON. 2002. I left Global Finance in 2000. 

Mr. STEARNS. Okay. I have—it is Tab number 22 that Mr. 

Fastow signed. It is a proxy statement talking as of holdings of equity securities in the company. And on the last page, he talks 

about, in response to questions, he says—they are talking about his 

salary and his affiliates and his shares, and he said, ‘‘I suggest that 

you talk to Scott Sefton if you want to talk about my arrangements, my salary, and that Scott Sefton is preparing a draft of the 

disclosure relating to these transactions, which he will provide 

shortly.’’ Do you remember preparing a draft of disclosure on Mr. 

Fastow? 

Mr. SEFTON. Yes. 

Mr. STEARNS. And what did that disclosure say? 

Mr. SEFTON. It was for the proxy for 2000. 

Mr. STEARNS. And it did not talk at all about his salary and how 

much his compensation was. 

Mr. SEFTON. The disclosure that I worked on was for the related 

party transactions. 

Mr. STEARNS. Did you have an understanding of how much he 

made before you left the company? 

Mr. SEFTON. No. 

Mr. STEARNS. So all during the process you never understood it. 

You never knew how much he made. 

Mr. SEFTON. No. 

Mr. STEARNS. Mr. Rogers, did you? 

Mr. ROGERS. No, sir. 

Mr. STEARNS. And Mr. Dilg, do you? 

Mr. DILG. I did not know until the results came back from the 

meetings with Mr. Duncan and the other board member. 

Mr. STEARNS. Mr. Astin? 

Mr. ASTIN. No, Congressman, not until the report that Mr. Rogers referred to, the 8K filing that first disclosed the number. 

Mr. STEARNS. And Ms. St. Clair? okay. Thank you, Mr. Chairman. 

Mr. GREENWOOD. Thank you. The Chair recognizes the gentleman from California for 5 minutes. 

Mr. WAXMAN. Thank you very much, Mr. Chairman. One of the 

most disturbing facts to emerge from Congress’ investigation of the 

Enron collapse is the extent to which the company lobbied for and 

took advantage of inadequate regulation and oversight by legislators and regulators. If not for Enron’s political connections and 

power, the company’s true financial status might have been uncovered long ago. I would like to ask some questions about those political connections. 

From 1989 to 2001, Enron’s PAC, Political Action Committee, 

and its employees and family members gave close to $6 million to 

Federal candidates and political parties. Press reports indicate that 

employees were, at the very least, strongly encouraged to make political contributions. One press report has cited a 2000 company 

memo that recommended employees give money to President 

Bush’s campaign. Are any of you aware of this particular memo? 

Mr. DERRICK. It is certainly possible that I would have seen it 

at the time, Congressman. I don’t have specific recollection of it 

now. 

89

Mr. WAXMAN. Okay. Any of the others. Mr. Sefton, are you aware 

of any memo asking employees to contribute? 

Mr. SEFTON. I don’t recall a memo relating to the Bush campaign, but the employees of the company were asked from time to 

time to consider contributions to, I think, a Political Action Committee that was set up by the company. 

Mr. WAXMAN. And how were they asked, through a memo, 

through written communication? 

Mr. SEFTON. Probably a memo or an e-mail. 

Mr. WAXMAN. Anybody else recall seeing any memos or being 

aware of this information? Mr. Rogers? 

Mr. ROGERS. Yes, sir. I don’t recall any specific request to support a specific candidate. I do recall getting Political Action Committee materials. The company did—there was no obligation on any 

employee to join the PAC, but the company—all the employees 

were given the opportunity to, and I think the company did endorse 

being a member of the PAC. But there were no—nothing negative 

would happen to an employee if he did not join the PAC. 

Mr. WAXMAN. Were any of them, when they were told they could 

voluntarily do this, given a suggested amount they ought to contribute? 

Mr. ROGERS. Not to my recollection. 

Mr. WAXMAN. Anybody else have a——

Mr. ROGERS. It is possible, I don’t recall. 

Mr. WAXMAN. Well, according to a press story, low-level employees were encouraged to give $500, and senior executives, at least 

$5,000. Do you know whether that would have been accurate? 

Mr. ROGERS. I don’t recall, but it would be very easy to find out. 

Mr. WAXMAN. Did any of you, as lawyers for Enron, advise the 

company on campaign-related matters? 

Mr. DERRICK. No, but we did have an employee who was 

charged, not as 100 percent of her job, but as part of her job was 

advising the PAC issue. 

Mr. WAXMAN. Okay. And could you identify for the record, if not 

right now, who the employee had been——

Mr. DERRICK. Certainly; I will be happy to. 

Mr. WAXMAN. And, Mr. Rogers, you say it would have been easy 

to find out if a memo had been sent out. How would we go about 

finding out that information? 

Mr. ROGERS. I would guess the company would have records of 

the materials that it would send out with respect to the Enron 

PAC. 

Mr. WAXMAN. The Washington Post reported that a letter was allegedly sent by Ken Lay to certain employees in the spring of 1999 

asking for contributions to the Bush campaign. One recipient of the 

letter, according to the press report, said it was a rather menacing 

letter. Are any of you aware of this or other letters or memos from 

Ken Lay encouraging employees to contribute to the Bush campaign? 

Mr. DERRICK. Congressman, I may have received a letter, not in 

Mr. Lay’s capacity as the chairman of Enron, but in this private 

capacity. I know he was active for a number of candidates, one of 

whom was President Bush. And, certainly, I made a number of conVerDate Jun 13 2002 08:36 Jul 17, 2002 Jkt 010199 PO 00000 Frm 00093 Fmt 6633 Sfmt 6602 W:\DISC\78506 pfrm17 PsN: 78506
90

tributions to various candidates, and one of those would have been 

to Mr. Bush. 

Mr. WAXMAN. And when you gave contributions to a number of 

candidates, were they at the request of Mr. Lay? 

Mr. DERRICK. There would have been some of those, but it was 

my philosophy to try to support good candidates on both sides of 

the aisle. And only a small fraction of those would have been the 

result of any communication from Mr. Lay. But, again, it would 

have been in Mr. Lay’s capacity, not as chairman of Enron but 

rather as a private citizen. 

Mr. WAXMAN. Are you aware of any campaign contributions 

being reimbursed, like bonuses or other compensation intended, in 

effect, to reimburse employees for what they gave politically? 

Mr. GREENWOOD. Last question, Mr. Waxman. 

Mr. WAXMAN. I would like to have Mr. Rogers answer it was 

well. 

Mr. DERRICK. I have no personal recollection of any such reimbursement. 

Mr. WAXMAN. Mr. Rogers, are you aware of that? 

Mr. ROGERS. Let me make sure I understand the question. 

Would you restate that, please? 

Mr. WAXMAN. What I am trying to find out is whether you are 

aware of any additional compensation that was given to employees 

or executives to make up for the contributions they would have 

given to campaigns? 

Mr. ROGERS. I am not aware of that. 

Mr. WAXMAN. Are any of you aware of that? 

Mr. GREENWOOD. Apparently not. The time of the gentleman has 

expired. 

Mr. STEARNS. Mr. Chairman, just a point of information. I think 

in all fairness, if the question is going to be asked of the President, 

I think the gentleman from California should also ask it of President Clinton too, his same questions. 

Mr. WAXMAN. I think that is reasonable. I want to know if any 

political campaigns. 

Mr. GREENWOOD. I think the record has demonstrated that the 

Enron employees and Enron Political Action Committee, as well as 

Enron soft money, went generously to both sides of the aisle, this 

election cycle and previous election cycle. 

The Chair thanks the gentlemen and lady for their testimony 

today. This committee has held 4 days of hearings on the collapse 

of Enron, and we have done that because this is the largest bankruptcy in the history of the country. We have done that because not 

only did 4,000 Enron employees, at least, lose their jobs, pensions 

lost, but teachers’ funds, retirement funds across the country were lost, $70 billion. Funds invested by parents for their children’s education lost because of investments in Enron. There has been a lot 

of human suffering as a result of this collapse, not the least of 

which, of course, is the tragic death of Mr. Baxter. 

It has been interesting to this member that this collapse happened at a time when all of the commodities in which this company 

was trading were in high demand in the country. You had good 

supplies, you had great demand, all of the economic reasons for 

this company to succeed were in place. And yet it failed. The acVerDate Jun 13 2002 08:36 Jul 17, 2002 Jkt 010199 PO 00000 Frm 00094 Fmt 6633 Sfmt 6602 W:\DISC\78506 pfrm17 PsN: 78506
91

countants have come in and told us that it didn’t fail because of 

anything they have done, no one from the company’s management 

has said it has failed because of anything that they have done 

wrong, and none of you have indicated today that the company because of anything that you have done wrong. 

My final question for you, in retrospect and without the gift of 

clairvoyance, as you look back upon this failure, what happened? 

Who caused the failure of Enron. Mr. Derrick? 

Mr. DERRICK. Well, there are brighter people than I who are 

looking at this issue. From my perspective, Congressman, it was a 

loss of confidence and panic selling. I believe—I am not a businessman, I am not a financial person, but certainly it was my sense 

that the company still had enormous opportunities. There was, as 

some have said, a run on the bank—— Mr. GREENWOOD. It wasn’t loss in confidence that you could sell 

natural gas and electricity and—it wasn’t like automobiles were 

made and people lost confidence in the ability to sell buggy whips, 

was it? It was loss of confidence in the management, was it not? 

Mr. DERRICK. I can’t speak to that. I can’t say that you are 

wrong on that. I don’t know. But experiencing from the inside, it 

was simply a panic sale of our shares based on what seemed to be 

a loss of confidence, and I think had the company had some opportunity to have had a circuit breaker in place, that it might have 

saved many, many people from the tragedy that they have undergone. 

Mr. GREENWOOD. Well, it would be my final observation—first, 

without objection, I would like to put into the record the documents 

to which we have referred today and identified as, ‘‘O&I Financial 

Collapse of Enron, March 14, 2002.’’ My only comment in closing would be that once again the commentary from the witnesses is that the company failed because of 

loss of confidence of the investors, which sounds an awful lot to me 

like blaming the victims, the people who lost the money failed because they failed to have confidence in the company itself. 

This hearing is adjourned. 

[Whereupon, at 3 p.m., the subcommittee was adjourned.] 

[Additional material submitted for the record follows:]

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