From: Carleton, Norman

Sent; Wednesday, November 21, 2001 1:23 PM

To: Lori Sanatamorena (E-mail)

Subject: FW: Dow Jones Newswires: Enron Closes On $450M Secured Credit Line

~Qnginal Message-—--

From: Carleton, Norman

Sent: Wednesday, Naverniber 21, 2001 1:22 PM

To: Bar, Sheila; Berardi, Steve; Btsberger, Timathy; Cetina, Jil; Eichner, Matthew; Gabilondo, Jose; Gross, Jared; Hamner, Viva;
Nickoloff, Peter; Novey, Michael; Pletrangell, Fred; Roseboro, Brian; Schulthetss, Heidilyrne; Sharer, Jemes; Whaley, Jes;
‘Wiedman, Mark

Subject: Dow Jones Newswires: Enron Goses On $450M Secured Crecit Line

November 21, 2001

Enron Closes On $450M Secured Credit Line

HOUSTON -- Enron Co. (ENE) closed on the remaining $450 million of a previously announced $1
billion in secured credit lines and said it is in active discussions to restructure its debt to improve

liquidity.
In a press release Wednesday, Enron said the $450 million credit facility is secured by the assets of
Enron's Norther Natural Gas Co.

A $550 million credit facility, secured by the assets of Enron's Transwestern Pipeline Co., closed
Now. 16. The proceeds are being used to supplement short-term liquidity and to refinance maturing
obligations.

The company said the maturity on its $690 million note payable obligation will be extended to mid-
December.

Dow Jones Corporate Filings Alert reported Monday that Enron is currently preparing a restructuring
plan aimed at taking aggressive steps to rationalize the company's existing cost structure,
accelerating the process of divesting noncore businesses and assets and restructuring scheduled
maturities of debt and other obligations.

Enron's credit lines are from J.P. Morgan, the investment-banking arm of J.P. Morgan Chase & Co.
(JPM), and Salomon Smith Barney, the investment-banking arm of Citigroup Inc. (C).

Enron also reaffirmed its commitment to the merger with Dynegy Inc. (DYN). On Nov. 9, Enron and
Dynegy signed a definitive merger agreement that would give Enron shareholders 0.2685 share of a
Dynegy share, The merger is expected to close by the end of the third quarter of 2002.

On Monday, Enron filed its Form 10-Q for the third quarter, which reflected a wider loss by 3 cents a
share. The energy company previously reported a loss of $618 million, or 84 cents a share, on
revenue of $47.6 billion for the third quarter ended Sept. 30,

-Stephen Lee; Dow Jones Newswires; 201-938-5400

, 03030

01300000001640


Conclusion

While the Commission's work relating to the Enron matter is just beginning, jt is
clear that with losses this sudden and deep to one of our largest reporting companies, we
must look carefully at the adequacy of the current system of financial reporting. You can
Test assured that the Commission and its staff are approaching this inquiry with an open
mind and a firm intention to find out exactly what occurred and to deter, where possible,
similar occurrences in the future. Should we conclude that any legislative solutions seem
appropriate or helpful, we will seek the assistance of this Committee and your
Subcommittees. We very much appreciate your prompt action and interest in having
scheduled this hearing today and inviting us to participate.

02343

01300000000952


Testimony of Richard L. Trumka

House Financial Services Committee

December 12, 2001

Page 5

stock or bonds. If any person in this room has an S&P 500 index fund in your 401(k) or
your mutual fund portfolio, you lost money in Enron probably about half a percent of
your total assets in that fund, And this is if you invested in index funds-- in a strategy

that is designed to cheaply mitigate the risks of investing in any single company.

Let me give you some examples of the monies lost by pension funds. The Amalgamated
Bank of New York, @ major index fund manager for union and public pension funds, has
filed court papers stating index funds it sponsored lost approximately $10 million in
Enron equity and debt."” The Georgia State Board of Investment has said in court that it
has the largest losses. Filings by major commercial money managers with tens of billions
of dollars of worker retirement money under management such as Alliance, Janus and
Fidelity suggest each has losses in the hundreds of millions of dollars.'' Most of this
money is being invested to fund pension benefits for worl.ing families-- for the public
employees we are counting on to protect us during this period of national crisis, for the
pensions of the iron workers who are as we speak clearing the rubble at Ground Zero, for
the firefighters who today, as on September 11, stand ready to give their lives to save
ours, Because of the way that our retirement system has become increasingly interwoven
with the capital markets, practically every American fortunate enough to be able to save

for retirement in any form was hurt by the collapse of Enron.

In part, the moral of this story is that conflicts of interest in the capital markets can do a

lot of damage to America's working families. Currently, Congress is considering

02407

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22/05/01 15:46 FAX 202 646 5399 . . @ors-o2a

= WSiicom Page 2of?

rice drvps below $10 a shere efter reports the Simancially roubled enerzy

nei 1g to shore up confidence.

Nov. 8, 2001 -Enron files document: with SEC revising its financial statements for past five years to
account for $586 million in losses

Nov. 9, 2001 -Dynegy Inc.{DYN) ar sounces an agreement to buy its much larger rival Enrow for more
than $8 billion in stock

Nov, 14, 2001 -Enron announces it is trying to raise an additional $500 million re $} billion in new
private equity to shore up customer iad market confidence.

Nov. 19,200] -Enron restates its thi d-quarter earnings and discloses it js tying tw restructure a $690
million obligation that could come d te Nov, 27.

Nov. 20,2001 -Concerns about Enr a's ability to weather its spitaling financial problems send the
company’s stack down nearly 23% t its lowest level in nearly 10 years. Officials from both Enron and

Dynegy say the merger was not in tr uble.
Nov. 2], 2001 -Enyron reaches critic: | agreement to extend $690 million debt payment.

Nov. 26, 2001 -Enron shares fall anc ther 15% as investors continued to doubt that the deal will
completed. Shares finish day at $4.01. “

Nov. 28, 2001 -Dynegy backs out 0° deal after Enron's credit rating is downgraded to junk bond status;
analysts say a bankvuptcy filing is li :ely. Enron shares plunge below $1] amid the heaviest single-day
trading volume ever for a NYSE or Vasdaq-tisted stock,

Dec. 2, 2001 -Enron files for Chapt: 11 bankruptcy protection; sues Dynegy for wrongful termination
of merger. in

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Printing, distribution, and use of this m2 terial is governed by your Subscription Agreement and copyright laws.

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wee theve,cgi7id=BT-CO-290] 1202-00030] djmld&iemplate=.,. 123/01

01300000000871


From: Nickoloff, Peter

Sent: Friday, November 02, 2001 1:16 PM

To: Carleton, Norman; Schultheiss, Heidilynne
Subject: Another Enron story

The New York Times

November 2, 2001

The Rise and Fall of Enron

Earlier this year, most companies would have loved to have Enron's problems. Californians resented the energy
trading company's huge profits during their energy crisis, and Democrats in Washington raised questions about
Enron's influence within the White House and about the cozy relationship between Enron's chairman, Kenneth
Lay, and Vice President Dick Cheney. Nobody seemed better positioned to thrive during the Bush presidency
than this Houston-based apostle of deregulation.

Wall Street was impressed with Enron's strategy of swooping into formerly regulated markets to broker
contracts for natural gas, electricity or unused telecom bandwidth. The company was celebrated as a paragon of
American ingenuity, a stodgy gas pipeline company that had reinvented itself as a high-tech clearinghouse in an
ever-expanding roster of markets. 's push to force utilities into the Internet age with its online trading
systems, at a seemingly handsome profit, became an cpic tale of the dot-com revolution.

It now appears that Enron's tale may be more cautionary than epic. Enron envy has crashed, along with the
company's stock price, as serious questions emerge about its bookkeeping. Enron disclosed carlicr this month
that $1.2 billion in market value had vanished as a result of a controversial deal it entered into with private
partnerships run by its chief financial officer, Andrew Fastow.

Most alarming was Enron's reluctance to shed light on management's wheeling and dealing. "Related-party
transactions,” as the accountants call them, are fraught with conflicts of interest. Though much remains to be
leammed about these transactions, their scope and lack of transparency suggest that Enron may have in effect
created its own private hedge fund to assume some of the risk and mask the losses of its complex trading. The
extent to which company insiders profited from the partnerships is not yet clear.

Enron has scrambled to dampen Wall Street's concems, acknowledging its credibility problem while insisting
on the health of its core businesses. On Wednesday it brought in William Powers, the dean of the University of
Texas School of Law, to review the transactions. The Securities and Exchange Commission has launched its
own formal investigation. Mr. Fastow was forced to resign, following Jeffrey Skilling, the man credited with
driving Enron into new cutting-edge businesses, out the door.

Enron's former admirers on Wall Street, mindful of recent scandals involving high-profile companies doctoring
their earnings, and of the spectacular collapse of the Long-Term Capital Management hedge fund in 1998, are
alarmed, Carole Coale of Prudential Securities summed up the prevailing sentiment when she told The Times:
"The bottom line is, it's really difficult to recommend an investment when management does not disclose

facts." Analysts, as well as the media, are not entirely blameless. Enron did mention, albeit in passing, the
troubling related-party deals as early as March 2000, But few analysts bothered to raise questions at a time when
the company’s revenues, profits and stock price were soaring.

Harvey Pitt, the new Securities and Exchange Commissioner, must pursue the Enron inquiry aggressively in
order to assure investors that he will be as vigilant as his predecessor, Arthur Levitt, when it comes to protecting
the integrity of financial markets. Indeed, even if Enron is cleared of any wrongdoing and regains some of its
past luster, as it well might, the company that preaches the merits of self-regulating marketplaces has reminded
us all of the need for a strong regulator on Wall Street.

: 02589

01300000001198


Credit concerns about the once-dominant energy trading company were heightened with Enron's
fling of its third quarter annual report Monday evening with the U.S. Securities Exchange
ommission.

Enron may have to pay $690 million on a note that became a demand obepadon with the
company's most recent credit-rating downgrade, Enron said in Monday's filing. The company also
warned that its profits in the fourth quarter could be hurt by credit concerns, a decline in asset
values and reduced trading activity.

“The 10Q in and by itself is a document that could raise concerns," Fitch analyst Ralph Pellecchia
said. "We have a lot of questions outstanding relative to disclosures that were new to us and their
strategies of how they are going to manage the situation.”

Companies are willing to buy from Enron in the spot gas and power markets, because taking
delivery on commodity and paying for it a month later poses no credit risk for the buyer

An Enron spokesman didn't respond to a request for comment,

Reliant Resources (RR!) and the Bonneville Power Administration, the federal government's
western power marketer, both said their organizations are continuing to "do business" with Enron.
But when asked specifically if they were selling spot power or gas to Enron, spokesmen for both
declined to comment.

“We're watching the situation very carefully," said Reliant spokesman Richard Wheatley. “There is
a lot of speculation because of the filing yesterday.”

Energy companies began shying away from Enron over the past month, as concems about its
finances precipitated a 75% drop in its stock price and left its bonds trading at levels typically
associated with junk-rated debt.

Traders and their companies have said consistently that until Enron's credit ratings improve, they
will continue to watch their exposure to Enron carefully, with trades limited to short-term deals.

Moody's Investors Service, Standard & Poor's and Fitch all rate Enron one notch above
speculative grade. Moody's has Enron's ratings on review for a downgrade, and S&P has Enron
on negative credit watch. Fitch calls Enron's credit rating "evolving." Enron's ability to do business
in the energy markets depends on its maintaining investment-grade ratings.

The manager of one hedge fund that follows Enron closely said Tuesday that several trading
companies expressed strong concerns about Enron's financial viability. But the manager thought
those concems weren't proportionate to Enron's position.

“They have nine days to work out the $690 million debt payment, and if they can’t work it out, they
have the cash to make the payment," the manager said.

Dynegy Inc, (DYN), which has agreed to buy Enron in a stock-swap currently worth about $10
billion, injected $1.5 billion into Enron last week. Enron has also closed on $1 billion worth of
revolving credit lines with J.P. Morgan Chase & Co. (JPM) and Citigroup (C) in the past week,
with $450 million of that amount closed Monday.

Developments with Enron, however, have raised enough concerns that energy companies aren't
willing to extend themselves into positions that have even the appearance of vulnerability,
Sanchez of Gelber & Associates said.

"The industry has been shell-shocked by their recent announcements, and they're not ready to go
back to trading with them," said Sanchez of Gelber & Associates.

Some traders wondered why Dynegy hasn't stepped in to buy energy from sellers and then sell
that product to Enron. Such a move, known as “sleeving" in eneray markets, serves as an ad hoc

; 02582

01300000001191


Page 2 of 2

Campion .Walah@dowjones com

02003

01300000000611

1/17/02


Good morning Chairman Baker. My name is Richard Trumka, and I am the Secretary-
Treasurer of the AFL-CIO. On behalf of the AFL-CIO and our unions’ 13 million
members, | am grateful to the Financial Services Committee for affording us the
opportunity to express our views on the implications of the collapse of Enron. In
particular 1 would like at the outset to commend this Committee and Chairman Baker in
Particular for his leadership in calling this hearing and his foresight in looking at the issue
of analyst independence last summer. As I will describe below, that issue is significant

part of what went wrong at Enron

My purpose in appearing here today is threefold. First | would like to give the committee
some sense of the impact the collapse of Enron has had on workers trying to invest for
their retirement, and on unions and employers trying to help workers achieve retirement
security. Second, ! would like to take a moment or two to talk about why Enron
collapsed, and the links between Enron's collapse and the issues that were already facing
this Congress on the day the Enron disclosures began. Finally, and perhaps most
importantly, there is a clear regulatory agenda that the Securities and Exchange
Commission and the Department of Labor must take up. Today the AFL-CIO has sent
rulemaking petitions to the SEC embodying this agenda of auditor independence and
Board integrity. With this Congress’ support, the relevant regulatory agencies could take
@ series of initiatives that would go a long way toward protecting workers" retirement
security and the investing public from the conflicts of interest that led to the collapse of

Enron,

02403

01300000001012


In evaluating the 3 percent residual equity level required to qualify for non-consolidation, there
were some complex issues concerning the valuation of various assets and liabilities. When we
reviewed this transaction again in October 2001, we determined that our team’s initial judgment
that the 3 percent test was met was in error. We promptly told Enron to correct it.

We are still looking into the facts. But given what we know now, this appears to have been the
result of a reasonable effort, made in good faith.

Adjustments previously not made to Enron's 1997 financial statement

As a result of the restatement for the SPEs, Enron was required to address proposed adjustments
to its financial statements that were not made during the periods subject to restatement.
Questions have been raised about certain of these “passed adjustments.” Let me address that
issue next.

As part of the audit process, the auditor proposes adjustments to the company’s financial
Statements based on its interpretation of Generally Accepted Accounting Principles (GAAP). A
company’s decision to decline to make proposed adjustments does not mean that there has been
an intentional effort to misstate. If the auditor believes that the company’s actions result in either
an intentional error or a material misstatement, it may not sign the audit opinion.

Often, there is a timing issue to consider. These adjustments typically are proposed by the
auditor at the conclusion of the audit work — usually one or two months after the close of the
year-end. Some companies, like Enron, choose to book those adjustments in the year after the
auditor identifies them, when they are immaterial.

Questions have been raised about $51 million in adjustments not made in 1997 when Enron
reported net income totaling $105 million. Some have asked how adjustments representing
almost half of reported net income could have been deemed to be immaterial.

Auditing standards and SEC guidance say both qualitative and quantitative factors need to be
considered in determining whether something is material. The Supreme Court has described this
approach as the “total mix” of information that auditors must consider.

In 1997, Enron had taken large nonrecurring charges. When the company decided to pass these
Proposed adjustments, our audit team had to determine whether the company’s decision had a
material impact on the financial statements. The question was whether the team should only use
reported income of $105 million, or should it also consider adjusted earnings before items that
affect comparability — what accountants call “normalized” income?

02352

01300000000961


Page | of 2
Carleton, Norman

From: — Carleton, Norman

Sent: Thursday, November 29, 2001 9:31 AM

To: Nickoloff, Peter; Schultheiss, Heidtynne

Subject: EW: Interesting piece in today's NY Times that pins recent spike in vol in Eurodollars & UST market on
n

Tracking: Recipient Delivery Read
Neckoloff, Peter Delivered: 11/29/01 9:31 AM Read: 11/30/01 9:29 AM
Schultheiss, Heidiynne Delivered: 11/29/01 9:31 AM Read: 12/10/01 12:33 PM

--~-Original Message----

From: Cetina, Jill

‘Sent: Thursday, November 29, 2001 8:36 AM

To: Gross, Jared; Malvey, Paul; Carleton, Norman; Bitsberger, Timothy; Roseboro, Brian; Sobel, Mark; Byrne,
Kathleen; Sharer, James; Quinn, Lois; Dulaney, Tim

Subject: Interesting piece in today's NY Times that pins recent spike in vol in Eurodollars & UST market on
Enron

Had heard participants speculate that something might up with Enron's Eurodollar portfolio but
no one I talked to had seen the flow,

Enron's Woes Exacerbate Turmoil

03035

ifr he swift downfall of Enron (news/quote) has contributed to extreme turbulence in the United

States Treasury market in recent weeks, causing violent swings in interest rates not seen since
Russia defaulted on its debt and the Long-Term Capital Management hedge fund nearly collapsed in late
1998.

By GRETCHEN MORGENSON

Even though the exact makeup of Enron's large trading portfolio remains a mystery, traders said that the
nergy company had bet that interest rates would continue to decline because of continuing weakness in
the economy.

Then two weeks ago, the economy began to show signs of revival, As investors decided that the days of
Federal Reserve rate cuts were over, rates began to rise and prices on Treasury securities fell, The move
out of Treasuries crushed traders who still expected the weak economy to push interest rates lower.
Scrambling to cut their losses, those traders sold even more, depressing prices and pushing up rates
further.

The sense among many market participants is that Enron's woes made a bad market excruciating. "1
think the Street in gencral lost half of its year or more in the last week or two,” said Stan Jonas,
managing director at Fimat USA, a broker dealer. "Everyone was long the bond market, thinking the
economy was going to be bad, Then everything shifted, and Enron drove it to extremes.”

How extreme? In the two weeks beginning Nov. 12, two-year Treasury [3
notes plummeted in price, pushing their yields up to 3,18 percent, from : Enron Collapses as Suitor

2.41 percent. In the same period, yields on Treasuries with five-year Cancels Plans for Merges
maturities went to 4.4 percent, from 3.62 percent. (November 29, 2001)

Mark A Big Fall
The trade that appears to have gone awry for Enron, market En areal Id Memories

1/16/02

01300000001645


investors, has limited stakeholders other than shareholders and does not depend on external Perceptions of its soundness
to remain in business. Most risk management firms fail on one or ail of these caveats, and when things go wrong, analysts
suddenly find themselves shifting from a plausible tale of profits to one of losses that don't have a verfigble floor. They
began to suspect they will discover the real answer not in the next conference call, but years later in the dry transcripts of
courts, jators, regulators and commissions. (The Royal Commission on Australia’s HIH Insurance begins sitting next
week will report in mid-2002.)

One answer to the problem of air walking is to strengthen the connection between risk reporting, company statements and
the specific duties of boards of directors, A rest
- the Economic Policy Review

shitip wwe. newyorkfed.org/tmaghome/e r jmac.htmi> recently by

of the Federal Reserve Bank ew York points out that to become liable for a bank failure in the US, directors have to fail
utterly to establish @ reporting system for risk. The authors of the paper that this is too soft, given the i it
critical nature of such systems and the variety of stakeholders in a bank. They recommend instead: "In order to avoid
liability, directors of benks have a continuing obligation to develop and maintain a detailed and elaborate system for

monitoring and oversight.”

Elsewhere, the international accounting authorities and the sepulekne of both the banking and insurance industry are
moving {o Uphien up beat practice in company aocounte and reporting of risk. Away the field of requiatory capital
reform, the Committee's accounting task force issued a y i > in August on
the intema! audit function in banks. Among other recommendations, it stressed that a bank's internal audit group should
regularty carry out an independent review of the risk management system to set the bank's capital levels. The
same committes is currently preparing a survey of how internal audit works in practice,

But these are long-term efforts, and to be effective they will have to cross many professional and industry boundaries.
Meanwhile, risk might ask themselves a simpler question. If a rumour circulates tomorrow that their firm is in
trouble, could they convince an outsider that the cogs in their financial reporting, risk reporting and corporate governance
systems are all meshed together?

02585

01300000001194


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01300000000972


12/05/01 15:46 FAL 202 646 5199 . . @ors-o023

© WSiicom Page 2 of 2

Now. 6, 260) -Enron’s stock price drrps below $10 a shes
wader was seeking additions! financi 1g tw shore up confidence

ports the Snancially weubleZ energy

Nov. 8, 2001 -Enron files document: with SEC revising its financial statements for past five years to
account for $586 million in losses.

Nov. 9, 200] -Dynegy Inc.(DYN) at aounces an agreement to buy its mucb larger rival Enron for more
than $8 billion in stock.

Nov. 14, 2001 -Enron announces it is trying to raise an additional $300 million to $1 billion in new
private equity to shore up customer iad market confidence.

Nov. 19, 2001 -Enron restates its thi d-quarter earnings and discloses it is trying to restructure a $690
million ebligation that could come die Nov. 27.

Nov. 20, 2001 -Concerns about Enrc 2's ability 10 weather its spiraling financial problems send the
company’s stock down nearly 23% t» its lowest level in nearly 10 years. Officials from both Enron and
Dynegy say the merger was not in trouble.

Nov. 21, 2001 -Enron reaches criici ! agreement to extend $690 million debt payment

Nov. 26, 200] -Enron shares fall anv ther 15% as investors contiqued to doubt that the deal will
completed. Shares finish day at $4.01. “

Nov. 28, 200! «Dynegy backs out o” deal after Enron's credit rating is downgraded to junk bond status;
analysts say a bankruptcy filing is li <ely. Enron shares plunge below $1 amid the beavicst single-day
wading volume ever for a NYSE or Nasdaq-hsted stock.

Dec. 2, 2001 -Enron files for Chaptec 1] bankruptcy protection; sues Dynegy fer wrongful termination
of merger. .

URL for this Article:
hnp llinteractive wsj.com/archive/ratre: ¢.cgi7i¢=BT-CO-2001 1202-CO0301 dym

Copyright D 20 1 Dow Jones & Company, Inc. All Rights Reserved.
Printing. distribution, and use of this m2 .erial is governed by your Subscription Agreement and copyright laws.

For information about subseribing, go te Attp:/'wsj.com

02252

vet tieve.czi?id=BT-CO-20611202-000201 djmi&iemplaie=.,. 12'3/01

01300000000861


Carleton, Norman

From: Carleton, Norman

Sent: Wednesday, November 21, 2001 1:22 PM

To: Lori Sanatamorena (E-mail)

Subject: FW: Bloomberg: Enron Gets Extension on $690 Min Note Due Next Week (Update)
~-~-Original Message--—

From: Carleton, Norman

Sent: Wednesday, November 21, 2001 1:14 PM

Tor Roseboro, Brian; Bair, Shela; Gross, Jared; Wiedman, Mark; Cetina, Jil; Sharer, James; Petrangel, Fred; Berardi, Steve; Whaley,

Jean; Nickoloff, Peter; Schultheiss, Heidlynine; Novey, Michael; Hammer, Viva; Eichner, Matthew; Bitsberger, Timothy
Subject: Bloomberg: Enron Gats Extension on $690 Min Note Due Next Week (Updatel)
121 12:38

Enron Gets Extension on $690 Min Note Due Next Week (Update1)
By Mark Johnson

Houston, Nov. 21 (Bloomberg) — Enron Corp., whose shares had dropped 92 percent this year amid a financial crisis, said
lenders extended to mid-December the payment date on a $690 million note due next week,

Enron, which agreed to be bought out by rival energy trader Dynegy Inc. in a transaction now valued at more than $23
billion, said earlier this week a drop in its credit rating may force it to repay the $690 million note. The repayment would
strain cash reserves Enron needs to back its trading operations, investors and analysts said.

The Houston-based company didn't say in its releese who holds the note, which is owed by an affiliated partnership that
owns Brazilian netural-gas assets and was backed by Enron

The note is held by a group of banks led by the Citibank unit of Citigroup Inc., Standard & Poor's said in a press release
yesterday.

Enron also is in discussions with other lenders on a restructuring of its debt, the company said in a statement distributed by
PR Newswire.

“We believe the interests of Chase and Enron's cther primary lenders are aligned in this restructuring effort,” James Lee,
vice president of JP Morgan Chase & Co., said in the Enron statement. "We will work with Enron and its other primary
lenders to develop a plan to strengthen Enron's financial position up to and through its merger with Dynegy.~ Morgan has
been advising Enron on its merger with Dynegy

Enron said yesterday it may have to pay $9.15 billion in debt due by 2003, suggesting the company may run out of cash
before the merger closes. Dynegy has said the merger shoukd close before the end of the third quarter of 2002.

Enron said in a regulatory filing that it has less than §2 billion in cash or credit lines.

Shares of Enron, the most active stock in U.S. trading, fell $1.79, or 23 percent, to $5.20 in midday trading. Before the
announcement that it had renegotiated the $690 million note, its shares had fallen as much as 42.78 percent, the lowest
level in more than a decade.

Dynegy fell $2.50, or 6 percent, to $39.20. Shares of ChevronTexaco Corp., which owns 26 percent of Dynegy, rose 49
cents to $87.02

03031

01300000001641


Carleton, Norman

From: Carleton, Norman
Sent: Tuesday, June 19, 2001 2:42 PM
To: Annette Nazareth (E-mail); Belinda Blaine (E-mail);

b Colby toy (Em mal} Bol Bob Zwirb (E-mail);
‘David Wall’; ‘Diane Virzera’, Eichner, Matthew, mail}, Ere Hirschnom (E-
mail); Hammer, Viva; John Polise (E-mail); ‘ve reraoeli Katey jick (E-mail); Kevin

Erickson (E-mail); Kurt Wilhelm (E-mail); tamorena E-mail), “Miguel

Nickoloff, Peter; , Michael; Pat Parkinson (E-mail); ‘Pat ; Schultheiss, Heideynne
Ce: rose, Jared; Ellett, fartha; Sutton, Gary; Gabilondo, Jose; DeMarco, Edward; Hughes,
Subject: FW: Suggested Interviewees

==--- Original Message-~-~~--

From: Zwirb, Robert S$. [mailto-bzwirbecPT¢.gov]
Sent: Tuesday, June 19, 2001 2:35 PM

To: 'Norman,Carleton@do.treas.gov'

Subject: Suggested Interviewees

Here is our list of organizations/individuals that we propose to interview
for the retail swaps study;

National Grain Trade Council

Enron

FIA

Managed Funds Assn

Refco

Bob MacKay (former chief of staff at CFTC}

Tracking: Recipeent Delivery Read
Annette Nazarem (E-mail)
Belinda Blaine (E-mail)
Bob Colby (E-mail)
Bob 2wirh (E-mail)
‘David Wall
‘Diane Virzera’
Eichner, Matthew Delivered: 6/1801 242 PM Read: 619801 4:06 PM
Elizabeth Fox (E-mat)
Eric Hirschhorn (E-1asil)
Hammer, Vive Delivered: @1901 242 PM Read: 6/2001 1:54 PM
John Polise {E-mail}
‘Joyos Hansev
Kathryn Olek (E-mail)
Kevin Erickson (E-mail)
Kurt Wilhelnn (E-mail)
Loti Sanatamorene (E-mail)
‘Miguel Browne"
Nickolof, Peter Delivered: 619101 242 PM Read: 619/01 2:45 PM
Novey, Micha! Delivered: 6/1901 242 PM Read: 619/01 5:04 PM
Pat Parkinson (E-mail)
“Pat White”
‘Schultheiss, Heiditynne Delivered: 619/01 2:42 PM Read: 6/1801 2:42 PM
Gross, Jared Delivered: 6/19/01 2:42 PM Read: 6/1901 2:42 PM
Ellett, Martha Detivered: 619/01 2:42 PM Read: 6/21/01 9:34 AM
Sutton, Gary Detvered: 6/19/01 2:42 PM Read: 7/2/01 9:04 AM
Gabliondo, Jose Datvered: 6119/01 2:42 PM Read: 6/18/01 3:00 PM
DeMarco, Edward Datvered: 619/01 2:42 PM Read: 6/1901 4:10 PM
Hughes, Gerry Delivered: 6/19/01 2:42 PM

: 02979

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Testimony of Richard L. Trumka

House Financial Services Committee

December 12, 2001

Page 10

whose advice comes with a price tag beyond that of the average 401(k) participant, you

would have heard a different story.

As late as October, Salomon Smith Barney, whose parent Citigroup is one of the largest
creditors of Enron and a provider of investment banking services, rated Enron a “buy”
until October 26, then it went to “neutral” where it remained until the company filed
Chapter 11.'* Lehman Brothers, who stood to eam a large advisory fee if the Dynegy
deal closed, rated Enron as a strong buy right through to the end; Lehman Brothers then
abruptly dropped coverage of Enron after it filed Chapter 11, stating that the “filing had
complicated [the] outlook for [Enron] stock,”19 Out of thirteen analysts that covered
Enron in October, according to Forbes Magazine, eleven were bullish.20 But among
eight independent investment s&wsletters tracked by Forbes, by August, when Enron
CEO Skilling mysteriously resigned, four were already bearish and two more went

bearish by October,2!

Finally, the last link that failed was the active money managers. And here again
investors faced conflicts of interest, including the same conflicts that compromised
analysts, But the most glaring apparent conflict is the case of Alliance Capital, a major
manager of worker pension fund assets and its link to Enron through Enron board
member Frank Savage, a former senior executive and board member of Alliance, In the
second quarter of 2001, while Mr. Savage was an executive of Alliance, Alliance Capital

increased its Enron holdings by 71 percent to become the largest Enron shareholder,

02412

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Carleton, Norman

——
From: ‘Schultheiss, Heidilynne

Sent: Monday, February 26, 2001 9:52 AM

To: Carleton, Norman, Nickoloff, Peter

Subject: Fortune: Is Enron Overpriced?

There are three parts to this interesting article on Enron; you have to click to load
parts 2 and 3.

http: //wew. fortune. com/fortune/2001/03/05/enr. html

‘ 02478

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Page 2 of 2

On a conference call, Mr. Skilling said he could not "stress enough that this has nothing to do with Enron." He added
that “the reasons for leaving the business are personal, but I'd just as soon keep that private."

Mr. Skilling, who is divorced, has joint custody of three teenage children — a daughter, 17, and two sons, 14 and 11 —
with his ex-wife. Mr, Skilling, who will leave the board but will serve as a consultant to the company, will not receive
any severance package because his departure is voluntary, Mr. Lay said.

Since May 2000, Mr. Skilling has sold at least 450,000 Enron shares worth at least $33 million, according to Securities
and Exchange Commission filings. He still owns about 1.1 million shares, the filings show.

"Absolutely no accounting issue,” Mr. Lay told analysts, "no trading issue, no reserve issue, no previously unknown
problem issues" are behind the departure, There will be "no change in the performance or outlook of the company going
forward," he added.

He also said the company was on track to meet analysts’ earnings expectations, which are about $1.80 a share this year
and $2.15 next year.

On the call, Mr, Skilling said that "in general there have been a lot of issues" that have buffeted the company this year,
but he said that he believed Enron had already surmounted most of them. "Now is the time” to step down, he said,
“because I think we've got a lot of these things behind us."

Nonetheless, the move jolted analysts, who, despite the stock's recent slide and the company’s other problems, saw Mr.
Skilling as the unquestioncd leader to follow Mr. Lay.

In after-hours trading, shares of Enron fell about 8 percent, to $39.55. That fall follows a plunge of almost 50 percent
since January in the stock, which had closed in regular trading at $42.93, up 78 cents. The news of the executive
changes came after the market closed.

"I'm surprised and I'm stunned," said Philip K. Verleger, an energy economist with the Brattle Group, a consulting firm
in Cambridge, Mass. "Skilling was the guy who executed the growth in the trading business.”

Investors have become increasingly concerned that a surge in new power plant construction will lead to a glut of
electricity within a few years and lower the valuc of Enron's role as a middleman between plant owners and electricity
users. In addition, the company’s efforts to enter the water business have fared poorly, and its broadband trading
operation has become a cash drain.

Mr, Skilling's promotion carly this year came after several crucial Enron executives resigned. These included Rebecca
Mark, who at one time was considered a rival for the top job.

Ms. Mark became chief executive of the Azurix Corporation (news/quote) in 1999 after Enron spun off the company, its
global water business. But its financial performance was disappointing, and Ms. Mark left the company last year. Enron
later agreed to buy back Azurix stock for less than half what public shareholders had paid.

02942

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01300000001551


Derivatives Study Center

political package which, though it might have broad appeal from a lot of
picces in it, would have virtually no impact if you're trying to influence
economic decision-making,” Thomas said. "It would be better if we sat down
and tried to come to a bipartisan agreement on a package that had a
sufficient focus to make a difference."

Other Stimuli

Beyond tax cuts, lawmakers are considering other ways to help boost the
economy in the wake of the terrorist attacks. One proposal under discussion
would be to assist laid-off workers in paying their share of temporary
medical insurance available to them after they are no longer employed.
Republicans also have resumed their push for legislation that would once
again empower the president to negotiate trade agreements that Congress
would have to accept or reject quickly and without amendment.
Longstanding partisan disagreement on such a measure will make it difficult
to schedule quick action but Republican leaders say granting Bush such "fast
track" power would give businesses confidence in their international futures
-- as well as building a coalition of nations committed to eradicating
terrorism. (Diplomacy, p. 2191)

Regardless of what the elements of the package are, some economists believe
Congress cannot wait too long to act. "There's not enough appreciation of
what's been lost here in terms of momentum," said Randall Dodd of the
Economic Strategy Institute, a think tank that advocates free-market
policies. "We were in this box two weeks ago, but now we have an excuse to
take actions that might otherwise have seemed rash."

Still, that excuse may not last long. David C, Colander, professor of public
finance and macroeconomics at Princeton University, said the nature of the
coming military conflict will determine how long the current dynamic
remains. "If it's actual wartime, everything is forgotten about balancing
budgets, and the total focus goes elsewhere," Colander said.

However, if it tums out to be a war of sporadic, small-scale engagements
rather than a focused, massive assault, the public's attention could drift
back to domestic concerns, he said, and Washington could return to its old
ways of fighting over budget priorities in the context of surpluses and
deficits. "This clearly is not war as we know it,” Colander said.

Monday, September 24, 2001

WBUR ~ Boston University and National Public Radio
Frozen Assets: The Financial Battle Begins

Page 8 of 14

President Bush issued an executive order today to freeze the U.S. assets of 27 groups and individuals suspected to
support terrorism. Calling the order a “strike on the financial foundation" of terrorists, the President called on financial
institutions around the world to follow suit. If foreign banks did not take similar action, Bush wamed that those banks

may have their U.S, assets frozen.

A financial assault is seen by many as an important component of the war against terrorism, Jeffrey Robinson, author a
two books on money laundering, says the financial war will be difficult, because funding for terrorism does not come

from a rich ex-Saudi millionaire as most people thing -- but from criminal activity and charities.

You can listen to the show, using Real Player, by clicking on the hyperlink Listen below,

V/15/02

02617

01300000001226


Testimony of
Charles L. Hill
Director of Research
Thomson Financial / First Call
before the joint s ion of
the House Subcommittee on
Capital Markets, Insurance, and Government Sponsored Enterprises
and
the House Subcommittee on
Oversight and Investigations
12 October 2001

BROKER ANALYST’S ANALYSIS OF ENRON
Prologue

I welcome the opportunity to again testify in front of the House Pinancial
Services Committee. I believe this committee has been addressing
substantive issues that are important not only to the future health of the
investment community, but important to the general public’s perception of
and confidence in the overall capitalist system.

The excesses associated with,Znron that led to its bankruptcy are more far
reaching than just their impact on Enron.

There is plenty of blame to go around in the mistakes made in the Enron
situation. I am here today to focus on the role of the broker analysts in

this debacle.

In my previous testimony before this committee, I did not tread lightly on
what I thought were some serious problems in analyst behavior that needed

to be remedied.

I am here this morning, however, to say that the analysts to some degree
were more victims rather than culprits in the Enron situation. Not that
they were without blame, particularly in the late stages of the Enron
collapse, but they were not the underlying cause of the excessive rise in
Enron's stock that later proved to be irrational.

The performance of the analysts should be judged on two fronts. ‘The first
is their analysis of Enron's fundamentals, particularly in regard to
earnings. The second is their valuation assessment and recommendations of

Enron stock,

Analysis of Enron Fundamentals by Broker Analysts

02358

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Carleton, Norman

From: Nickoloff, Peter

Sent: Tuesday, December 04, 2001 12:02 PM

To: Carleton, Norman; Schulthelss, Heidilynne
Subject: Some EnronOnline stories from Internetweek.com

in no particular order...
Friday, November 30, 2001, 5:52 PM ET.

UPDATE: EnronOnline Still Trading

By Jade Boyd

While a bankruptcy filing by troubled energy trader Enron Corp. is widely expected, the company
says it continues to trade more than 400 products at its online trading exchange, EnronOnline

An Enron spokesman said Enron traders are stil! actively making trades via EnronOnline in 472
products. Most trades are in core energy products like natural gas and electricity, but Enron also
continues to trade paper and forest products, said company spokesman Eric Thode.

Enron averaged about 5,000 trades per day on its site prior to November. The company conducted
about 1,000 trades Thursday, when only 62 products were sold online, Thode said.

Analysts say traders from other companies aren't establishing new positions with Enron, so virtually
all of Enron's current trade volume represents trades by people who are closing out existing positions
to limit exposure to Enron.

Since Enron did a huge volume of trade online -- about $600 billion since EnronOnline went live in
November 1999 -- it may take weeks for trading to wind down completely, said Peter Fusaro,
president of the energy consulting firm Global Change Associates.

The bigger question is how long Enron can finance its trading operation. Fusaro said a bankruptcy
filing might make it easier for Enron to raise the cash it needs to fund trading operations, but that
won't restore trader confidence in the company.

Since Enron is a party to every trade on its site, either as buyer or seller, it's vital that trading partners
have confidence in Enron's ability to stand behind the deals it makes. Analysts say that confidence is
lacking, and an infusion of cash won't be enough to restore it.

Wednesday, November 28, 2001, 4:15 PM ET.
UPDATE: Enron-Dynegy Deal Collapses; EnronOnline
Temporarily Halts Trading

By Jade Boyd

Dynegy Inc. has cancelled its proposed $8 billion merger offer for fellow energy trader Enron Corp,
Trading on Enron's pioneering exchange, EnronOnline, was halted temporarily today in response to

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01300000000878


Enron Chairman Gave Warning to Bush Officials on Company's Collapse Page 3 of 3
Dynegy Inc. (news/quote), backed out of an $8.4 billion buyout plan late last year.

Just a year ago, stock of Enron, the nation’s largest buyer and seller of natural gas, traded at
$85 per share. Today it is less than $1.

Lay has close ties to Bush and his father, the former president. Lay was a top contributor to the
younger Bush's 2000 presidential campaign.

The company played a key role earlier this year when a White House task force met with

business executives and other interests to fashion a national energy policy. The task force was
headed by Vice President Dick Cheney.

A

On the Net:
http://www.enron.com

http://usdoj.gov

(Copyright 2002 The Aspocisted Pregs | Privacy Information

03011

file:/C:\WINDOWS\Temporary%20Intemet%20Files\OLK303 | \Enron%20Chairman%20Gave%20Waming... 1/16/02

01300000001621


Jonathan G, Katz
December 12, 2001
Page 6

client, Commentators have noted that an auditor that views a registrant's management as
its client is less likely to challenge that management in the context of an audit.

Similarly, investors would be better informed about the extent of the audit
committee's involvement if the Commission required disclosure regarding audit
committee pre-approval of consulting arrangements, The Panel on Audit Effectiveness
organized by the Public Oversight Board, which was convened on the request of the
Commission and issued its report last year, recommended that audit committees pre-
approve non-audit services that exceed a threshold arrived at by the committee.
Disclosure will assist investors in determining whether a registrant has implemented that
recommendation.”

We urge the Commission to consider taking the steps proposed herein as soon as
practicable. It is vital, we think, in light of recent events, to assure the investing public of
the integrity and reliability of the audited financial statements of U.S. public companies.
We believe that the reforms we propose to the auditor independence and audit committee
disclosure rules can be an important step in that direction.

If you have any questions regarding this petition, please do not hesitate to contact
Damon Silvers at 202-637-3953. We look forward to discussing this with you further.

. Very truly yours,

Richard Trumka
Secretary-Treasurer

* The Panel on Audit Effectiveness Report and Recommendations, sec 5.30 (Aug. 31, 2000),

02387

01300000000996


the platform. Enron wouldn't reveal specifics about pricing, which varies based on the length of contract,
number and size of prospective deals and the number of potential bidders.

Centerpiece Of E-biz

For the time being, energy trading--and trading in financial products related to those trades--will remain the
centerpiece of Enron's online business. Forrester estimates that notional trading for U.S. natural gas futures and
options contracts amounted to about 3.6 times the total quantity of physical trades and 12 times the amount of
physical delivery in 2000,

"Electricity in the U.S. is a $300 billion market, but the velocity at which that $300 million is being tumed over
is increasing,” says Bob Christensen, an cnergy industry analyst with First Albany Corp, "The same power--and
all the fuels related to it-can chum and change hands a dozen times a day.”

As other companies convert their trading systems to online models, Enron hopes to sell its expertise in this area,
(Enron says its own online-cnabled back-end systems reduced its marginal cost per transaction by 75 percent in
2000.)

Enron stands to gain twice: first, by providing the services itself, and second, by further increasing online trade
volumes in a market where it has a clear ownership stake.

, 02276

01300000000885


oad

@ iplent eli ery
Read 111301225 PM

Deliweree 1113011251 PM

Anderson, Helen
Ludwick, CM Delivered 11 1301 1251 PM Read 1173011 12PM
Whaley, Jean Delivered 1113011251 PM Read 1113011252 PM

03050

01300000001660


Derivatives Study Center Page 8 of 14

political package which, though it might have broad appcal from a lot of
pieces in it, would have virtually no impact if you're trying to influence
economic decision-making,” Thomas said. "It would be better if we sat down
and tried to come to a bipartisan agreement on a package that had a
sufficient focus to make a difference."

Other Stimuli

Beyond tax cuts, lawmakers are considering other ways to help boost the
economy in the wake of the terrorist attacks. One proposal under discussion
would be to assist laid-off workers in paying their share of temporary
medical insurance available to them after they are no longer employed.
Republicans also have resumed their push for legislation that would once
again empower the president to negotiate trade agreements that Congress
would have to accept or reject quickly and without amendment.
Longstanding partisan disagreement on such a measure will make it difficult
to schedule quick action but Republican leaders say granting Bush such “fast
track” power would give businesses confidence in their international futures
_- as well as building a coalition of nations committed to eradicating
terrorism. (Diplomacy, p. 2191)

Regardless of what the elements of the package are, some economists believe
Congress cannot wait too long to act, "There's not enough appreciation of
what's been Jost here in terms of momentum," said Randall Dodd of the
Economic Strategy Institute, a think tank that advocates free-market
policies, "We were in this box two weeks ago, but now we have an excuse to
take actions that might otherwise have scemed rash,”

Still, that excuse may not last long. David C. Colander, professor of public
finance and macroeconomics at Princeton University, said the nature of the
coming military conflict will determine how long the current dynamic
remains. “If it's actual wartime, everything is forgotten about balancing
budgets, and the total focus goes elsewhere," Colander said.

However, if it turns out to be a war of sporadic, small-scale engagements
rather than a focused, massive assault, the public's attention could drift
back to domestic concerns, he said, and Washington could return to its old
ways of fighting over budget priorities in the context of surpluses and
deficits. "This clearly is not war as we know it,” Colander said.

Monday, September 24, 2001

WBUR — Boston University and National Public Radio
Frozen Assets: The Financial Battle Begins

President Bush issued an executive order today to freeze the U.S. assets of 27 groups and individuals suspected to
support terrorism. Calling the order a "strike on the financial foundation" of terrorists, the President called on financial
institutions around the world to follow suit. If foreign banks did not take similar action, Bush warned that those banks
may have their U.S, assets frozen.

A financial assault is seen by many as an important component of the war against terrorism. Jeffrey Robinson, author a
two books on money laundering, says the financial war will be difficult, because funding for terrorism does not come
from a rich cx-Saudi millionaire as most people thing -- but from criminal activity and charities.

You can listen to the show, using Real Player, by clicking on the hyperlink Listen below. r@) 2 6 0 3
1/15/02

01300000001212


involve the most complex, subjective or ambiguous decisions or assessments. Investors should
be told, concisely and clearly, how these principles are applied, as well as information about the
range of possible effects in differing applications of these principles.

— Private-sector standard setting that responds expeditiously, concisely and clearly to current and
immediate needs. A lengthy agenda that achieves Its goals too slowly, or not st al, like good
intentions, paves a road to the wrong locale,

— An environment that encourages public companies and auditors to seek our guidance in
advance. The SEC must be, and must appear to be, a constructive resource and hospitable
sounding board for difficul and complex accounting issues before mistakes are made. We will
always need, and utilize, after-the-fact enforcement, and we can, and will, improve our review of
financial reports. But by now it is painfully clear that preventing problems is infinitely superior, and
far Jess damaging, than acting afler Investor funds, retirement accounts or le savings are
dissipated.

— An effective and transparent system of self-regulation for the accounting profession, subject to
our rigorous, but non-duplicative, oversight. As the major accounting firm CEOs and the American
Institute of Certified Public Accountants recently proposed, the profession, in concert with us,
must provide assurances of comprehensive and effective self-regulation, including monitoring
adherence to professional and ethical standards, and meaningfully disciplining firms or individuals
falling short of those standards. Such a systern has costs, but those who benefit from the system
should help absorb them.

~ More meaningful investor protection by audit committees. Audit committees must be proactive,
not merely reactive, to ensure the quality and integrity of corporate financial reports. Especially
critical is the need to improve interaction between audit committee members and senior
management and outside auditors. Audit committees must understand why critical accounting
principles were chosen, how they were applied, and have a basis for believing the end result fairly
Presents their company’s actual status.

~ Analyst recommendations predicated on financial data they have deciphered and interpreted.
Analysts and their employers should eschew expressing views without an adequate data
foundation, or when confused by company presentations.

Our system can be improved and modemized. In a crisis, some seek easy answers to difficult
Problems by pointing fingers. But true reform requires rigorous analysis, respect for competing
views, and compromise and statesmanship by all concemed. We are up to the task, but only if we
‘are able to tap our best minds to produce our most creative solutions, and only if we are able to
discuss these issues openly and honestly. We are committed to that end, and we seek
Participation from everyone with an interest in our capital markets. Together, in partnership, we
can make a difference. That is our vision, and our mission.

Mr, Pitt is chairman of the Securities and Exchange Commission.
Copyright © 2000 Dow Jones & Company, inc, All Rights Reserved.

22

02348

01300000000957


Carleton, Norman

From: Carleton, Norman
Gent: iurace , January 10, 2002 12:16 PM
‘0: ina,
Subject: FW: Bloomberg Column: Enron Broadband Trading Losses Grew as Company Touted
Success
~-~-Original Message—-—-
From: Carleton, Norman
Sent: ‘Thursday, January 10, 2002 12:14 PM
To: Barr, Sheila; Berard, Steve; Bitsberger, Timothy; Eichner, Matthew; Gatllondo, Jose; Gross, Jared; arenes, Viva; Lort
Sanatemerera (Fai Nickoloff, Peter; Novey, Michael; Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heclynne; Whaley, Jean;
Subject: Bloomberg Column: Enran Broadband Trading Losses Grew as Company Touted Success
onto 10:31
Enron Broadband Trading Losses Grew as Company Touted Success
By Loren Steffy

Houston, Jan. 10 (Bloomberg) — Dixie Yeck landed Enron Corp.'s first contract to trade space on high-speed phone lines,
‘@ milestone in the company's plan to tum fiber-optic bandwidth into a commodity to be bought and sold like electricity and
natural gas.

Her bosses told Yeck her December 1999 agreement with Global Crossing Ltd. was a step toward realizing Enron’s goal of
dominating a market that company executives projected would grow to $500 billion in 2005 because of the explosion of the
Internet.

“Enron wanted to be the biggest buyer and seller of bandwidth," sai Yeck, 36, who was in charge of finding
telecommunications companies in the midwestern U.S. that wanted to sell network capacity and businesses that wanted to

buy it. “They got you so pumped up, you just had to believe them.”

Yeck's dream faded in less than a year as Internet companies went out of business and those that remained had more
fiber-optic network space than they needed. Yeck said many of her 1,500 co- workers at Enron Broadband Services had
50 little to do that they spent hours each day surfing the Internet.

“The whole market had started to dry up," Yeck said. “I knew EBS was going under.”

Yeck said she listened in disbelief in January 2001 to an Internet broadcast in which Enron executives told investors the
company's broadband business was booming. Chairman Kenneth Lay said the division had reached the ‘‘critical mass” it
needed. Then-President Jeffrey Skilling touted "enormous growth prospects” for the business. The broadband civision, he
said in an interview two months later, was worth $36 billion, or $40 a share, at a time when Enron's stock traded at $70.

My experience did not match what was being presented," said Yeck, who quit ner job in October, less than two months
before Enron fied the largest Chapter 11 bankruptcy in U.S. history.

Suspect Profits
Even as market prices for bandwidth tumbled in 2000, Enron Broadband recorded gains on its income statement from

equity investments in other companies, derivative instruments and sales of fiber-optic cable among Enron-affiliated
partnerships. Gains from those sales accounted for 20 percent of the division's pretax profit last year.

“There's something not right about that," said Ron Banaszek, director of bandwidth trading for Tradition Financial
Services, an over-the-counter commodities broker in Stamford, Connecticut. ‘Prices have been eroding. If there was that
kind of money to be made, | think other (broadband) companies would be making a lot of money right now.”

Surge of Losses

When Enron restated earnings for the past four and a half years in November, the extent of the financial distortions
became clear. The broadband division's $60 million year-end toss ballooned to $357 million by the third quarter of 2001,

02989

01300000001598


Carleton, Norman

— —_——_—_____ — —
From: Hamener, Viva
Sent: Wednesday, November 21, 2001 10:08 AM
To: Carleton, Norman
Subject: RE: Dow Jones Newswires; Energy Cos Limit Business With Enron After 10Q -Traders

| missed the meeting as you know because of a lyons meeting. How did it go?

ve=Oniginal Message-—-
From: Carleton, Norman
Sent: Tuesday, November 20, 2001 5:06 PM
To: Rosebaro, Brian; Bar, Shella; Wiedman, Mark; Gross, Jared; Cetina, Jif; Sharer, James; Nickaloff, Peter; Schulthelss, Heidilynine;

Berarcl, Steve; Pietrangeli, Fred; Whaley, Jean; Lori Sanatamarens (E-mail); Navey, Michael; Hamner, Viva; Eichrer,
Matthew; Gabllondo, Jose
‘Subject: Dow Jones Newswires: Energy Cos Limit Business With Enron After 10Q -Traders

November 20, 2001

Energy Cos Limit Business With Enron After 10Q -Traders

Dow Jones Newswires

By Mark Golden
Of DOW JONES NEWSWIRES

NEW YORK -- Many energy trading gomnpantes were unwilling to sell power and natural gas for
next day delivery to Enron Corp, (ENE) Tuesday mmoming, 2 result of heightened credit concerns
following the release of Enron's quarterly financial report Monday, traders and other sources said.

For weeks, companies have limited both buying and selling with Enron for future deliveries. But

for the first time since Enron's troubles began a month ago, energy companies weren't selling to
Enron in the spot markets for fear that Enron might not be able to pay its bills as soon as next
month.

“It's pretty well accepted in the industry that people are staying away for now," said Charlie
Sanchez, energy market manager for Gelber & Associates in Houston.

Traders at all of the major companies contacted said they couldn't sell to Enron Tuesday
morning. Several spokespeople for energy companies confirmed the situation, but declined to say
$0 on the record.

“Nobody will take Enron,” one western electricity broker said. After struggling, however, that
broker eventually found a utility that was willing to sell to Enron Tuesday morning.

Calpine, a prominent independent power producer and trader, said it was willing to sell power to
nron.

“We continue to sell power to Enron and are monitoring the situation closely," spokeswoman
Catherine Potter said,

The situation Tuesday morning was fluid, One utility that refused to sell to Enron in the morning

was willing to do so in the afternoon, @ person at the company said. That company's trading,
however, was still limited to the spot markets.
1 02581

: 01300000001190


says.
~- JADE BOYD <mailto;jcboyd@emp.com>

November 30, 2007

The Internet Didn't Kill Enron

rpreston@cmp.com

"We have a fundamentally better business model.”

That's how Jeffrey Skilling, then president of Enron Corp., summarized his company’s startling
ascendancy a year ago, as Enron's revenues were soaring on the wings of its Internet-based trading
model.

It was hard to find fault with Enron's strategy of brokering energy and other commodities over the
Internet rather than commanding the means of production and distribution. EnronOnline, its year-old
commodity-trading site, already was handling more than $1 billion a day in transactions and yielding
the bulk of the company’s profits. At its peak, Enron sported a market cap of $80 billion, bigger than
all its competitors combined.

Today, Enron has filed for bankruptcy, the status of EnronOnline is touch and go, ENE is a penny
stock and Skilling is out of a job. Last year's Fortune 7 wunderkind, hailed by IntemetWeek and
others as one of the most innovative companies in America, overextended itself to the point of
insolvency.

So was Enron's “better business model" fundamentally flawed? With the benefit of 20/20 hindsight,
what can Internet-inspired companies in every industry learn from Enron's demise?

For one thing, complex Internet marketplaces of the kind Enron assembled are fragile. Enron
prospered on the Net not so much because it had good technology -- though the proprietary
EnronOnline platform is considered leading-edge -- but because online customers trusted the
company to meet its price and delivery promises.

As Skilling told InternetWeek a year ago, “certainty of execution and certainty of fulfillment are the
two things people worry about with commodity products.” Enron, by virtue of its expertise, networked
relationships and reputation, could guarantee those things.

Once it came to light, however, that Enron was playing fast with its financials -- doing off-balance
sheet deals and engaging in other tactics to inflate earnings -- customers (as well as investors and
partners) lost confidence in the company, And Enron came tumbling down.

Furthermore, advantages conferred by superior technology and information-gathering are fleeting.
Competitors learn and mimic and catch up. Barriers to market entry evaporate. Profit margins narrow.

Enron, short of incessant innovation, could never hope to corner Internet market-making, especially
in industries, like telecommunications and paper, that it didn't really understand. In its core energy

‘ 02272

01300000000881


that partnership's financial statements could not be consolidated with Enron's financial
Statements under the accounting rules, In 1997, Chewco bought out Calpers” interest in JEDI
Enron sponsored Chewco's creation as an SPE and had investments in Chewco.

The rules behind what happened are complex, but can be boiled down to this. The accounting
tules dictate, among other things, that unrelated parties must have residual equity equal to at least
3 percent of the fair value of an SPE's assets in order for the SPE to qualify for non-
consolidation. However, there is no prohibition against company employees also being involved
45 investors, provided that various tests were met, including the 3 percent test.

In 1997, we performed audit procedures on the Chewco transaction. The information provided to
our auditors showed that approximately $11.4 million in Chewco had come from a large
international financial institution unrelated to Enron. That equity met the 3 percent residual
equity test. However, we recently learmed that Enron had arranged a separate agreement with that
institution under which cash collateral was provided for half of the residual equity.

What happened?

Very significantly, at the time of our 1997 procedures, the company did not reveal that it had this
agreement with the financial institution. With this separate agreement, the bank had only one-
half of the necessary equity at risk. As a result, Chewco’s financial statements since 1997 were

required to be consolidated with JEDI’s which, in a domino effect, then had to be consolidated in
Enron's financial statements.

111s not clear why the relevant information was not provided to us. We are still looking into that.
On November 2, 2001, we notified Enron’s audit committee of possible illegal acts within the
company, as required under Section 10A of the Securities and Exchange Act.

Now, about the second SPE structure; specifically, a subsidiary of the entity known as LIMI.
This transaction was responsible for about 20 percent -- or $100 million -- of Enron's recent
SPE-related restatement.

In retrospect, we believe LIMI's subsidiary should have been consolidated, I am here today to
tell you candidly that this was the result of an error in judgment, Essentially, this is what
happened:

After our initial review of LIMI in 1999, Enron decided to create a subsidiary within LJM1,
informally referred to as Swap Sub. As a result of this change, the 3 percent test for residual
equity had to be met not only by LJM1, but also by LIMI’s subsidiary, Swap Sub.

02351

01300000000960


Nickoloff, Peter

From: Carleton, Norman
Sent: Friday, December 21, 2001 10:37 AM
To: Cetina, Jill; Bair, Sheila; Berardi, Steve; Bitsberger, Timothy, Eichner, Matthew; Gabilondo,

Jose; Gross, Jared; Hammer, Viva; Lori Senatamorena (E-mail); Nickoloff, Peter; Novey,
Michael; Piatrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Whaley, Jean; Wiedman,
Mark; Bieger, Peter, DeMarco, Edward; Dorsey, Karen; Eliett, Martha; Ellis, Dina; Huffman,
Lucy; Hughes, Gerry; McGivern, Tom; Mcinemey, Roberta; Saladin, Anne; Smith, Amy,
Sutton, Gary; Tishuk, Brian

Subject: DJ: US Congress Fails To Pass Contract Netting Bil

December 21, 2001

US Congress Fails To Pass Contract Netting Bill

Dow Jones Newswires
(This article was originally published Thursday.)

WASHINGTON -- Despite an eleventh-hour appeal from Federal Reserve Chairman Alan Greenspan
and pressure from Wall Street, lawmakers again failed to enact legislation that clarifies corporate
bankruptcy laws by allowing companies to quickly settle outstanding derivatives contracts in the event
of an insolvency.

The once-obscure financial issue gained new prominence and urgency on Capitol Hill as lawmakers
struggled to understand the high-finance finagling that lead to the recent Chapter 11 bankruptcy filing
of energy giant Enron Corp. (ENE).

The measure allows institutions to quickly close outstanding derivatives contracts with bankrupt
trading partners by netting all the losses and gains of individual contracts into one deal.

"Enron underscores the importance of it," said Peggy Peterson, spokeswoman for the House
Financial Services Committee. "The other factor is the recessionary economic climate - the netting
provisions would lower market risk.”

Greenspan recently met with committee Chairman Michael Oxley, R-Ohio, and House Judiciary
Chairman James Sensenbrenner, R-Wis., after Oxley held a bruising hearing on financial
improprieties leading to Enron's demise.

Pressure to pass the measure was already building since the Sept. 11 terrorist attacks shut down
U.S. financial markets and destroyed the Manhattan offices of many Wall Street brokerage houses.

"Congress should not fail to enact netting legislation this year," Greenspan and Treasury Secretary
Paul O'Neill wrote House lawmakers a few weeks after the attacks. “Further delays would
unnecessarily place the financial system at greater risk.”

But Sensenbrenner rebuffed requests from Greenspan, Oxley and House leaders to pass the
legislation apart from the larger bankruptcy bill it was attached.

02965

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country’s 401K regulations and corporate disclosure rules as a result of Enron's bankruptcy. On
Wednesday, the Justice Department announced it would launch a criminal investigation into Enron's
collapse, the largest bankruptcy in the nation’s history.

However, Bush said he didn't meet with Lay personally and he said a full investigation into Enron
was warranted and would take place.

Fleischer maintained that Bush was never involved in the discussions about whether to extend
government assistance to Enron.

Asked if O'Neill or Evans approached Bush about the Enron matter, Fleischer said. "They did not.”

Fleischer also said the two secretaries didn't tell Bush that Enron had approached them until
Thursday morning. He called the fact that Enron's Lay approached the two secretaries nothing
unusual.

"I think it should surprise no one that people in the administration receive phone calls from people
who are either in business or at unions. It happens everyday. | mean, it's not uncommon for people to
receive phone calls from business leaders across the country, from union officials across the country.
That happens as a common occurrence has always taken place," Fleischer said.

"| want to remind you that, communication is not a wrongdoing. What took place here was, they
received phone calls and took no action. The charge has been, did the government take any action?
And the answer form these two officials is no,” Fleischer said.

Fleischer wamed Democrats against seeking to reap political hay from Enron's woes and its ties to
the White House. He called such efforts a “fishing trp" and said it was the sort of investigation the
country tired of in the 1990s.

-By Alex Keto, Dow Jones Newswires; 202-862-9256; Alex.Keto@dowjones.com

Tracking: Recipient Delivery Read
Abdelrazek. Rawan Delivered: 1/1002 5:84 PM Reade 1/1102 10:07 AM

; 02978

01300000001587


December 11, 2001

Jonathan G. Katz

Secretary

USS. Securities and Exchange Commission
450 Fifth Street, N.W.

Washington, DC 20549

Re: Petition for rulemaking
Dear Mr. Katz,

The American Federation of Labor and Congress of Industrial Organizations (the
“AFL-CIO") hereby petitions the Securities and Exchange Commission (the “CommissionTM)
to undertake a rulemaking proceeding to amend Items 40) and 404 of Regulation S-K to
require more proxy statement disclosure regarding conflicts of interest on the part of
directors and director nominees. We believe that recent events at Enron Corporation have
made plain that the existing disclosures are simply inadequate to ensure that shareholders are
informed of all relevant information about director conflicts of interest.

Background

Our system of corporate governance relies heavily on independent directors to act as
vigorous monitors of management behavior and to represent shareholder interests. For
example, a committee of independent directors is often constituted to evaluate potential
transactions or litigation involving a company. Similarly, the tax code requires that incentive
compensation in excess of the $1 million cap on deductibility be awarded by a compensation
committee composed of independent directors. Many institutional investors, following on
that requirement, take compensation committee independence into account when voting on
pay packages and deciding whether to withhold votes from director candidates.

One of the most important functions entrusted to independent directors is oversight of

the financial reporting process, which is of vital importance both to a company’s
shareholders and the markets in general, To that end, listing standards of both the New York

02388

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Derivatives Study Center Page 11 of 14
Mimi Whitefield

If terrorists or their associates tried to manipulate securities markets in the days before the Sept. 11 attacks and profited
as stocks affected by the disaster plummeted, analysts say the money they made has probably already been moved out 0
the country.

The Securities and Exchange Commission is investigating whether some investors were aware of the attacks ahead of
time and used that knowledge to profit in the stock options market, or by short-selling stocks — selling borrowed shares
and buying them back Jater at much lower prices.

The SEC declined to comment Tuesday on the progress of the investigation, referring to a statement issued last week
that said: "We are vigorously pursuing all credible leads but, at this time, we have drawn no conclusion.”

SEC Chairman Harvey I, Pitt is scheduled to testify before the House Financial Services Committee today, however,
and may be questioned about links between those responsible for the terrorist attacks and securities market fluctuations.

The Chicago Board Options Exchange, the world’s largest options market, also is investigating.

Leo Guzman, who heads Guzman & Co,, an investment banking and brokerage firm in Miami, says at first he was
skeptical there was any connection between the terronst attacks and market activity.

But after analyzing unusual options trading involving airline stocks and the stocks of two companies devastated in the
World Trade Center attack, he says the link seems to be more than coincidental,

"There is enough evidence to be very suspicious,” he said. "The options leave a huge trail." The case that terrorists may
have sold stocks short, however, is not nearly as convincing, he said.

In the week before two American Airlines and two United Airlines jets were hijacked and crashed into the Pentagon and
the twin towers of the World Trade Center, traders on the options markets in Philadelphia and Chicago noticed a sudden
surge in the purchase of stock-options contracts that would have gained value if the price of AMR Corp. and UAL
Corp., the parent companies of the two airlines, declined.

Essentially, the terrorists would have been betting on the negative impact of an event only they knew was going to occur
on stock prices.

‘Traders suspicions prompted the SEC probe, which was announced last Wednesday -- two days after the markets
reopened following a four-day hiatus in the wake of the attacks,

By that time, however, terrorists or their associates could have liquidated their positions and wired their profits offshore,
analysts said.

"My suspicion is the money has already left the country,” said Randall Dodd, an economics professor at
American University and head of its Derivatives Study Center,

If there was manipulation of so-called put options —- contracts that give the bolder the right to sell a security at a
specified price (the strike price) by a certain date -- regulators should be able to trace the options trades to the brokers
who placed the orders and ultimately to the customers who submitted them.

But if it turns out an order was submitted by an offshore company or a front company the trail may stop there,
says Dodd. "The bright light of the audit trail can stop quite quickly and disappear into the shadows, especii
one of these tax haven countries is involved," he says.

Absolute banking secrecy that makes the true owners of offshore accounts difficult if not impossible to trace has been
the chief competitive advantage of offshore banking centers. Recently, in the face of international pressure, some

1/15/02 02606

01300000001215


Testimony of Richard L. Trumka

House Financial Services Committee

“December 12, 2001

Page 8

lose Enron and its shareholders over $1 billion.'* The disclosures around these
Partnerships and the loss that suddenly appeared on Enron's balance sheet in October was
the first of a series of increasingly devastating revelations that both recast the company’s

historic performance and completely destroyed the credibility of Enron's management.

How was this allowed to happen? Let's begin with the first line of defense when
management goes bad-- the Board of Directors. At Enron most of the Board was
independent of the company according to the SEC’s requirements. But look another
layer deeper, as we did after the initial revelations, and you find the majority of the
supposedly independent directors were dependent on Enron or its executives-- dependent
on them for political support, dependent on them for investment opportunities—and were
ultimately unsuited to sit on the Audit Committee or the Compensation Committee.

Some of these “independent” directors were actually investing in Enron-sponsored
limited partnerships. Is it any wonde:-that when the crisis began and shareholders needed

desperately to hear from outside directors, all they got was silence?

Then there were the auditors. Arthur Andersen was the company's long-time auditor,
And until its division into a consulting company and an accounting firm, Andersen had
been receiving millions of dollars per year in consulting fees.'* But even on the
accounting side, Andersen marketed a variety of consulting services to Enron, including,
many believe, advising Enron on the structure of the special purpose vehicles. So you

had an audit firm that was dependent on Enron management for higher margin consulting

02410

01300000001019


plays a fundamental role in making our markets the most efficient, liquid, and resilient in
the world.

Transparency enables investors, creditors, and the market to evaluate an entity.
In addition to helping investors make better decisions, transparency increases confidence
in the fairness of the markets, Further, transparency is important to corporate governance
because it enables boards of directors to evaluate management's effectiveness, and to
take carly corrective actions, when necessary, to address deterioration in the financial
condition of companies. Therefore, it is critical that all public companies provide an
understandable, comprehensive and reliable portrayal of their financial condition and
Performance. If the information in financial reports is transparent, then investors and
other users of the information are not surprised by unknown transactions or events.

Investors and creditors expect clear, reliable, consistent, comparable, and
transparent reporting of events as they occur. Accounting standards provide a framework
that is intended to present financial information in a way that facilitates informed
judgments. For financial statements to provide the information that investors and other
decision-makers require, meaningful and consistent accounting standards and comparable
practices are necessary. Companies in like circumstances must apply such standards and
Practices in @ like manner if the information is to be comparable.

The SEC Relies on an Independent Private Sector Standards-Setting Process that Is
Thorough, Open, and Deliberative

While the Commission has the statutory authority to set accounting principles, ?
for over 60 years it has looked to the private sector for leadership in establishing and
improving accounting standards.’ The quality of our accounting standards can be
attributed in large part to the private sector standards-setting process, as overseen by the

: See, e, section 19(a) of the Securities Act of 1933, | SUSC 77s{a), and section 13(6X1) of the
Securities Exchange Act of 1934, 15 USC 78m(bX1)

, Accounting Series Release (ASR) No, 4 (April 1938) and ASR No. 150 (December 1972).
3

02329

01300000000938


Testimony of Richard L. Trumka
House Financial Services Committee
December 12, 2001

Legion spanacand by Rep, Boehner that would remove the ban on conflicts of interest
in the provision of investment advice to 401(k) participants.'? Mr.Boehner's bill would
leave 401(k) participants prey to the same conflicts that have so distorted the analysis of
individual stocks, and as Enron shows, conflicts of interest can truly harm 401(k)
participants’ retirement savings. Similarly, consider how much worse this situation
would be for Enron employees if their Social Security benefits had been invested in
Enron, as they would if the privatization advocates had had their way.

Now some may ask, don't people gain and lose money in the markets every day-- isn't the
Enron story just a particularly dramatic example of the dynamics of risk and return, Our
answer, as stewards of worker capital, is emphatically no-- this is not how the financial
markets should work. This is not a story of risk or of ignorance. It is a story of conflicts
of interest, of duties breached and duties ignored, of loyalty betrayed. This is a story of
vital information whose disclosure might have saved the company being withheld until it
was too late. It is @ story of people so shameless and greedy that literally as the
bankruptcy papers were being drawn up they were still passing what remained of the

firm's cash out to themselves--$55 million on the last working day before they filed for

Chapter 11."
Now obviously a lot of people have sued in court alleging some of these things. In the

end the facts, many of which today are murky, will be sorted out. But even today certain

things are clear,

02371

01300000000980


Dorgan noted that Lay, Enron's chairman and chief executive, has agreed to testify at a
future hearing. Dorgan also said the committee will invite Skilling, Enron's former chief
executive, and Andrew Fastow, Enron's former chief financial officer, to testify at the
same hearing.

"Was this just bad luck, incompetence and greed, or were there some criminal or illegal
actions, as has been suggested by the accounting firm that reviewed Enron's books?"
Dorgan said.

02167

01300000000776


at 249 7 erened Ure wily cot fi Ue. Le glee ne
merchants such as Enron. i also worked ‘with the Commodity Futures Trading Commission - -
then chaired by Wendy Gramm -- for a regulatory exemption for futures trading in energy
derivatives, which later became Enron's most lucrative business. Soon afier Gramm stepped
down in 1993, she was appointed to Enron's board.

Independent sources knowledgeable about these dealings, however, said Enron was not the main
interested party, They said the lead was taken by several major oil companies, including British
Petroleum Co. and Phillips Petroleum Co., which were concerned about the effect of CFTC
regulation on their offshore trading in crude oi] contracts. Wendy Gramm, an apostle of free
markets, needed little convincing, the sources said.

That same year, Lay served as chairman of the committee organizing the Republican National
Convention in Houston. Hedging its bets, Enron made a major contribution to a "street fair" in
honor of Sen. John Breaux (D-La.), a key energy policymaker, at the Democratic convention.
Key orders by FERC in 1996 also supported Enron's transformation into a freewheeling trader of
gas, electricity and more exotic products, such as telecommunications services and sulfur-
dioxide emissions credits. .

The new rules ensured that Enron and other merchant companies could buy electricity from
independent power plants and sell it to distant customers, using transmission lines borrowed
from utility companies.

Even Enron's harshest critics credit Lay with putting mew issues -- such as electricity
deregulation -- on the Washington agenda. Lay,a former Interior Department official with a PhD
in economics, became "the ambassador" for deregulation, one former employee said,

Throughout the 1990s, Enron's agenda was opposed by coal-burning utilities, especially ones in
the Southeast, which viewed the emerging wholesale electricity market as a threat to their turf.
Many of these, such as Atlanta-based Southern Co., had impressive political funding and
connections of their own.

But with the explosive growth of Enron and the GOP takeover of Congress in 1995, the
company’s sofi-money donations -- unregulated and unlimited gifts to political parties and
organizations -- jumped sharply. They went from about $136,000 in the 1993-94 election cycle.
to $687,000 in 1996 and $1.7 million in 2000, according to the Center for Responsive Politics.

Frustrated by Washington

For all its connections, sources say, Enron often found Washington frustratingly slowand
unreliable.

The company placed a substantial bet on federal support for limits on the greenhouse gases
causing global warming. Enron officials hoped to exploit a new market in industry for carbon-

emissions credits, similar to the one that developed for sulphur credits after clean-air legislation
was enacted in 1990.

02160

01300000000769


form of credit guarantee one transaction at a time.
Dynegy didn't return phone calls on the matter.
-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com

(John Edmiston in Houston, Kristen McNamara in New York and Jon Kamp in Chicago
contributed to this article.)

Reached later, Dynegy made clear it wouldn't take any extraordinary measures to support Enron
in the market.

“We will operate as two separate companies until the merger is completed,” Dynegy spokesman
John Sousa said. "We have to act independently.”

Mirant Corp. (MIR), a major trader of North American power and gas, has trimmed its business
with Enron,

“We're trading on a very limited basis," said spokesman Chuck Griffin, who wouldn't be more
specific.

Cinergy Corp. (CIN), a mid-sized energy trading company, said it is buying and selling gas and
power with Enron.

-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com

(John Edmiston in Houston, Kristen McNamara in New York and Jon Kamp in Chicago
contributed to this article.)

a 02583

01300000001192


will not be able to provide any specific information about those investigations.
Please phrase your questions accordingly.

On the third panel, we will hear from the chief executive of Arthur Andersen, which
serves as Enron's auditor, We welcome back Chuck Hill to the Committee, to
discuss the performance of Wall Street research analysts in this matter. And finally,
we will hear from the AFL-CIO on the impact to investors.

Unfortunately, Enron's CEO, Kenneth Lay, was not able to testify before the
Committee here today. I want to assure the members of the Committee, as well as
the public, that I am confident that Mr. Lay, and Enron, will provide answers to us
and to the public as the Committee continues its investigation into this matter.

I look forward to the testimony.

02326

01300000000935


Derivatives Study Center

shift in political rhetoric on Capitol Hill. Republicans and Democrats —

who were hurling accusations of fiscal mismanagement at each other until the
moment the airliners struck the World Trade Center and Pentagon — have cast
that rhetoric aside.

"The definition of how much is: enough to get America going again," the
president declared Sept. 19, when he was asked how much he was willing to
spend of the surplus revenue once dedicated to the Social Security trust

funds -- the so-called lockbox. (Background, CQ Weekly, pp. 2126, 2050)
"The leaders from the Congress are very reasonable, and they are mindful
about government money as well as anybody else," Bush said, with the top
Republicans and Democrats from the House and Senate seated beside him in the
Oval Office. “But we are dedicated -- we are dedicated to saying to the
American people, this is an emergency the likes of which we have not seen in
a long time in this country, and this government will come together and deal
with it.”

The next day, after members of the House Ways and Means Committee met in
private with several economists to discuss options for economic stimulus
legislation, Chairman Bill Thomas, R-Calif., said “one of the things that

there was general agreement on was the fact that the budget constraints are
probably not a major obstacle in the current environment."

What Can Congress Do?

Participants in the week's discussions said one reason for the lack of
consensus about what taxes to cut next is that there is no clear

understanding yet about the scope of the attacks’ consequences for consumer
confidence, the stock markets and the gross domestic product.

"It's open because there are so many unknowns," Senate Finance Committee
Chairman Max Baucus, D-Mont., said after a Sept. 21 meeting with O'Neill,
Thomas, Finance ranking Republican Charies E. Grassley of lowa and Ways and
Means ranking Democrat Charles B. Rangel of New York.

But the talks nonetheless illustrated the new framework for the federal

budget debate: It is no longer about which party is a more studious guardian

of the shrinking surplus. It is about how best to spend the surplus to

stimulate the economy. That is a change many economists say was a long time
in coming.

"If the economy is slowing down, you want to lean in the direction of
deficits, and until Tuesday, this was clearly not understood on cither side

of the aisle," Frank C. Wykoff, a professor of economics at California's
Pomona College, said in describing the Sept. 11 attack, "Up until now this
bipartisan agrecment on Social Security has essentially becn Hoover
economics, and now they finally woke up and realized you have to stimulate
the economy.”

In the Ways and Means meeting -- to which each party invited three
economists to share their views of the current economic situation and how to
improve it -- participants were said to be split on three key questions:

Should Congress even try to legislate an economic stimulus? If so, should

the package's provisions be permanent or temporary? And should its emphasis
be on long-term or short-term concems?

In a Sept. 17 report, the Congressional Research Service noted that many
1/15/02

Page 5 of 14

02600

01300000001209


I do not believe the fees we received compromised our independence. Obviously, some will
disagree, And I have to deal with the reality of that perception. I am acutely aware that our firm
must restore the public’s trust. I do not have all the answers today. But I can assure you that we
are carefully assessing this issue and will take the steps necessary to reassure you and the public
that our backbone is firm and our judgment is clear.

Lessons for the Future

When a calamity happens, it is absolutely appropriate to ask what everyone involved could have
done to prevent it. By asking the other witnesses and me to testify today, the committee is
working hard, in good faith, to understand the issues involved and to help prevent a recurrence
with another company.

I believe that there is a crisis of confidence in my profession. This is deeply troubling to me, as I
believe it is a concern for all of the profession's leaders and, indeed, all of our professionals.
Real change will be required to regain the public's trust.

Andersen will have to change, and we are working hard to identify the changes that we should
make. .

The accounting profession will have to reform itself. Our system of regulation and discipline will
have to be improved. I discussed some of the issues that the profession faces in an op-ed in the
Wall Street Journal last week, which is attached to my testimony.

Other participants in the financial reporting system will have to do things differently as well -
companies, boards, audit committees, analysts, investment bankers, credit analysts, and others.

We all must work together to give investors more meaningful, relevant and timely, information.

But our work starts with our firm. We are committed to making the changes needed to restore
confidence.

A day does not go by without new information being made available, and 1 would observe that
all of us here today -- and many others who are not here -- have a responsibility to seek out and
evaluate the facts and take needed action. My firm, and I personally as its CEO, will continue to
do our part. I hope that my participation today has been helpful to your efforts.

Thank you.

02357

01300000000966


Good morning Chairman Baker. My name is Richard Trumka, and I am the Secretary-
Treasurer of the AFL-CIO. On behalf of the AFL-CIO and our unions’ 13 million
members, I am grateful to the Financial Services Committee for affording us the
opportunity to express our views on the implications of the collapse of Enron, In
particular I would like at the outset to commend this Committee and Chairman Baker in
particular for his leadership in calling this hearing and his foresight in looking at the issue
of analyst independence last summer. As I will describe below, that issue is a significant

part of what went wrong at Enron.

My purpose in appearing here today is threefold. First I would like to give the committee
same sense of the impact the collapse of Enron has had on workers trying to invest for
their retirement, and on unions and employers trying to help workers achieve retirement
security, Second, | would like to take @ moment or two to talk about why Enron
collapsed, and the links between Enron's collapse and the issues that were already facing
this Congress on the day the Enron disclosures began. Finally, and perhaps most
importantly, there is a clear regulatory agenda that the Securities and Exchange
Commission and the Department of Labor must take up. Today the AFL-CIO has sent
rulemaking petitions to the SEC embodying this agenda of auditor independence and
Board integrity. With this Congress’ support, the relevant regulatory agencies could take
a series of initiatives that would go a long way toward protecting workers’ retirement
security and the investing public from the conflicts of interest that led to the collapse of

Enron.

02366

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Page | of 2
Carleton, Norman

From: Lori.Santarmorena@bpd treas.gov
Sent: Thursday, December 27, 2001 8:13
To: Norman.Carleton@do.treas.gov
Subject: Re:

interesting, OPIC and Ex im Bank at one time issued instruments that were TT&L eligible,

Norman.Carteton@dotress. Gv =r, a Cosragico tress.g0v, Aree Sata vans gov, Soa Baro ras gov. ‘Steve Becardido.reas gov,
Timothy. ‘yoas, Gablondogde. ares Greahca eas gov

12/2001 05:36 PM ‘eae vinaloyt2o reas go.

Decenber 20, 2003

Baran, GB, Bechtel Clain US Insurance On India Project

Dow Jones Nevewires

WASHINGTON -- Enron Corp. (ENS), Qeneral Electric Co. (GB) and Bechtel Corp
(X.BTL) have filed # totsl of mearly $200 million in insurance claims with
the U.8, government for inventment lonnes in India.

Since last week the three companies have individually filed applications
with the Overseas Private Investment Corp. for ‘expropriation compensstionTM
on these investments in Dabhol Power Co., OPIC spokesman Larry Spinelli said
Thureday.

Dabhol Power ig a $2.9 billion power plant and liquefied satural gas, or
LNG, import terminal near Bombay in western India. It's considered the
largest foreign direct investment in India's history.

“We obviously regard this as a very serious developrent,* Spinelli said of
the ingurance clains, "And we are locking te the indian government for
constructive involvement to settle these issues,”

OPIC 40 a government agency that finances U.S. companies’ overseas
investments through ingurance and loans. Im addition te OPIC financing, the
U.S. government io owed $202.5 million for a loan the Export-Ieport mank
made to Dabhol Power.

Work on the 2,184-megawatt Dahbol power plant stopped this year after ite
sole custoner, the Nabarashtra State Electricity Board, declined to psy
earlier-agreed power prices.

Faced with sonpaynent, Enron said tn Acgust tt would consider buyers for ite
controlling 65% interest in the project. Officials from the Bankrupt
Mouaton-based company met last week with Indian lenders and government
officials to discuss ways of disposing of its atake.

G2 and Bechtel each hold # 10% interest in the project. The Maharashtra
State Electricity Board holds the remaining 15%

Two Indian companies, Tata Power Co. (P.TPW) and BEES Ltd. {P.BSx}, have
shown interest in bidding for the Osbhol power plant. Royal Dutch/Shell (85)
and 80 Group Pic (ARG) have shown interest in the Dabhol LNG inport
terminal,

ay caste ie oe coe mee abe a 02002

1/17/02

01300000000610


Jonathan G. Katz
December 12, 2001
Page 5

capacity, Disclosable relationships should be defined to include contributions to the
organization in excess of $10,000 made by the registrant or any executive officer in the last
five years and any other activity undertaken by the registrant or any executive officer that
provides a material benefit to the organization, “Material benefit” should be defined to
include lobbying efforts such as those engaged in by Mr. Lay on behalf of the M.D.
Anderson Cancer Center as well as fundraising activities undertaken by the registrant or any
executive officer on the organization's behalf.

2. Relationships in which the registrant or any executive officer exercises significant
control over an entity in which a director or immediate family member owns an equity
interest or to which a director or immediate family member has extended credit. Significant
control should be defined with reference to the contractual and governance arrangements
between the registrant or executive officer, as the case may be, and the entity. For example,
in most cases, a general partner exercises significant control over a partnership, while a
limited partner may exercise significant control depending on the terms of the partnership
agreement.

It may be necessary to provide that the existence of significant control may depend, in
part, on the overall ownership structure of the entity and not just the stake held by the
registrant or executive officer. For example, the owner of less than a majority of a
corporation's stock may nonetheless exercise significant control if the other stockholders are
numerous and fragmented.

3. Joint ownership by a registrant or executive officer and a director or immediate
family member of any real or personal property.

4. The provision of any professional services, including legal, financial advisory or
medical services, by a director or immediate family member to any executive officer of the
registrant in the last five years.

We understand that in 1998 the Council of Institutional Investors (“CIT”) filed a
petition for rulemaking relating to disclosure of director conflicts of interest and that the
Commission has not responded to that request. Although CII's proposed language is more
general, we believe that our request covers many if not all of the conflicts that were of
concer to CH.

We urge the Commission to take up these important issues immediately. Investor
confidence in the United States capital markets depends in large measure on their
transparency. Full disclosure of director conflicts of interest will improve transparency and
enable investors to assess more accurately the quality of companies’ governance structures.

If you have any questions regarding this petition, please do not hesitate to contact
Damon Silvers on 202-637-3953. We look forward to discussing this with you further.

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Derivatives Study Center Page [2 of 14

offshore banking centers have lifted the veil of secrecy in an effort to combat moncy laundering. Others, however, have
balked.

If terrorists did indeed profiteer from put options, said Guzman, they could have reaped their profits on Sept. 17 —
selling their puts the day the markets reopened. “It was a good time to do it because the market was crashing," he said.

Because options are settled overnight, profiteers could have wired their money offshore the next day, Guzman said.

His theory is that if manipulation of put options did occur, the investors knew their trades would be traceable but
gambled that by the time they were tracked, they would have been paid. "Maybe the trail doesn't matter, if the payoff is
big enough,” Guzman said.

He said the case for that scenario is the most dramatic for American Airlines stock. If, for example, an investor bought
an option at $2.20 on Sept. 10 -- the day before the attacks, that investor would have been able to sell it on Sept. 17 for
$10.80.

On both those days, there are huge spikes in the volume of put options traded. During August, around 150 American
Airlines put options traded each day, During the first week of September the volume was even lower than that, Then on
Sept. 10, the trading volume shot up to 1,535 put contracts, each Tepresenting 100 shares. On Sept. 17, the volume was
1,219 contracts, before falling off sharply in subsequent days.

Guzman said he found a similar, though not as dramatic, spike in trading volume on Sept. 10 for Marsh & McClennan
Cos., an insurance firm with offices in the World Trade Center, and Morgan Stanley Dean Witter, whose WTC offices
also were destroyed, The big upsurge in UAL options trading came on Sept. 6,

"The interesting thing is that this (pattern) happened to several companies in different industries,” Guzman said,

If there was put option manipulation, said Dodd, and the money is already offshore, it should serve as a lesson
for the future,

While the United States has a regulatory environment that permits transactions to be readily traced, he said that’s not
always the case with offshore banking centers, where record-keeping and regulations may be lax.

"The long-term solution is to establish multilateral financial regulatory agreements with other countries," Dodd
said. "In order to bring these transactions into the light, the U.S. needs to support efforts such as the OECD
(Organization for Economic Cooperation and Development) initiative on tax havens that will create proper
record-keeping and reporting requirements."

Wednesday, September 26, 2001

Watchdogs probe unusually high volumes
of pre-attack trades on hotel, airlines stocks

Brock N. Meeks 02 6 2 1

MSNBC

WASHINGTON, Sept. 26 — More evidence of suspicious options trading in the airline and hotel sectors prior to the
Sept. 11 attacks has emerged in a report from an options analysis newsletter. The Chicago Board Options Exchange is
investigating the unusual activity, a CBOE spokesperson confirmed.

THE SECURITIES and Exchange Commission and New York Stock Exchange are also investigating the suspicious
trading activity, according to sources familiar with those investigations, The SEC and NYSE have declined to confirm

1/15/02

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VVVV VV VV VV

compensation system.

During a hurried two-week conference in August -- dubbed the "Steve
Peace death march" for his propensity to keep negotiators at the table late into
the night -- the fi points of the energy law were hashed out,

Legislators entrusted their judgment to Peace and the few colleagues
who worked on the bill. There was an abiding sense by a number of participants
that few members of either house knew what was in the bill or even
understood it. It was passed by both houses of the Legislature unanimously
and signed into law the following month.

"People were grateful to Peace and (former Sen. Diane) Martinez for
taking it on,” said Debra Bowen, D-Los Angeles, the current chair of the Senate
energy committee. "Historically, utilities were a pretty boring topic, and
I think term limite factored into it.*

The law was to end the monopolistic control that utilities held over
both power production and supply by requiring them to sell off their
generators. It set rates artificially high so they could recover money
from bad investments. And it gave them nearly two years to prepare for
competition.

Moreover, residential customers would be granted an immediate 10
percent rate cut.

The system took effect April 1, 1998, and, at first, things seemed to
work well. Soon, though, there were warning signe.

It turned out the residential rate cut was actually going to he
financed with $7.5 billion in bonds that customers had to pay off. So the reduction
in real terms was closer to only 3 percent, not 10 percent.

Then in early 1999, the California Energy Commission, which tracks the
state's supply and demand, was warning of coming supply shortfalls.

Demand was skyrocketing, the agency pointed out in a Senate ene:
committee hearing, and no new significant generation had been built ina
decade. Without more power, California was going to run out. But
construction of new power plants takes at least two years from start to
finish, and the state was already running behind in accommodating the
growth.

Back in the early 19908, however, the energy commission had painted a
far different picture. At that time, California had an oversupply of power,
perhaps as much as 30 percent more than it needed.

There was so much that when the utilities commission set up an suction
for the construction of new facilities in the early 1990s, Edison and San
Diego Gas and Blectric Co. appealed to the Federal Energy Regulatory
Commission to halt the auction, arguing there was already too much
generation in California. The FERC obliged.

"If anybody had told us in 1996, or even in 1998, that we would
experience (such) load increases, we would have said, ‘You're crazy,’ " said D.J.
Smith, a lobbyist for the California Large Energy Consumers Association
and one of the top advocates of deregulation. "Nobody had ever seen load
go up like that in a mature situation."

Still, production figures from Edison Electric Institute, which provide
a crude indicator of demand, show consumption grew by 4 percent in 1996, 3.4
percent in 1997, nearly 5 percent in 1999, and 4 whopping 10 percent this
year.

And surrounding states, including Arizona, Nevada, Oregon and
Washington, began to experience the same demand growth, Since California imported as
much as 25 percent of its power from those states, the amount available
was suddenly reduced by ae much as half.

But considering the long time it takes to build plants, in part because
of public opposition, the warnings were too little, too late. In fact, the
situation remained far off the radar screen of consumers, since most were
still insulated from price spikea by a rate freeze.

Then this summer, things started to spiral out of control.

San Diego was the first region to meet the conditions necessary for
full deregulation, and as hot sumser months added to demand, customers’ bills
suddenly tripled.

The debt load of PG&E and Edison began to balloon -- to what will be an
estimated $11 billion by the end of 2000 -- as they borrowed to pay for
power while being barred from passing that cost on to consumers,

Suddenly, the glow of deregulation had lost ita luster.

It immediately became clear that California's failure to build power
plants as ite rapidly growing economy pushed demand upward was a serious
problem. Increasingly, the state's growing technolegy economy depended on
electricity, and new home construction concentrated in hot areas like
Riverside and San Bernardino counties, where air conditioning is a must.

‘ 02475

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Derivatives Study Center Page 3 of 14

govemment is supposed to do,” said Cornell's Bailey, "But the tax cut also has to be something that will genuinely encourage people to spend. If
it's too exclusive, it's not going provide much relief to the economy in the long term."

Wednesday, September 19, 2001

Newscast: Terrorists may have attempted to profit from a drep in airline stocks after the four hijackings

0920/2001
CBS News: Moming News
(c) Copyright 2001, CBS Worldwide Inc. All Rights Reserved,

SUSAN McGINNIS, anchor: Federal investigators are following a money trail, trying to find out if terrorists profited from stock swings blamed
on the suicide attacks. Sharyl Attkisson reports,

SHARYL ATTKISSON reporting:

Sources tell CBS News that the aftemmoon before the attack, alarm bells were sounding over unusual trading in the US stock options market, an
extraordinary number of trades betting that American Airlines’ stock price would fall. The trades are called ‘puts,’ and they involved at least
450,000 shares of American. But what raised the red flag ts more than 80 percent of the orders were puts, far outnumbering call options, those
betting the stock would rise, Sources say they've never seen that kind of imbalance before. Normally, the numbers are fairly even,

After the terrorist attacks, American Airlines’ stock price obviously did fall,, and according to our sources, that translated into well over $5
million total profit for the person ar persons who bet the stock would fall. Sources tell "60 Minutes” that the initial options were bought through
at least two brokerage firms including, including NFS, a subsidiary of Fidelity, and TD Waterhouse, a discount firm. At least one Wall Street
firm reported suspicions about this activity to the Securities and Exchange Commission shortly after the attack.

‘The same thing happened with United Airlines on the Chicago Board Options Exchange four days before the attack. An extremely imbalanced
number of trades betting United's stock price would fall also transformed into huge profits.

Mr. RANDALL DODD (Economic Strategy Institute); We can directly work backwards from the trade on the floor of the Chicago Boards
Option Exchange. That trader is linked to a brokerage firm. That brokerage firm received the order to buy that put option from cither someone
within their own brokerage fiem speculating or from one of their customers,

ATTKISSON: Now US investigators want to know whether Osama bin Laden was the ultimate inside wader, profiting from a tragedy he's
suspected of masterminding to finance his operation, Authorities are also investigating possibly suspicious trading in Germany, Switzerland,
Ttaly and Japan.

‘The stock trail could stop at the water's edge if the money came from banks in places that don’t cooperate with the US, But insider trading is
always motivated by greed, and a senior Wall Street executive noted it would be ironic if the terrorists’ greed ended up providing one of the best
leads investigators have, Sharyl Attkisson, CBS News, Washington,

Saturday, September 22, 2001

CQ WEEKLY - THE ECONOMIC INITIATIVE
Sept, 22, 2001, Page 2200

A Cautious Start for Stimulus

By Julie Hirschfeld Davis, CQ Staff

The cusp of a war, a swoon in the securities markets and the destruction at
the nation’s financial epicenter have jolted both parties in Congress and
President Bush into rethinking how the federal government should stimulate
an already weak economy.

Greenspan, at right, was among the economists urging the 107th Congress to

take a "go slow" approach to writing legislation designed to stimulate the

economy, He and Securities and Exchange Commission Chairman Harvey Pitt 0 2 5 9 8
1/15/02

01300000001207


ther we aspecis of [tue Excay ease) this romiad os of the savings end “sun soandai, ia Lie
sense that a powerful institution used big money to buy influence and protect itself while
ordinary citizens ended up losing their life savings,” said Fred Wertheimer, president of
Democracy 21, a Washington interest group, referring to a banking controversy in the 1980s.
Enron's ties to Republicans and the present Bush administration were especially close. Lay raised
large sums for George W. Bush's campaign.

Enron, Lay and its employees have contributed $572,350 to him over his career, far more than
any other company, according to the Center for Public Integrity in Washington.

Several top administration officials have been Enron advisers or stockholders. Enron, Lay and
other senior executives contributed $],7 million in soft-money donations to politicians in the
2000 election cycle, two-thirds of it to Republicans, according to the Center for Responsive
Politics.

Republicans clearly are sensitive to the potential political dangers. The National Republican
Senatorial Committee recently returned a $100,000 check collected from Enron in November,
afier deciding that "it was appropriate to give it back," spokesman Dan Allen said. The
Republican Governors Association last week retumed an Enron donation of $60,000.

What was unique about Enron, competitors and allies agree, was a brash and sometimes
counterproductive political style.

Stories of Enron's hardball style are legion. In October 1999, for example, Jeffrey K. Skilling,
then Enron's president, expressed his displeasure at Rep. Joe Barton's position on a deregulation
bill pending in the energy subcommiifee Barton chairs.

The meeting grew "heated and awful," said one person who was present, unti] Barton (R-Tex.), a
usually mild-mannered man who keeps a Bible on his desk, exploded. "Jeffrey Skilling, | may
not have your millions of dollars, but | am not an idiot,” one witness recalled Barton saying. The
meeting ended without Enron getting the changes it wanted. "Skilling did not get Washington,"
the source added.

"In their lobbying, they acted like the 800-pound gorilla they were,” said Christopher Homer, a
Washington lawyer who briefly directed Enron's government relations in 1997. Lay and Skilling
declined interview requests, but Enron officials say they have no Tegrets about their use of
money. “It got us name recognition," company spokesman Mark Palmer said. "Given the
aggregation of our foes, we had to make sure that people knew what our argument was."

Jump-Starting Deregulation

Almost from its start in 1985 as a gas pipeline company, Enron needed help in Washington, and
it got it in a series of actions by Congress and the Federal Energy Regulatory Commission
(FERC) that undermined the traditional monopoly of utility companies over power plants and
transmission lines.

Enron lobbied for several of the initial actions that set the stage for the era of a deregulated
wholesale electricity market.

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01300000000768


Complicated, off-balance sheet transactions were Enron's undoing. Its stock collapsed after a Nov. 8
announcement that the firm had overstated its net income by $569 million over four years.

Creditors are now lining up to collect on the approximately $40 billion in debt owed by Enron.

Of that, roughly $22 billion is on the balance sheet in the form of bank debt, commodity-transaction
financing, bonds and other public securities. The remainder is made up of roughly $7 billion in bonds
and bank debt linked to other assets in special partnerships, as well as an additional $10.7 billion in
“project finance,” a term that typically refers to money lent to build power plants or oil refineries.

-By Dawn Kopecki, Dow Jones Newswires; 202-862-6637; Dawn.Kopecki@dowjones.com

02966

01300000001575


— _ —

From: Carleton, Norman

Sent: Thursday, January 10, 2002 12:15 PM

To: Cetina, Jill

Subject: FW: OJ: Bush: Worried By Lost Pensions In Bankruptcies

-——-Onginal Message——-

From: Carleton, Norman

Sent: ‘Thursday, January 10, 2002 11:55 AM

To: Bar, Sheta; Berardi, Steve; Bitsberger, Timothy; Eichner, Matthew; Gabllonda, Jose; Gross, Jared; Hammer, Viva; Lori
roenmorens (E-mail); Nickolof, Peter; Novey, Michaet; Pietrangell, Fred; Roseboro, Brian; Schulthelss, Hediynne; Whaley, Jean;
Wiedman, Mark

Subject: Di: Bush: Worried By Lost Pensions In Bankruptcies

January 10, 2002

Bush: Worried By Lost Pensions In Bankruptcies

WASHINGTON -- President George W. Bush said Thursday that he wants to see a thorough
investigation into the sudden collapse of Enron (ENE) and has ordered a review of the U.S. laws
goveming pensions.

On other matters, Bush also wamed Iran not to thwart U.S. efforts in the war on terrorism and he
specifically warned Tehran not to harbor "al-Qaida murderers.”

Speaking in a hastily arranged event in the Oval Office, the president made his comments as the
political heat mounted over Enron's collapse, The company and its head, Kenneth Lay, have a record
of making large political contributions to Bush. Bush acknowledged this by calling Lay "a supporter"
Enron has also backed Democratic candidates.

Flanked by some of his top economic advisers, Bush said, “One of the things that we are deeply
concerned about is that there has been a wave of bankruptcies that have caused workers to lose
their pensions and that is deeply troubling to me.”

"So | have asked the secretary of treasury, secretary of labor, secretary of commerce to convene a
working group to analyze pension rules and regulations to look into the effects of the current law on
hard- ing Americans,” Bush said.

Specifically, Bush said the group will look at ways to prevent workers from losing their life savings if
their companies go belly up.

On top of this, Bush said he was asking the Treasury, the Federal Reserve, the Securities and
Exchange Commission and the Commodities Futures and Trading Commission to convene a working
group look at corporate disclosure rules and regulations.

Bush said he was ordering these actions “in light of the most recent bankruptcy, Enron.”

“There needs to be a full review" of the events at Enron, Bush added,

Bush said he was particulary disturbed by reports that workers at Enron who held Enron stock in their
401K plans were prevented from selling their shares as the company collapsed.

‘ 02997

01300000001606


Jonathan G. Katz

December 12, 2001

Page 6
Very truly yours,
Richard Trumka
Secretary-Treasurer

02393

01300000001002


05 ©. 15:45 FAX 202 646 Sigg

awS! som



Carleton, Norman

From: Carleton, Norman

Sent: Tuesday, December 18, 2001 12:13 PM

To: Cetra, Jit

Subject: FW: Bloomberg: Enron Enriched Wail Street Firms, Analysts Ignored Warnings (long story)

Original Message-~~-

From: Carteton, Norman

Sent: Soesser, December 18, 2001 12:12 PM

To: Bakr, Sheila; Berardi, Steve; Btsberper, Timothy; Eichner, Matthew; Gabilondo, Jose; Gross, Jared; Hamner, Veva; Lori
Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael; Pietrangell, Fred; Roseboro, Brian; Schultheiss, Heidlynne; Whaley, Jean;
Wiedman, Mark

Subject: Bioamberg: Enron Enriched Wal Street Firms, Analysts ignored Warnings (lang story)

12698 02:43

Enron Enriched Wall Street Firms, Analysts Ignored Warnings

By Adam Levy

Houston, Dec. 18 (Bloomberg) -- On Tuesday, Oct. 16, Enron Corp. Chief Executive Kenneth Lay delivered a shocker.
Late in a conference call that followed the release of the company’s third-quarter results, Lay said Enron would terminate
one of its several limited partnerships -- and thereby wipe out $1.2 billion of shareholder equity.

"| shuddered when | heard that.” says Gregory Phelps, who invests $1.1 billion in energy and utility stocks at John
Hancock Advisers Inc, and has long avoided Enron. ‘But it didn't seem to make much of an impression on part of the
investment community,”

Over the next few days, reports began piling up on Phelps's desk from the Wall Street analysts who track Enron. Merrill
Lynch & Co., UBS Warburg LLC, Credit Sursse First Boston and Goldman Sachs Group Inc. still rated Enron a “buy.”

Prudential Securities Inc. analyst Carol Coale wrote that she was “dismayed” by management's “disguise” of the $1.2

billion equity reduction, yet she kept intact her “buy” rating and $55 price target on Enron stock, which was then trading at
$33.17.

“Strong Buy’

Richard Gross of Lehman Brothers Holdings Inc. maintained his “strong buy" rating. ““The end of the world is not at
hand,” Gross said. “We think investors should rustle up a little courage and aggressively buy the stock.”

Phelps and other investors say the analysts’ reactions were just another sign of Wall Street's gullibility about Enron.

For more than a year, they say, analysts had ignored red flags ranging from inflated business valuations to large insider
stock sales, to the abrupt resignation of Jeffrey Skilling in August 2001 -- just six months into his tenure as CEO.

As recently as September, Enron was the second most highly rated stock in the Standard & Poor's 500 Index, behind Tyco
International Ltd., according to Thomson Financial/First Call

“Enron is uniquely positioned to be the GE of the new economy,” Donato Eassey, Merrill Lynch's energy stock analyst,
told Bloomberg News in February 2001. “This isn't a management team to bet against Eassey resigned from Merrill in
December.

Support is Obvious

One of the main reasons for all of the support is obvious, say investors: Unt the week before its third- quarter earnings
report in October, Enron was a deal machine that enriched dozens of Wall Street firms through lucrative underwriting
contracts, mergers and acquisitions assignments and derivatives trades.

*You'd be hard-pressed to find a house on the Street that didn't do business with Enron," says Don Coxe, chairman and
chief executive of Harris Investment Management Inc., which in early December held 78,000 Enron shares in the Harris

02999

01300000001608


Testimony of Richard L. Trumka
House Financial Services Committee
December 12, 2001

Page 8

lose Enron and its shareholders over $1 billion.'* The disclosures around these
partnerships and the loss that suddenly appeared on Enron's balance sheet in October was
the first of a series of increasingly devastating revelations that both recast the company's

historic performance and completely destroyed the credibility of Enron's management.

How was this allowed to happen? Let's begin with the first line of defense when
management gocs bad-- the Board of Directors, At Enron most of the Board was
independent of the company according to the SEC’s requirements. But look another
layer deeper, as we did after the initial revelations, and you find the majority of the
supposedly independent directors were dependent on Enron or its executives dependent
on them for political support, dependent on them for investment opportunities—and were
ultimately unsuited to sit on the Audit Committee or the Compensation Committee.

Some of these “independent” directors were actually investing in Enron-sponsored
limited partnerships. Is it any wonde. that when the crisis began and shareholders needed

desperately to hear from outside directors, all they got was silence?

Then there were the auditors. Arthur Andersen was the company’s long-time auditor.
And until its division into a consulting company and an accounting firm, Andersen had
been receiving millions of dollars per year in consulting fees." But even on the
accounting side, Andersen marketed a variety of consulting services to Enron, including,
many believe, advising Enron on the structure of the special purpose vehicles. So you

had an audit firm that was dependent on Enron management for higher margin consulting

02373

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Page 2 of 3

“I think the current business model can easily justify a 25-30 P-E, with the current business model and in the
current market,” Lay said. ‘We can't get that 40-50 P-E back until we get our return on capital investment
up."

Enron enjoyed the higher multiples as recently as March, but then the stock began an extended slump that
saw it lose about half its value.

WHO REPLACES SKILLING?

Though Lay took Skilling's duties over, he told employees that he expected to fill the void Skilling left in the
office of the chairman in the next few days. Skilling, 47, was chief operating officer before Lay handed him
the CEO reins in February, and the COO position has remained unfilled since then.

The executive or executives who assume the Operational role Skilling had will largely be seen as the new
heir or heirs apparent to Lay, 59, Enron earlier said it would increase the office of the chairman, which
previously was occupied by Lay and Skilling, to include Lay and two understudies,

“Certainly, there is a hole in the office of the chairman, and we will be addressing that very soon. | think | told
Some people yesterday that we were looking to do something probably in the next couple of days,” Lay said.

Lay reiterated that the succession will be internal, but did not elaborate on which executives he would
choose.

MANY GLOBAL ASSETS TO GO

The best way to return Enron's stock to its headier levels will be to get a higher return on capital investment,
he said. Enron hopes to glean billions from a sale of low-yield global assets, which it will then pour into high-
return businesses, Lay said.

“The quickest way to do that is to monetize some of these assets," Lay said, ‘“That doesn't mean we're
going to monetize all of them."

He said Enron will still be very active in Europe, Japan, Australia and other countries, and may start working
in developing countries at some point in the future.

Lay took more than a dozen questions from the audience, with topics ranging from work-a-day issues like
how close cubicles will be spaced in Enron's new office building to the issue of what recourse there is for
employees who have stock options that are priced in the $80 range.

While he rebuffed a re-pricing of those options because “stockholders hate that," he did say all employees
would be issued a new round of options that are priced at current levels.

Touching on another recent issue, Lay said Enron was in advanced talks to sell Oregon utility subsidiary
Portland General, which was to be sold to utility Sierra Pacificfor $3.1 billion until regulatory issues scuttled
the deal.

“We have another transaction that is pretty far advanced and it might be a transaction where we would even
maintain some ownership interest in that business for some time. But it's not far enough advanced to talk
about right now," Lay said, not revealing the name of the potential buyer.

Asked if Enron's broadband arm would suffer more layoffs if was not successful by year’s end, Lay said he
thought “the odds of that are very, very small.” Lay said 500 people were taken out of Enron's broadband
operation, with about half being laid off and the rest being redeployed within the company.

vane 02985

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Testimony of Richard L. Trumka

House Financial Services Committee

December 12, 2001

Page 3

in Enron's 401(k) plan.* Enron's contribution to these employees’ retirement security was
to donate stock to their accounts and to encourage employees to put their own savings
into company stock as well. They appear to have done this without even giving their
employees a prospectus, as required under current law.’ The result was that on the eve of
the collapse over half of the assets of Enron’s 401(k) were invested in the company’s

stock, and many individual workers had all of their 40](k) assets in company stock.

Then on October 17, 2001, the same day that the Securities and Exchange Commission
announced it was investigating Enron, the company chose to implement a plan to switch
401(k) administrators, knowing that their decision would freeze employees’ accounts,
leaving them unable to get out as the stock price went into freefall’ Meanwhile the
insiders continued their insider selling, selling that netted a handful of people over $1
billion,’ The blackout continued for three weeks, two weeks longer than the industry
standard for such a change, according to Plan Sponsor magazine.’ Then at the end of
November when the market price of Enron's stock was under $1, Enron placed shares of
stock it had purchased earlier this year into the frozen accounts and changed employees”
accounts $61 per share. The final insult was that as Enron laid off thousands of
employees, management tried to extort waivers of 401-k claims by threatening to
withhold portions of worker severance payments,’ Now Enron employees’ only hope of
recovering the retirement money they entrusted to their own company lies in the hands of
the courts. And frankly, there does not appear to be sufficient assets available to come

anywhere near close to the claims against the company.

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22/05/01 15:45 Fay 202 646 5 7 eee Ved
eee

November 30, 2001

Major Business News

USS. Attorneys Inform Regulators
They Want to Monito: Enron Probe

By MicHAEL SCHROEDER
Stac¥ Reporter of THe Wait S7es67 JOU Sat

WASHINGTON -- Federal prosecutors in two states have told the Securities and Exchange Commussion
that they are interested in monitor ag the agency's investigation into possible accounting fraud at Enron
Corp., as a possible precursor to a separate cTiminal probe, according to = person with knowledge of the

situation

Meanwhile, members of Comgress announced new inquirtes into the company’s activities,

Enron stock's spectacular plunge tut past few weeks has attracted the interest of officisis in New York
and Texas, including the U.S, atto neys' offices in Manhattan and Houston. this person said, Spokesmen
for the U.S. attorneys’ offices dec] _ned to comment.

In late October, Enron disclosed 1) at the SEC had undertaken a forma! investigation into the Houston
energy company's financial dealin zs with partnerships headed by its former chief financial] officer,
Andrew Fastow, i

A formal investigation involves the SEC's enforcement branch going to the five-member commission
and obtaining formal subpoena pe'wer to pursue Its inquiry. A pefson familiar with the SEC probe said
the agency felt it needed subpoeni power to compel the release of information by parties that have done
business with Enron.

Enron's stock price has collapsed rom about $60 a share early in the year to under $1 amid financial
restatements due to improper acce anting and a failed merger with crosstown rival Dynegy Inc.
Shureholder and Enron employee etirement account values have been devastated by the me]tdown.
Criminal authorities are interested to leam if the SEC finds that malfeasance contributed to the share-

price declines.

in 4 pm. composite tading Thurs day on the New York Stock Exchange, Enron was at 36 cents. down
25 cents, of 41%.

Ifa criminal probe were undertakin, it would be handled by one office, mosily likely in Houston.
Enron's hometown. But federal pr rsecutors in Manhattan, who have experience in secunties-fraud cases,
could assert jurisdiction because I'nron's stock trades on the New York Stock Exchange.

Early this year. Enron came undes artack from California politicians and regulators for profiting from
spiking energy prices in that state e

One reason authorities haven't bej,un their own investigations is the fear that a criminal probe might
cause wimesses “to clam up.” saic the person with knowledge of the situation re) 2 2 4 9

bap: finteractive.ws}.com/archive retneve cui ?id=SB 1007087266825656840 djm&templates... 11/3001

1300000000858


Ata Houston investor conference in September 2000, Lay said Enron had completed 90 bandwidth trades. He announced
@ plan to spend as much as $1.95 billion to beef up Enron's fiber network and trading operations in two to three years.

“When tech was in favor, all of Wall Street was pushing them to increase their exposure in broadband,” said Tim
Giviekey. manager of Ghriskey Capital Partners. As a fund manager for Dreyfus Corp. in late 2000, Ghriskey sold 1.55
million Enron shares.

Trading bandwidth proved more difficult than trading netural gas. For starters, Enron faced stiffer competition. When the
company began trading gas futures in 1991, it took years for rivals to follow its lead

Action by Rivals

Two months after Enron completed its first bandwidth trade, Williams Communications announced it was forming a unit to
trade broadband. By the end of 2000, rivals such as Koch Industries Inc, and Dynegy Inc. had set up units to trade
bandwidth

“When Enron revolutionized the gas industry, they were ahead of the game and they made a lot of money," said Kyle
Vann, chief executive of Entergy-Koch LP, a joint venture between Koch and New Orleans utility Entergy Corp. “Then they
took it to the power industry, and they made a lot of money, With bandwidth, once Enron went that way, there were a lot of
other people who did, too.”

Even as more companies began selling bandwidth, consumers and businesses began ordering fewer telecommunications
services. Industry experts estimate that about 20 percent of the world's fiber is being used.

“You have such an incredible surplus of capacity, that there's really not a lot of trading leverage there,” Vann said. “It's
just a big old huge excess."

In March, Enron lost one of its biggest customers. Blockbuster Inc., the world’s largest video-store chain, canceled a 20-
year contract to deliver movies-on-demand over Enron’s network. Blockbuster spokeswoman Karen Raskop? said at the
time that the company “decided there were plenty of other carriers out there that were more sophisticated technically.”

New Counting Method

With contracts drying up, Enron developed a new method for measuring trading volume. At the January investor
conference, Lay said Enron completed 300 “intermediation transactions” the previous year. He never defined the term,
and Yeck had never heard it before. It was a measure that broke broadband contracts down to their smallest components
to create a larger number. Yeck said.

“It made it look like a lot more was happening than there was," she said. "It's like a personal computer maker saying ‘we
sold a milion bytes.’ That's not much, but it sounds like it "a million, wow.”

Banaszek of Traditional Financial Services and other broadband traders and consultants said they aren't familiar with the
term, either.

“It was always very difficult with these guys to get any specifics in terms of their businesses," said Ghriskey, the former
Dreyfus fund manager. “That's one of the reasons we sokd all our stock.”

Few Broadband Trades

At a Houston court hearing on Dec. 7, William Lerach, an attorney for Amalgamated Bank, an Enron shareholder that
wants to freeze profits Enron executives made from stock sales, said his investigation found Enron's broadband unit never
did more than 20 “‘legitimateTM transactions.

Most of Enron's broadband trades were so-called daisy chain deals, with related affitates, Lerach said.

Enron spokesman Mark Palmer said he has no way to find out how many contracts the broadband division had, He said
he thinks intermediation transactions represented “deals where we were either the buyer or seller of some type of
bandwidth commitment in the future.”

Yeck and Kose said they knew of Enron buying and selling broadband contracts at no profit to increase trading volume,
Palmer dismissed such claims as the *'talk of disgruntied former employees.”

; 02991

01300000001600


treatment of an SPE involves more than just sufficient third-party equity. This equity
must be “at risk” from the investor's perspective. If the investor's return is guaranteed or
not “at risk,” the transferor would be required to consolidate the SPE in its financial
statements.

As noted in the Form 8-K filing, Enron has concluded that three previously
unconsolidated SPEs did not qualify for nonconsolidation pursuant to GAAP. Thus,
Enron plans to restate its financial statements to reflect these entities in the consolidated
statements of financial position and results of operations.

The SEC, as noted in its Annual Report to Congress for 2000, has urged the
FASB to continue their efforts to provide consolidation guidance conceming SPEs. The
FASB has announced its intention to concentrate on developing guidance for dealing with
several consolidation issues that would resolve many problems encountered in present
practice, including issues related to special-purpose entities. We will continue to urge the
FASB to address SPE consolidation issues to increase financial statement transparency.

Reduction in Shareholders’ Equity

Part of Enron's announced restatement includes a $1.2 billion reduction in
shareholders’ equity. Enron created four SPEs in 2000 and, as part of their initial
capitalization and a series of ongoing transactions, issued its own common stock in
exchange for notes receivable. At the time, Enron increased notes receivable and
shareholders’ equity to reflect these transactions. However, in announcing its restatement
Enron disclosed that it had concluded that pursuant to GAAP"? these notes receivable
should have been presented as a reduction of shareholders’ equity. GAAP gencrally
requires that notes receivable arising from transactions involving a company’s capital
stock be presented as deductions from stockholders’ equity and not as assets. Enron has

u EITF Issue No, 85-1, Classifying Notes Received for Capital Stock, and SEC Staff Accounting
Bulletin No, 40, Topic 4-E, Receivables from Sale of Stack.

12

02338

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Derivatives Study Center Page | of 14
Carleton, Norman

From: Schultheiss, Heidilynne

Sent: Thursday, November 08, 2001 5:05 PM

To: ‘weini@sec. gov, ‘dutth@sec. gov; judy.ringle@ssa.gov'; ‘mpenick@cfic.gov'; Carleton, Norman; Nickoloff,
Subject: FW: Derivatives Study Center in the Press

Randail is up to the same old tactics again. And | would hardly characterize him as “ree market’; | think he would be offended at
the label!

+---Original Message-----

From: Randall Dodd [mailto:rdodd@econstrat.org]
Sent: Thursday, November 08, 2001 5:02 PM

To: Randall Dodd

Subject: Derivatives Study Center in the Press

Derivatives Study Center
Randall Dodd 1407 H Sueet, NW, Suite
560
Director Washington, D.C. 20006
202 326 8555 rdodd@econstrat.ong
Dear Colleagues:

1 thought it would be worthwhile to take a moment to write and let you know that the Derivatives Study Center
has been in the news quite a bit in the last couple of months. This has given me the opportunity to discuss some of the
suspicious sxtock trades that preceded the terrorist attacks on September I 1th to explain some of problems in tracking
these transactions through tax haven countries, to comment on the various proposals for an economic stimulus package,
and even to talk about the possible issuance of War Bonds in the wake of the September 1 1" attacks. This includes
appearances on CNN's Money Line (September 7"), CBS Evening News (sce transcript below) and radio appearances
on WTOP, Wisconsin Public Radio, WBUR in Boston (discussing the tracking of terrorist finances) and WAMU’s
syndicated “Talk of the Nation” (discussing War Bonds). You can listen to cither of the latter two of these radio
broadcasts through links below. In addition to broadcast news, I have copied in below some examples of on-line and
print articles — including the Congressional Quarterly, San Francisco Chronicle and Miami Herald — where these
comments have been quoted.

Regarding current events, the Derivatives Study Center is closely following the implosion of Enron Corporation
and any impact it is having on energy and other derivatives markets, and the Center is also following the recent
disclosure that the Treasury Department bungled its announcement of plans to cease new auctions of the 30-year
Treasury bond so that the news was leaked carly to some market participants. So look for the Center to show up in
articles linked to these events.

Yours,
Randall Dodd
Thursday, September 11, 2001
Taxing Issues
Washington Wants to Trim Capital Gains Tax to Spur Growth
Experts Say It Won't Work
ABCNEWS.COM 02 6 1 (@)
1/15/02

01300000001219


Testimony of Richard L. Trumka
House Financial Services Committee
December 12, 2001

Page 15

1 “Is Enron Overpriced?”, by Bethany McLean. Fortune, March 5, 2001, Pg. 122.
2 “Enron: Let Us Count the Culprits.” Business Week, December 17, 2001, pg. 154

Roy E. Rinard and Steve Lacey, v. Enron Corp. and the Northern Trust Company, Class
Action Compliant Filed in the United States District Court Southern District Of Texas.

*“Enron Faces Suits by 401 (k) Plan Participants,” by Theo Francis and Ellen Schultz.
The Wail Street Journal, November 23, 2001

* Amlagamated Bank et. al. v. Kennath L. Lay et. al. Cass Action Complaint Filed in the
United States District Court Southern District Of Texas.

* “Recordkeepers: Blackouts can be Shorter,” PlanSponsor.com, December 10, 2001.

’*Enron asks Staff to Drop 401 (K) Suits for Severance,” Wall Street Journal, Nov 29,
2001, page C13.

*“Power Failure: As Enron crashes, angry workers and shareholders ask, Where were the
firm's directors? The regulators? The stock analysts?,” by Daniel Kadlec. Time
Magazine,

December 10, 2001, Pe. 68.

° As measured by market capitalization on December 29, 2000.

'° Amlagamated Bank et. al, v, Kennath L. Lay et. al. Cass Action Complaint Filed in the
United States District Court Southern District Of Texas.

"' Alliance, Janus and Fidelity Investments were among Enron’s five largest sharcholders
as of September f, 2001, as reported in “Enron: Running On Empty As The Collapsed
Energy Giant Seems Headed For Liquidation, Many Losers Count Their Losses,” by
Peter Coy et al. Business Week, December 10, 2001, pg. 80.

" The Retirement Security Advice Act of 2001 (H.R. 2269).

“Enron Made Payments in Bid To Hold Top Energy Traders”, by Richard A. Oppel Jr.
New York Times, December 10, 2001, pg. C2.

‘* “Enron Jolt: investments, Assets Generate Big Loss — Part of Charge Tied To 2
Partnerships Interests Wall Street,” by John Emshwiller and Rebecca Smith. Wall Street
Journal, October 17, 2001, pg. C1.

5 Enron Corp.'s Form 10-Q for the quarter ending September 30, 2001 filed with the
U.S, Securities and Exchange Commission on November 19, 2001.

02380

01300000000989


Page 1 of 3
Carleton, Norman

From: Wiedman, Mark

Sent: Friday, January 11, 2002 6:10 PM

To: Carleton, Norman

Subject: RE: 1BN } Treasury's O'Neill Comments on Enron Calls,

| haven't heard from Sheila on the e-mails, though I've checked. In any case e-mails like this are EXTREMELY useful, Thanks.

-----Driginal Message--—-

From: Carleton, Norman

Sent: Friday, January 11, 2002 9:47 AM

To: Cetina, Jill; Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Eichner, Matthew; Gabilondo, Jose; Gross, Jared;
Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael; Pietrangeli, Fred; Roseboro, Brian;
Schultheiss, Heiditynne; Whaley, Jean; Wiedman, Mark

Subject: FW: 1BN ) Treasury's O'Neill Comments on Enron Calls, Disclosur

-----Original Message----~
From: Lori,Santamorena@bpd.treas.gov [mailto:Lori.Santamorena@bpd.treas.gov]
Sent: Friday, January 11, 2002 8:40 AM

To: norman.carleton@ido.treas.gov

‘Subject: 1BN ) Treasury's O'Nelll Comments on Enron Calls, Disclosur

—— Forwarded by Lor Santamorena/BPO on 01/11/02 08:99 AM ~—

“PUBLIC DEBT, US DEPT OF TREASURYTM <GSRS@bioomberg.net> '
o —_eantamorenag}oed tress. gov

co
Ott802 08:17 AM ‘Subject 18N ) Treasury's O’Nel! Comments on Enron Calls, Disciosur

Treasury's O'teil] Commats on Saren Calls, Disclesure gules
2002-01-20 19:35 |New York)

Wavhington, Jan. 1¢ (Bloorberg) -- The following are comments
from U.5. Treasury Secretary Paul O'Neill ea his eceversations
with Enron Corp.'s chairman Ken Lay prior tc Bron's bankruptcy
and @ review by soverrment reguiators of the adequacy of corporate
disclosure rules. O'Neil! spoke during interviews on Cable Meme
Wetwork and CMBC

“my firat call from Ken Lay was for him to give me a heade-
up that they ware atruggling and to offer the pregident of his
company to speak vith the Undersecretary of Domestic Finance
(Peter Fisher] to understand the poaitiona thay had so we could
make sure that we were taking care of cor remponmibility, which is
to make wure Chat the U.s. capital marketa work, '' o'Nell1 told
on.

““vhat waa the purpose of Ken'a call to me, to let me know we
were welcome to have access to information #0 we could understand
what thoy ware doing and the possible exposure to the world's
capital narkecs.

“"the second call, Ken called me to tell me they were in
discussions with Dynergy and it was an information-only call

Subsequently, {Commerce Secretary) Don Evans called me to say he'd 02704

1/15/02

01300000001313


Derivatives Study Center Page 14 of 14

There is no set of guidelines telling the SEC how or when to freeze accounts under investigation, said John Hiney,
an agency spokesman. “It depends on the situation,” Hiney said. “We can go to court to freeze an account, and that

would be a matter of public record,” he said. “We don’t generally talk about investigations, although there will generally
be announcements put out about court action of one sort or another and will close with the word that the commission's

investigation continues.”

Friday, September 28, 2001

War Bonds
Over half a century ago, during World War Il, War Bonds boosted both the US economy and the morale of the country.
In the wake of September 11, some are suggesting special government bonds be reintroduced to help rebuild New York
and finance our new war against terrorism. A look at the economic, political, and social impact of War Bonds.
Sen. Mitch McConnell (R-KY), United States Senate
Randal! Dodd, Director of Derivatives Study Center, Economic Strategy Institute; also Professor of Economics,
American University
John Steele Gordon, author The Business of America (Walker & Co.); columnist with American Heritage
Magazine
Larry Samuel, author of Pledging Allegiance: American Identity and the Bond Drive of World War IT

(Smithsonian Institution Press

You can listen to the show by clicking on the following icon,
Listen in RealAudio!

02609

1/15/02

01300000001218


Page 1 of 2
Carleton, Norman

From: Carleton, Norman
Sent: Wednesday, August 22, 2001 10:12 AM
To: Nickoloff, Peter; Schultheiss, Heidilynne
Subject: FW: Enron article

Tracking: Recipient Delivery Read
Nickoloff, Peter Deliveredt: 6/22/02 10:12 AM Read: 8/22/01 10:13 AM
Schulthelss, Meictlyrne Deliverect 8/22/02 10:12 AM Read: 8/28/01 8:54 AM

---Original -
From: Norman Carleton [mailto:Norman.Carleton@workdnet.att.net)
Sent: Thursday, August 16, 2001 11:39 PM

To: Norman Carleton; norman.carleton@do.treas.gov

Subject: Enron article

|B

AUG 15, 2001

Enron's Chief Executive Quits After Only 6 Months in Job

By RICHARD A. OPPEL Jr. with ALEX BERENSON

| fo ALLAS, Aug. 14 — Jeffrey Skilling, the chief executive of the Enron Corporation (news/quote), stunned Wall
Street today by announcing that he would quit after just six months in the job, calling the move a “purely

personal decision."

But the abruptness of the departure left many analysts questioning whether a series of setbacks the company has
suffered played a part in the decision.

Kenneth Lay, Enron's 59-year-old chairman, will step back into the position he left early this year after 15 years as chicf
executive.

Mr. Lay, who originally recruited Mr. Skilling to Enron, said tonight that he had agreed to stay on through the end of
2005 to "make sure we've got plenty of time to work out an orderly succession."

Mr. Skilling, 47, had been at the heart of the transformation of Enron from an old- line natural gas pipeline company to
the biggest and most aggressive of the new breed of unregulated energy traders that buy and sell billions of dollars of
electricity and other commodities daily.

That strategy helped Enron's stock price soar during the last decade. But this year the company’s shares have fallen
sharply, as Enron has suffered from problems with its new broadband telecommunications trading unit, its investment in
a large power plant in India, and criticism from officials in California, who blame Enron and other energy companics fo
the collapse of the state's electricity market.

A former energy consultant at McKinsey & Company who joined Enron in 1990, Mr. Skilling built its energy-trading

operations into the company’s most profitable unit, accounting for nearly $1.7 billion — or 85 percent — of operating
income last year. He became president and chief operating officer in 1997, and in February of this year became chief

| 03045

01300000001655

1/16/02


The thing that stands out most visibly about the analyst's analyses of
Enron, is that over the three years up ‘to Octeber 2001, their estimates at
the beginning of each year for that year had minimal changes. The few
changes that did occur were always upward and usually followed the
guidance given by the company when they reported quarterly earnings. The
narrowness of the spread of estimates among analysts was remarkable,
especially for an energy company. The coefficient of variance for Enron
estimates was consistently below the average for the S&P500 during the

same period.

This pattern is highly suggestive that the analysts were being spoon fed
as to what Enron expected earnings te be. The analysts might have been
willing to accept company guidance, be it overt or inferred, as long as
the company kept meeting expectations each quarter. Since at least the
beginning of 1998, Enron has met or exceeded analyst estimates every

quarter.

One reason that analysts may have been more willing than normal to accept
company guidance for Enron was that it was becoming increasingly difficult
to understand how Enron was achieving its revenue growth and
profitability. Extensive use of derivatives, particularly when the
company is using mark-to-market accounting is extremely difficult in the
best of situations, We now know that a big additional reason for the
difficulties in analyzing Enron’s financials was that there were
significant parts of Enron's business that were hidden from the balance
sheet.

Often the way out for analysts when faced with difficult to analyze
Situations like Enron is to drop coverage. Why take the risk when there
are plenty of companies that are, transparent enough to do meaningful
analysis with confidence? The problem with dropping Enron was that it had
become the giant in the industry. If you were an analyst covering that
industry, you essentially had to cover Enron. That was further reinforced
if your firm was one of Enron’s investment bankers or investment banker
wannabe.

The real problem though was having sufficient information about the off
balance sheet items. Whether the accounting for each of these items was
within FASB rules or not is not yet clear, although the announced
restatement of prior periods earnings is a strong signal that at least not
all was kosher. But what is clear is that Bnron was not providing what
could even be considered minimum transparency in its financials and that
the analysts did not have all the tools necessary to make a reasonable
analysis.

Valuation of Enron Stock by Broker Analysts

In evaluating analyst performance on recommending Enron stock, one first
has to understand how the brokerage community's recommendation really

02359

01300000000968


Calpers is the nation’s largest public pension fund, with assets totaling approximately $151 billion.
-By Jason Leopold, Dow Jones Newswires; 323-658-3874;

Tracking: Recipient Delivery Read
Nickolotf, Peter Delivered: 11/7/01 3:05 PM Read: 11/7/01 3:12PM
Schultheiss, Heidlynne Delivered: 11/7/01 3:05 PM Read: 11/7/01 3:05 PM

2 03038

01300000001648


Carleton,

Tuesday, December 18, 2001 9:55 AM
Cetina, Jit
FW: ENRON ADMITS IT'S REALLY ARGENTINA

----- Original Message-----

From: Wiedman, Mark

Sent; Tuesday, December 18, 2001 7:52 AM

To: Roseboro, Brian; Carleton, Norman; Nickoloff, Peter; Schultheiss,
Heidilynne

Subject: PW: ENRON ADMITS IT'S REALLY ARGENTINA

lates Original Message
From: Jon Gross <jgross®projectgrad.org>

To: Mark Wiedman <Mark.Wiedmanedo.treas.gov>; Mike Grunwald Sgrunwaldmrawashpost . com>;
Anuj Gupta <agupta@mba1998 .hbs.edu>,; Eddy Daniele <eddy.daniels@enron, com>

Sent: Mon Dec 17 23:20:54 2001

Subject: PW: ENRON ADMITS IT'S REALLY ARGENTINA

lie Original Message-----

From: jegroes (mailto: jmgross@icademy. com]

Sent: Thursday, December 13, 2001 5:48 PM

To; Robert Vincent; Catherine Markman; Jonathan Gross
Subject: FW: ENRON ADMITS IT'S REALLY ARGENTINA

Too funny, on the slight chance you haven't already received this.

ENRON ADMITS IT'S REALLY ARGENTINA
Now Massive Ineptitude, Corruption Make More Sense, Analysts Say

Houston, Texas - Collapsed due to gross mismanagement and
insurmountable debt, enercy company Enron today confessed to what many
observers had long suspected: it ia actually Argentina.

Congressional leaders, who have called for an investigation into the
biggs corporate failure in U.S. history, immediately diamiseed
Enron's claim, but Argentinians weren't 80 sure. "The shady deals. The
crazy debt. I knew there was something familiar about those guys," said
Banco del Argentina director Ernesto Caballo,

Bnron chairman and CEO Kenneth Lay, speaking through an interpreter via
phone from Buenos Aires, apologized for any confusion the subterfuge
May have caus » and noted that as a sovereign nation, the company wag
immune from U.S. prosecution. Lay algo insisted that he had not "fled"
to Argentina, but had returned home to the capital to visit *mi
familia."

While not directly stating it, Lay also hinted that he might in fact be
Argentinian President Pernando de la Rua. Reached in Bue Aires, de
la Rua admitted he couldn't rule that out. "Things are pretty crazy
around here. Who can say?"

But Enron creditors, clients, and shareholders, who stand to lose
billions over their exposure to the company, weren't buying any of it.

03004

: 0130000001613


market, perhaps Enron was too quick to eschew refineries and pipelines for the volatile, information-
based business of trading.

But it wasn't Internet that killed the beast; it was management's insatiable appetite for expansion and,
by all accounts, personal enrichment.

It's too easy to kick Enron now that it's down. It did a lot right. The competition and deregulation and
vertical "de-integration" Enron drove are the future of all industries, even energy. Enron was making
markets on the Internet well before its competitors knew what hit them.

Was Enron on to a better business model? You bet it was. But like any business model, it wasn't
impervious to rules of conduct and principles of economics.

aeons

June 11, 2001
Services

Trader Reaps Benefits Of E-Market Leadership
‘Liquidity’ is the key to Enron's position at the center of online value chains
By JADE BOYD <MAILTO:jcboyd@cmp.com>

ENRON Headquarters:Houston Line of business: Energy production and marketing; online exchange operator 2000
Revenue: $100.79 billion 2000 Net Income: $979 milion Percentage of revenue from e-business activity: N/A CEO:
Jeffrey K. Skilling Top e-business executive: Philippe Bibi, president and CEO, Enron Net Works E-business
highlights:EnronOnline conducted its millionth transaction in May; total trade volumes on the cormmodity-trading site have
exceeded $550 billion since it was established in November 1999. Enron Broadband Services conducted 580 online
transactions in the first quarter, compared with 321 for all of 2000 E-business challenges:Re-creating its success in
online energy trading in dozens of other commodity businesses including bandwidth, data storage, forest products, metals,
coal and freight logistics Top @-business accomplishment:With EnronOnline, Enron brought immediate and transparent
orere to energy markets; the site is one of the world's leading e-commerce platforms, with dally trace volumes in excess

L ft, e@ E ek.corn/100-0 ty

of $4 billion 220e . K. 10-9 1/serviead Services: By The Numbers_
<http:/www.intemetweek.com/100-01/serv.him> ONLINE EXTRA--Reporter’s Notebook On Enron.

Uncertainty has debilitated many e-businesses, with staffers and managers alike wondering when things will
pick up. But optimism is still in the air at Enron Net Works, the e-business arm of Fortune 7 energy company
Enron Corp., which continues to expand its clectronic trading model into all manner of commodity markets.

Net Works oversees EnronOnline, where Enron buys and sells more than $4 billion a day of mostly natural gas
and clectric power, plus steel, coal, telecom bandwidth, data storage, freight services and 1,500 other products.

Net Works is also a new-business incubator, repackaging applications Enron originally developed for internal
use into revenue-generating online services. For example, Enrot i <http://www.EnronCredit.com>, an
offshoot of software Enron created to help its traders manage credit risk, offers a service to some 10,000
companics to quickly determine the cost of extending credit to their own trading partners. EnronCredit.com,
which broke even in its first year, is expected to turn a profit this year.

Net Works is part software development house and part IT department, responsible for routine tasks, such as
desktop support, and critical functions, such as keeping Enron's e-business infrastructure running. The group,
with 1,500 employees, grew some 30 percent in the past year, occupying more than four floors of Enron's
downtown Houston headquarters.

"Our job is in two parts," says Net Works COO Greg Piper. "Help Enron expand horizontally in markets for
s

02273

01300000000882


Derivatives Study Center Page 11 of 14
Mimi Whitefield

If terrorists or their associates tried to manipulate securities markets in the days before the Sept. 1! attacks and profited
as stocks affected by the disaster plummeted, analysts say the money they made has probably already been moved out o
the country.

The Securities and Exchange Commission is investigating whether some investors were aware of the attacks ahead of
time and used that knowledge to profit in the stock options market, or by short-selling stocks -- selling borrowed shares
and buying them back later at much lower prices.

The SEC declined to comment Tuesday on the progress of the investigation, referring to a statement issued last week
that said: "We are vigorously pursuing all credible leads but, at this time, we have drawn no conclusion.”

SEC Chairman Harvey I. Pitt is scheduled to testify before the House Financial Services Committee today, however,
and may be questioned about links between those responsible for the terrorist attacks and securities market fluctuations.

‘The Chicago Board Options Exchange, the world’s largest options market, also is investigating.

Leo Guzman, who heads Guzman & Co., an investment banking and brokerage firm in Miami, says at first he was
skeptical there was any connection between the terrorist attacks and market activity.

But after analyzing unusual options trading involving airline stocks and the stocks of two companies devastated in the
World Trade Center attack, he says the link seems to be more than coincidental,

"There is enough evidence to be very suspicious," he said. "The options leave a huge trail." The case that terrorists may
have sold stocks short, however, is not nearly as convincing, he said.

In the week before two American Airlines and two United Airlines jets were hijacked and crashed into the Pentagon and
the twin towers of the World Trade Center, traders on the options markets in Philadelphia and Chicago noticed a sudden
surge in the purchase of stock-options contracts that would have gained value if the price of AMR Corp. and UAL
Corp., the parent companies of the two airlines, declined.

Essentially, the terrorists would have been betting on the negative impact of an event only they knew was going to occur
on stock prices.

Traders’ suspicions prompted the SEC probe, which was announced last Wednesday -- two days after the markets
reopened following a four-day hiatus in the wake of the attacks.

By that time, however, terrorists or their associates could have liquidated their positions and wired their profits offshore,
analysts said,

"My suspicion is the money has already left the country," said Randall Dodd, an economics professor at
American University and head of its Derivatives Study Center,

If there was manipulation of so-called put options — contracts that give the holder the right to sell a security at a
specified price (the strike price) by a certain date -- regulators should be able to trace the options trades to the brokers
who placed the orders and ultimately to the customers who submitted them.

But if it turns out an order was submitted by an offshore company or a front company the trail may stop there,
says Dodd. "The bright light of the audit trail can stop quite quickly and disappear into the shadows, especially if
one of these tax haven countries is involved,” he says.

Absolute banking secrecy that makes the true owners of offshore accounts difficult if not impossible to trace has been
the chief competitive advantage of offshore banking centers. Recently, in the face of international pressure, some

1/15/02 02620

: 0130000001229


Carleton, Norman

From: Carleton, Norman

Sent: Wednesday, December 05, 2001 7:18 PM

To: Cetina, Jill; Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Eichner, Matthew; Gabilondo,
Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail), Nickoloff, Peter; Novey,
Michael; Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heiditynne; Whaley, Jean; Wiedman,

Subject: FT: Enron probe will examine industry-wide impact

Enron probe will examine industry-wide impact
By Gwen Robinson in Washington and Andrew Hill in New York
Published: December 5 2001 19:22 | Last Updated: December 6 2001 00:03

US lawmakers signalled on Wednesday that investigations into the Enron case would go beyond the
collapse of the energy trader and dig deep into the implications for companies, markets and the
accountancy profession.

Investigators from the House of Representatives energy and commerce committee - one of the most
powerful congressional panels - will meet Enron officials on Thursday in Texas as part of their probe
into the company, which filed for bankruptcy protection on Sunday.

Billy Tauzin, the Louisiana Republican who chairs the committee, said his investigators "intend to be
very aggressive” and would begin hearings next month.

“This is just the beginning,” said an official involved with the hearings. “These issues go way beyond
Enron to securities law and financial markets regulation - and the role of auditors.”

“Too many people were hurt by this," Mr Tauzin said, adding that he wanted to know how Enron
manipulated accounting procedures and would examine the impact of the company’s failure on
energy markets.

Although Mr Tauzin said he could not say right away whether Congress needed to take action, an
Official involved with the probe predicted that “at the very least" it would lead to tighter regulation of
accountants and ensure more transparency in commodities trading.

The "Big Five” accountancy firms including Andersen, Enron's auditor, issued a joint statement on
Wednesday that responded to growing criticism over the the quality and objectivity of Andersen's
audits and promised to react to the implications of the Enron collapse.

The energy committee, which conducted a comprehensive investigation into last year’s controv
over defective Firestone tyres on Ford Explorer vehicles, is promising an equally thorough inquiry into
nron.

The committee's investigators met on Wednesday with the Financial Accounting Standards Board
and senior executives of Andersen. Wednesday's talks with Enron in Texas will centre on the
company’s accounting procedures and its relationship with Andersen. The committee this week
asked Enron and the SEC to hand over documents on the company's accounts and the SEC's
investigation,

Michael Oxley, the Republican chairman of the House financial services committee, said on Tuesday
that two of its subcommittees would “move past the headlines and get the facts on Enron” in their
joint hearings planned for next Wednesday.

Meanwhile, Enron continues to hive off non-core operations. PwC, which is acting as the

administrator for Enron Europe, said it intended to sell the group's European metals, commodity
trading and credit derivatives business, having agreed the sale of Enron Direct, the UK-based gas

, 03005

01300000001615


An example of the POB's projects that benefit the public interest occurred in 2000
when the POB, at the SEC staff's request, sponsored the Panel on Audit Effectiveness
(Panel). Although the Panel found that the audit process is fundamentally sound, the
Panel's report contained approximately 200 recommendations for the accounting
profession, standard setters, audit committees and regulators. The AICPA and others are
working to implement those recommendations, including: revising the auditing standards
for detecting material misstatements in financial statements that may be due to fraud,
. enhancing the peer review process, and strengthening the AICPA's disciplinary
processes.

In this regard, the AICPA recently amended its self-regulatory processes to
require member firms to have specific quality controls related to maintaining their
independence from audit clients, to provide for “continuous” peer reviews of the largest
accounting firms (which provides for the performance of certain peer review procedures
in the two years between the firm's triennial peer reviews), and, in the event of litigation
alleging deficiencies in the audit of a public company, in certain situations to terminate,
remove from audits of public companies, or subject to additional oversight the individual

involved.

As shown by these recent changes, the self-regulatory process can, and does,
change over time in response to the needs of investors. In view of the events surrounding
Enron, the profession and the Commission are considering what further improvements
should be made,

For example, last week the managing partners of the five largest accounting firms
issued a joint statement that they intend to work with the SEC and others to evaluate and
improve the profession’s self-regulatory process, and to enhance disclosures and audit
procedures concerning related party trensactions, special-purpose entities, and issues
related to market risks, including those related to energy contracts.® They also indicated

‘ See, “Statement From Big Pive CEOs,” dated December 4, 2001

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expensive to set up and maintain. Therefore, SPE activities usually occur on a large scale
so the impact of the reduced interest rate more than offsets the costs.

To illustrate, here is an example of how an SPE might work. A third party
investor unrelated to a transferor may set up an SPE for the benefit of a transferor, which
is the company that transfers or contributes the assets to the SPE, The investor will
control the activities of the SPE and retain the substantive risks and rewards like common
stockholders in a “normal” corporation. The SPE will hold assets and finance them
through debt and equity issued to institutional investors or public shareholders. To
reduce the interest rate paid on the debt, the SPE wil] obtain credit enhancements (for
example, guarantees or similar derivative arrangements) often from the transferor and or
other third parties. This spreading of the risk through the credit enhancements, coupled
with the fact that the SPE's securities are usually liquid and easily traded, generally
reduces the cost of the borrowing to a level below what it would have been had the
transferor directly borrowed money from a bank or the market.

Most SPE transactions are off-balance sheet. This means that financial
information about the SPE, including its assets and liabilities, does not appear in the
financial statements of the transferor.

The accounting literature regarding SPE consolidation is found in materials issued
by the EITF.' In order to achieve off-balance sheet treatment of an SPE pursuant to
GAAP, two conditions must be met. First, the assets must be sold to the SPE (be legally
isolated from the transferor) and, second, an independent third party owner that has made
@ substantive capital investment (which amounts to at least 3% of the SPE’s total
capitalization) must both control the SPE and possess the substantive risks and rewards of
owning the SPE’s assets. If executed properly, the legal isolation and the control bya
third party reduce the risk of the creditor, as discussed above. Thus, off-balance sheet

mn

See: EITF Issue No, 90-15, /mpact of Nonsubstantive Lessors, Residual Value Guarantees, and
Other Provisions in Leasing Transactions; EITF Issue No. 96-21, Implementation Isswes in
Accounting for Leasing Transactions involving Special-Purpose Entities; and EITF Tapic No. D-
14, Transactions involving Special-Purpose Entities.

02337

01300000000946


and restructuring a derivative investment resulted in negative revenue of $125 million, according to statements filed with
the U.S. Securities and Exchange Commission.

“The broadband deal was the beginning of the end,” said Ogan Kose, a crude-oil trader who was one of 4,500 Houston
employees Enron fired in December “Instead of writing it off, they continued to carry it."

Enron entered the 1990s as a Houston-based pipeline operator and transformed itself into the dominant trader of natural
gas futures, controlling as much as 30 percent of the gas futures contracts traded on the New York Mercantile Exchange.
The company repeated that success in markets for trading electricity and weather derivatives.

‘Skilling promised investors, including those at the meeting last January, that Enron would deliver 20 percent to 30 percent
profit growth annually by applying the same strategy to new markets. Enron began trading in metals, lumber and
broadband and set up companies such as New Power Holdings Corp. and Azunx Corp. to tap deregulated electricity
markets and buy and sell water.

Toli of Failures

None of the ventures generated the profits that flowed from Enron's eerly trading businesses. By the third quarter of 2001,
gas, power and weather trading generated $717 million in pretax profit. Losses from other operations topped $1.4 billion,

“We made millions, and they just kept putting it into the next business hoping it would be the next big thing," said Tom
Donchoe, an Enron natural gas trader who was fired in December. ‘“Azurix was a flop. Broadband was a flop. Any one of
them we probably could've absorbed, but it was just one after the other.”

For a while, Enron endured the losses by shifting debt and assets off its books using partnerships capitalized by the
company's shares, which rose 87 percent last year. Many of the partnerships were set up by former Chief Financial Officer
Andrew Fastow, who made $30 million running them, according to SEC filings.

Chain Reaction

When Enron's shares began falling, the company became liable for off-balance-sheet debt. That set off a chain reaction
that cut the company’s credit rating, scared off customers and drove Enron's shares as low as 26 cents. The stock's
decline wiped out the savings of thousands of employees who'd loaded their 401(k) retirement plans with Enron shares.
The SEC, the Justice Department and Congress are investigating.

Lay, Skilling and Fastow declined interview requests. They are named as defendants in more than 40 lawsults filed by
shareholders and employees and are among Enron insiders who sold more than $1 billion of company stock during the
past three years.

Broadband Strategy

Enron set up its broadband unit as Internet growth was peaking and thousands of companies were creating retail Web
sites, electronic exchanges and inventory management systems that needed to move data over high-speed lines. Enron
planned to make a market in access to the lines, serving as a middleman between companies that wanted to sell
transmission capacity and those that wanted to buy it.

Enron also began building a fiber-optic network, spending $436 million in 2000 alone on 18,000 miles of cable that it
planned to connect to transmission equipment and lease to users.

In its first contract, the one Yeck signed with Global Crossing, 2 telephone and data network operator, Enron agreed to buy
bandwidth capable of moving data and streaming video between New York and Los Angeles. Enron planned to resell the
bandwidth at a profit.

“This is * pay one’ of @ potentially enormous market," Skilling said in a news release on Dec. 2, 1999. “The market
structure for bandwidth is currently inefficient and expensive. We are demonstrating that bandwidth can be traded under
flexible, market-based contract structures."

Enron began transferring hundreds of employees from other divisions, eventually assigning 1,500 to its broadband trading

unit. That was more than three times the number of employees Williams Communications Group Inc. hired for its
broadband business, which had 33,000 miles of fiber, almost twice as much as Enron.

2 02990

01300000001599

Spending Plans


Carleton, Norman

— — $$ —$—___—

From: Nickoloff, Peter

Sent: Tuesday, December 04, 2001 12:02 PM

To: Carleton, Norman; Schultheiss, Heidilynne
Subject: Some EnronOniine stories from internetweek,com
In no particular order...

Friday, November 30, 2001, 5:52 PM ET.

UPDATE: EnronOnline Still Trading

By Jade Boyd

While a bankruptcy filing by troubled energy trader Enron Corp. is widely expected, the company
says it continues to trade more than 400 products at its online trading exchange, EnronOnline.

An Enron spokesman said Enron traders are still actively making trades via EnronOnline in 472
products. Most trades are in core energy products like natural gas and electricity, but Enron also
continues to trade paper and forest products, said company spokesman Eric Thode.

Enron averaged about 5,000 trades per day on its site prior to November. The company conducted
about 1,000 trades Thursday, when only 62 products were sold online, Thode said.

Analysts say traders from other companies aren't establishing new positions with Enron, so virtually
all of Enron's current trade volume represents trades by people who are closing out existing positions
to limit exposure to Enron.

Since Enron did a huge volume of trade online -- about $600 billion since EnronOnline went live in
November 1999 -- it may take weeks for trading to wind down completely, said Peter Fusaro,
president of the energy consulting firm Global Change Associates.

The bigger question is how long Enron can finance its trading operation. Fusaro said a bankruptcy
filing might make it easier for Enron to raise the cash it needs to fund trading operations, but that
won't restore trader confidence in the company.

Since Enron is a party to every trade on its site, either as buyer or seller, it's vital that trading partners
have confidence in Enron's ability to stand behind the deals it makes. Analysts say that confidence is
lacking, and an infusion of cash won't be enough to restore it.

Wednesday, November 28, 2001, 4:15 PM ET.
UPDATE: Enron-Dynegy Deal Collapses; EnronOnline
Temporarily Halts Trading

By Jade Boyd

Dynegy Inc. has cancelled its proposed $8 billion merger offer for fellow energy trader Enron Corp.
Trading on Enron's pioneering exchange, EnronOnline, was halted temporarily today in response to

02565

01300000001174


their support for the modernization of the financial reporting system, as previously
announced by Chairman Pitt.’ Similarly, AICPA Chairman James Castellano stated that
the AICPA is committed to working with the SEC and accounting firms to make needed
changes to the self-regulatory process and to provide improved guidance to auditors and
to modernize the financial reporting system.

Role of the SEC in Reviewing Filings

As noted above, the Commission is responsible for administering the federal
securities laws. These laws are designed to protect investors by requiring full and fair
disclosure of all material information about publicly traded securities. Full disclosure
ultimately benefits both investors and the capital markets. By enhancing investors’
confidence in the completeness and accuracy of information about public companies,
these full disclosure requirements encourage investor participation in the capital markets.

The Commission does not have authority to approve or disapprove a security or a
transaction on its merits. If a transaction appears to involve a high degree of risk to
investors or if @ company involved in a transaction is experiencing financial difficulty, we
do not, and we cannot, stop the transaction from proceeding on that basis. Rather, the
Commission's job is to ensure that the company fully discloses these risks and fully
informs investors of its financial condition so that investors can make informed
investment decisions. This system is designed to maintain market transparency. It
allows market forces rather than regulatory controls to determine what transactions will
proceed and at what prices a company’s securities wil] trade. In this way, even small
companies and companies with financial difficulties may have access to the public capital
markets on an equal footing with larger or more financially secure companies. Full and

, Set, 6g, Remeria by SEC Chakconn Hervey L. Pat at the Fall Meeting of the ABA's Committee
on Federal Regulation of Securities, dated November 16, 2001

‘ “AICPA Statement of James G. Castellano, AICPA Chair, Barry Melancon, AICPA President and
CEO,” dated December 4, 2001

02333

01300000000942


bankruptcy, it owed some of them hundreds of millions of dollars,

According to its bankruptcy filing, Enron owed $185 million to two offices of Chase Manhattan Bank, a subsidiary of J. P.
Morgan Chase; $74 million to UBS; and $71 million to CSFB. Bear Stearns Cos. said it stood to lose $69 million from the
collapse of the energy trader; Commerzbank AG said @ would lose slightly less than $45 million

Schmoozing Wall Steet

Enron's multiple business dealings with Wali Street caused firms to look favorably on the company’s new ventures, say
investors.

In late January 2001, for example, Enron's senior management hosted a meeting for 170 analysts and investors. Skilling
told the crowd that Enron's biggest immediate opportunity was its plan to trade broadband capacity: space on the fiber-
optic networks that zip voices, data and images around the planet

Skilling said that based on his analysis, Enron's broadband business was worth $36 billion, or $40 a share. Enron stock
was then trading at $82. The business had lost $60 million on $408 million in revenue in 2000

“The numbers never added up, but Wall Street didn’t challenge them,” says Harris investment's Coxe.

Ronald Barone, an analyst at UBS Warburg, wrote after the January meeting that he was “brain drained, having digested
scores of detaied presentations.” He also wrote that he was “enamored” with Enron's broadband business, even though it
wouldn't generate earings for at least a year because it would take that long to generate enough trades.

$25 a Share

He estimated the business was worth $25 a share, or $22.5 billion. He kept his “strong buy” rating on the stock and, in a
January 25 report, raised his 12-month target on Enron stock to $102 from $100. The stock was trading at $82 at the time.
Barone declines to comment on his recommendations.

Lehman's Gross raised his 12-month target price on Enron to $100 from $90 after the company’s analysts’ conference. He
said he viewed Enron's foray into broadband as no different from any of its other endeavors.

Given the track record that has been displayed over the past 36 months, we have no reason to doubt the success of their
efforts,” Gross wrote a week after the conference in a report dated Feb. 1. Enron stock was then trading at $78. "We
continue to recommend Enron as a core holding," he wrote. Gross declines to comment.

$180 Mition Charge

Enron's fiber-optic business collapsed this past summer. In its third-quarter earnings release, Enron said it had taken a
$180 milion charge to restructure the business, including severance payments to 500 fired workers and a reduction in the
value of its operations.

As Enron's stock was rising on Wall Street, analysts often said they were in the dark about the company: how it made
money and booked sales and what was behind dozens of off-balance-sheet partnerships.

Their lack of knowledge didn't stop them from promoting Enron stock. Goldman Sachs analyst David Fleischer said in
March that Enron's “lack of disclosure and transparency is @ long-standing hallmark."

Enron had been a fixture on Goldman's “recommended listTM of a couple hundred favored stocks since 1993, when
analyst Fleischer joined the firm.

“Extraordinary Franchises"

Enron has built unique and, in our view, extraordinary franchises in several business units," Fleischer said in March,
On March 14, Commerzbank Capital Markets analyst Andre Meade raised his long-standing rating on Enron to
“accumulate” from “hold” because the stock had dropped 30 percent in the previous three months -- even though, he
said, he couldn't construct accurate earnings models. ‘Enron keeps a lot of facts close to the vest,” he said.

~ Saying they don’t understand it but stil recommend it is a slap in the face to remind us how useless analysts are,” says
Robert Olstein, a 35-year Wall Street veteran who runs the $890 million Olstein Financial Alert Fund.

; 03001

01300000001610


Carleton, Norman

_ —_—

From: Carleton, Norman

Sent: Thur: , January 10, 2002 12:15 PM

To: Cetina, Ja

Subject: FW: AP: Bush Orders Treasury To Eye Pension, 401K Rules - Sources

--—Original Message-—-

From: ‘Carleton, Norman

Sent: ‘Thursday, January 10, 2002 11:57 AM

To: Bair, Shea; Berard, Steve; Bitsberger, Tenathy; Eichner, Matthew; Gabllondo, Jose; Gross, Jared; Hammer, Viva; Lori
Sanakamorena {E-mat); Nickoloff, Pater; Novey, Michael; Pistrangel, Fred; Rosebore, Brian; Schulthetss, Medilynne; Whaley, Jean;
Wiedman, Mark

‘Subject: AP: Bush Orders Treasury To Eye Pension, 401K Rides » Sources

January 10, 2002

Bush Orders Treasury To Eye Pension, 401K Rules - Sources

WASHINGTON (AP)-U.S. President George W. Bush, in a follow-up to the criminal investigation of
Enron Corp. (ENE), has ordered the Treasury Department to review rules regulating company
pension and 401(k) plans, The Associated Press has learned.

Administration sources, speaking on condition of anonymity, said Bush would announce the action
Thursday in the Oval Office, in part to inoculate hims politically from the bankruptcy of the Texas-
based energy company that has ties to Bush and administration officials.

The Justice Department announced Wednesday It has begun a criminal investigation of the bankrupt
energy company, whose collapse caused many employees to lose their life's savings.

The Justice Department is forming a national task force to look into the company’s dealings. The
group will be headed by lawyers at the department's criminal division and include prosecutors in
Houston, San Francisco, New York and several other cities, said a Justice Department official,
speaking on condition of anonymity.

As a follow-up, Treasury Secretary Pau! O'Neill will head a review of laws and regulations to
determine if they can be tightened to protect worker pension plans. A senior official involved in
discussions on the issue said the Justice Department will determine whether Enron broke any laws
and the Treasury Department will study whether Enron's conduct, although potentially legal,
exposed loopholes in the system.

Enron's chairman and chief executive, Kenneth L. Lay, is a political ally of Bush's. He and other
Enron officials met six times with Vice President Dick Cheney or his aides last year, before and after
the release of the administration's energy plan.

Lay and his company have been leading contributors to Bush as well as to a long list of Democratic
and Republican candidates.

The Center for Public Integrity, a nonpartisan watchdog agency in Washington, says Enron's
executives contributed nearly $800,000 to Bush, members of Congress and the two national political
parties from 1999 to 2001.

A senior Bush adviser said the president wants to protect workers’ pensions. His political team, the

adviser said, is worried that the administration could face intense criticism for its association with Lay
and Enron as hearings heat up on Capitol Hill.
1
02995

01300000001604


After the market closed for trading on Aug. 14, Skilling, 48, abruptly resigned, citing personal reasons and raising concerns
among investors that dire financial news might be forthcoming.

Falling Stock
Enron stock dropped as much as $6, or 13 percent, the following day, ending the week at $36.67

Analysts insisted nothing was awry. “There is nothing wrong with the company,” UBS's Barone said after meeting with
Lay, who had once again become Enron's CEO. “There is no other shoe to fall - and no charges to be taken.” He kept his
“buy” rating on the stock.

Lehman's Gross also met with Lay and other senior managers on the night of Aug. 16. “The Enron machine is in top
shape and continues to roll along,” Gross wrote to investors the next day.

He didn't see a short-term catalyst to boost the stock — then trading at $36.85 a share -- yet he urged investors to get more
shares, maintaining his “strong buy" recommendation and a 12-month price target of $72.

CSFB analyst Curt Launer wrote a brief note to clients after what he described as “intensive meetings” with management.
He said there was “‘no truth to any of the speculations" and kept his 12-month target of $84 and his ''buy”
recommendation.

Enron a “Buy”

Of the 22 analysts who covered Enron, 19 rated the stock a “buy” as of mid-October 2001. That's when, one after
another, disclosures spilled out of the Houston-based company: Enron's partnerships had hidden billions of dollars in debt;
years of profits had been exaggerated; and the U.S. Securities and Exchange Comméssion was investigating Enron's
partnerships with affiliates.

The disclosures dashed Enron's credibility with lenders and drove it to bankruptcy.

On Nov. 21, with Enron stock at less than $7 -- down more than 90 percent from its high in August 2000 -- Goldman's
Fleischer downgraded Enron to “market perform,” Wall Street parlance for “hold.” He didn’t respond to several phone
calls,

Easier Decision

Investors say Fleischer's decision to downgrade the stock was made easier by his firm's failure to win a role advising
Enron on its planned sale to Dynegy. '"! wouldn't doubt at all that being dropped from the ‘recommended list had
something to do with not winning the advisory business,” says Phelps.

Fleischer and Goldman spokespeople didn’t return phone calls.

To many investors, there were signals that should have tipped off analysts that something was amiss, In December 2000
and January 2001, 10 top Enron executives sold more than $73 million in stock. Lay and Skilling together sold stock
valued at more than $17.6 million, according to the Washington Service, which trecks insider stock sales and purchases.
Insider sales are often a strong sign to investars that something’s wrong. Timothy Ghriskey, who at the time was a fund
manager at Dreyfus Corp., sold about 1.55 million Enron shares in tate 2000. “It wasn't much of an endorsement that they
were bailing out too," he says. “| didn’t see much upside in the stock and figured that with the valuation so high. there was
a lot of downside if they falled to deliver."

Wake-Up Calli for Analysts

Coxe and other investors say Enron's failure should provide 2 wake-up call for analysts, who pay too little attention to
company balance sheets. “'| pay the Street lots of commission dollars and expect that analysts are reading the footnotes
and kicking tires," Coxe says,

Several Wall Street firms took steps last year to defuse criticism that conflicts of interest taint analysts’ research. In July,
Merrill Lynch announced that its analysts could no longer own shares in the companies they cover. CSFB soon followed

, 03002

01300000001611


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01300000000971


Testimony of Richard L. Trumka

House Financial Services Committee

December 12, 2001

Page 7

Though Enron began as a utility and pipeline company, and its hard assets remain just
that, Enron had become a new kind of financial intermediary. Enron brokered a huge
number of contracts allocating price risk and other kinds of risk in an increasingly
bewildering array of commodities— from natural gas and electricity to Internet services to
the weather. In that kind of business, a company's most valuable asset is trust-- trust that
you are telling all your constituencies the truth, trust that you are a market maker and not
merely a gambler. And what seems to have fundamentally happened to Enron is that the
company’s management abused that trust and ultimately destroyed it, Almost overnight
Enron tumed from a market colossus with an enterprise value of well over $70 billion to

a mere collection of pipes and computer terminals worth considerably less than its debts.

The story of Enron's unraveling begins with self-dealing-- with transferring business out
of the company into the hands of related entities that were in large part owned by Enron
executives, These transactions were approved by the Board of Directors, the auditors and
the lawyers. According to the chairman of the Compensation Committee, Charles Le
Maistre, the partnership arrangements served in part to retain executives, saying "We try
to make sure that all executives at Enron are sufficiently well-paid to meet what the
market would offer.”'* But there was no mention of these transactions anywhere in
Enron's extensive disclosure of its already extremely generous executive compensation
practices. And the company funds that were put into these partnerships were accounted

for as investments, not as payments to executives. These partnerships then went on to

02372

01300000000981


TESTIMONY OF
ROBERT K. HERDMAN
CHIEF ACCOUNTANT
U.S, SECURITIES AND EXCHANGE COMMISSION
RECENT EVENTS RELATING TO ENRON CORPORATION

Before the Subcommittee on Capital Markets, Insurance and Government
Sponsored Enterprises and the Subcommittee on Oversight and Investigation,
Committee on Financial Services
U.S. House of Representatives
December 12, 2001

Chairman Baker, Chairwoman Kelly, Ranking Members Kanjorski and Gutierrez,
and members of the Subcommittees:

I am pleased to appear before you on behalf of the Securities and Exchange
Commission (“SEC” or “Commission”) to testify concerning the recent events relating to
Enron Corporation (“Enron”). | appreciate the opportunity to discuss the importance of
transparent financial reporting to investors and our capital markets and several
accounting issues raised by Enron's recent filings with the Commission.

Overview of the Effects of Enron on our System of Capital Markets

The SEC shares the Subcommittees” concem about the recent events Surrounding
Enron, The bankruptcy filing of a Fortune 10 company gives pause to all of us who care
about financial reporting—and, more importantly, about its customers—the investing
public. As Enron has disclosed in its public filings with the Commission, the SEC is
investigating the Enron matter. Any further information relating to that investigation is
nonpublic at this point and, accordingly, my statement wil) be confined to the public

02327

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Testimony of Richard L. Trumka
House Financial Services Committee

December 12, 2001

Page 11

while other large investment managers reduced their stake in the former energy giant

during the same time period.””

The result was that for years the marketplace set the price of Enron's stock artificially
based on fictitious accounting, passed on by a conflicted Board and conflicted auditors,
and hyped by conflicted analysts. And both sophisticated institutions and the average
investor, following the advice of experts, bought at that price. And at least some of us
were buying from insiders, who all this past year were unloading stock at an astounding

rate.

Of course J have just described what happened before the attempted Dynegy acquisition.
In the weeks that followed the announcement, the same dynamics that appear to have
prompted the crisis led to the creation of a new myth-- that the problems at Enron were
manageable. Many people had an interest in that myth-- most importantly Enron
executives, the investment bankers who stood to reap large fees if the deal went through
and the commercial lenders whose ability to avoid an Enron bankruptcy depended on
steering the company into the Dynegy safe harbor. No one wanted to disclose what the
real state of Enron’s finances was, clearly because some very scary things were hidden
there. But what this secrecy did was make certain that once the news of the extent of the

problems began to leak, no one could stop the collapse.

02413

01300000001022


consensus to a remarkable 1.2, But as the Enron story began to unravel
over the next few days, the recommendation downgrades exploded, plus six

of the seventeen analysts dropped coverage.

Conclusions

In these kind of situations, it is easy to point a finger at the analysts
for mistakes made. In my prior testimony, and in other forums, I have
taken the analysts to task for net performing to an acceptable standard in
certain situations. While the analysts are certainly not without blame on
Enron, they are not the real culprits in this situation.

I am not an expert in doing the actual accounting at a company, or in
auditing a company’s accounting, but having been an analyst for 22 years,

as well as closely observing analyst behavior at First Call for the last

ten, I can say without reservation that this was a situation where either

the company or its auditors or both were at fault in not providing

investors, especially including the analysts, with the tools necessary to .
understand Enron’s business,

Whether the letter of the accounting rules were met or not, it is patently
obvious that the spirit of the rules was violated in that Enron's
financial statements did not fairly convey enough information for
investors to reasonably analyze the company’s operations.

In that climate, it is hard to be too critical of the analysts’ optimism.
Enron had a long history of showing consistent and substantive earnings
growth. If it had been up to me if I was in that situation, I would have
dropped coverage long before October 2001. The financial reports and
details of operations had become more and more inscrutable well before
then. But as I mentioned earlier, most, if not all, analysts did not have
that operation. All things considered, they probably did as well as could
be expected until October 2001, although in hindsight it is easy to say
that they could have at least tempered their bullish recommendations to
some degree.

However, once the issues of the off balance sheet items became an
unexplained issue on the 16 October 2001 conference call on 3Q01 results,
it does seem that the analysts could have moved quicker to either suspend
their recommendation or dramatically drop the level of their
recommendation. The unexplained $1.2 billion balance sheet writedown was
not a caution flag, it was a red flag.

But Enron is not the situation on which to challenge analyst performance.
There are far more significant situations were analyst conflicts and
performance are at issue. The lessons to be learned here is how to insure
that company’s and their auditors can be relied on to openly provide the
necessary tools for investors to meaningfully analyze the company’s
business.

02397

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Testimony of Richard L. Trumka

House Financial Services Committee

December 12, 2001

Page 4

Ironically, Congress passed the Employee Retirement Income Security Act (ERISA) to
prevent situations in which corporate bankruptcies meant workers lost their jobs and their
pensions, just like what happened to thousands of workers at Studebaker in the 1960s.

Decades later, thousands of Enron employees find themselves in the sane position.

I focus particularly on these workers because, unlike most other investors in the
company, by and large Enron workers did not have diversified portfolios. The bulk of
their retirement savings was in Enron stock. Many of the 1,000 members of the
International Brotherhood of Electrical Workers at Enron's subsidiary Portland General
Electric have suffered catastrophic losses, members like Roy Rinard, who watched
helplessly, his accounts frozen, as his twenty two years of retirement savings dwindled
from $472,000 to less than $3,500. Ken Kahloni, a former information and technology
manager at Enron, lost $75,000 in his 401(k). He said, "I took a pay cut to work there

two years ago, because I wanted to work for the 'best company.”

But the harm Enron's collapse has caused America's working families by no means stops
there, Workers’ retirement funds have lost tens of billions of dollars in the collapse of
Enron. Earlier this year, Enron was the 7th largest company in America measured by
revenue.* Enron's equity at its peak was worth about $63 billion, and its bonds another
$6 billion more. There was almost twice as much money invested in Enron stock than in

General Motors stock.’ Most pension funds and institutional investors held some Enron

02406

01300000001015


Tracking: Recipient Delivery Read
Cetina, Jill Delivered: 11002 12:15 PM Deleted: 1/14/02 1:36 PM

02996

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Testimony of Richard L, Trumka

House Financial Services Committee

December 12, 2001

Page 9

services, purporting to provide independent review on behalf of investors of transactions

some of which they themselves, may have designed and charged a fee for.

On the subject of auditors, some have suggested that auditors are not able to detect a
carefully hidden freud, one where the truth is completely hidden by management. And
that may very well be true, but that was not what happened at Enron. The financial
statements themselves contain the proof that the auditors were aware of each of the
transactions that led this company to grief—the self-dealing with the CFO, creating
partnerships to trade in the company's own stock, other partnerships whose purpose
seemed to be to generate dubious revenues, hide liabilities and otherwise bookable
derivatives positions from the investing public.” While none of these were disclosed in a
way to make them transparent to the investing public or to Enron's employees, there was
more than enough information in those statements alone to sound warning bells among

the auditors that signed off on them.

Then finally there were the Wall Street analysts. Ultimately investors look to the expert
analyst community to interpret the numbers released by the companies they invest in.
And here we saw again the spectacle of conflict of interest triumphing over duties to
investors. Enron was such a large firm doing so much business in the financial markets
that practically every Wall Street firm and post-Glass-Steagal] commercial bank had an
interest in courting the company. And in the eyes of their analysts, Enron was always @

good buy. Of course, if you knew enough to seek out independent analysts, many of

02411

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©2001 Bloomberg LP. Al nights reserved. Terms of Service <http www bloembere conviog, htmi>, Privacy Policy
<hiip:iwaw bloomberg com/privacy.himl> and Trademares <hitp /taww, bloomberg comrademarks, hfn!>

2 03034

01300000001644


Enron Chairman Gave Warning to Bush Officials on Company's Collapse

werw aytinies.com

Page | of 3

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WASHINGTON (AP) - Enron (news/quote) Chairman Kenneth L. Lay reached out to two of
President Bush's Cabinet officers when the energy company was collapsing, the White House — or ee that e all
disclosed Thursday as the Justice Department opened a criminal investigation of Enron's Lever m fe0n
bankruptcy.
. we . se . Easily change from TV
Bush, who received significant campaign contributions from Lay and other Enron executives, to VCR to DVD to
said he himself has never discussed Enron's financial problems with its embattled corporate Video Games with the

chairman. The president said he last saw Lay in Texas at spring fund-raiser for former first
lady Barbara Bush's literacy foundation.

touch of a button

Digital camera,
Lay also was among a group of some 20 business leaders who came to the White House carly peebcem and
in the Bush administration to discuss the state of the economy, Bush said. orere ner Inthe
Many Enron employees lost their life savings when the company filed for bankruptcy Dec. 2. firs time to put all of
lyour photos onto your
“ What anybody's going to find out is that this administration will fully investigate issues such computer
as the Enron bankruptcy, to make sure we can learn from the past and make sure workers are
protected.” Bush said. Time zone to time zone

But Lay did seek the ear of other top-level administration officials last fall.

According to White House press secretary Ari Fleischer, Lay telephoned Treasury Secretary
Paul O'Neill amid Enron's collapse “to advise him about his concern about the obligations of
Enron and whether they would be able to mect those obligations."

Lay also told O'Neill that Enron ‘was heading to bankruptcy,” Fleischer said.

ONeill received calls from Lay on Oct, 28 and Nov. 8, said Treasury spokeswoman Michele
Davis. It was on Oct. 16 that Enron made its stunning disclosure of a $638 million third-
quarter loss.

In a separate phone call to Commerce Secretary Don Evans, Lay similarly worried that the
company might have to default on its obligations. He brought to the secretary's attention “that
he was having problems with his bond rating and he was worried about its impact on the
energy sector,” Fleischer said.

After that conversation, Evans spoke to O'Neill ‘and they both agreed no action should be
taken to intervene with their bond holders," Fleischer said.

never set your watch
agen

__Advertisernent

03009

file://CAWINDOWS\Temporary%20Internet%20Files\OLK303 1\Enron%20Chairman%e20Gave%20Wamning... 1/16/02

01300000001619


—___ —__—__—____— ——_—_—_—___— — —
From: Nickoloff, Peter
Sent: Friday, November 23, 2001 12:08 PM
To; in, Norman; Schultheiss, Heidilynne
Subject: Enron and risk management
From ERisk.com
Walking On Air
meson. ERIsk

November 20, 2007

There's a much-loved moment in the world of cartoons when the heroes and villains chase each other way the
edge of a cliff or high building, sustained by their momentum. It's only when they notice the drop beneath thern that their
confidence fails, their legs stop moving and they plummet like a stone,

It's no surprise that the economic boom of the 1990s, followed by the sharp slowdown and geo-political turbulence of the
past 12 months, have given rise to a few moments like that in the corporate worid. It’s more worrying that institutions
whose principal skills are to identify and manage risk have also managed to ‘walk on air’ for an extended period,

The latest ai walker to come to grief seems to be international energy giant Enron, which after e difficull fey months
dwww. chron com/cs/COA/story Més/busine: 2583> is preparing to be swallowed up by Dynegy in an act thet wilt

rather resemble shark being eaten by a goldfish. Comment began to paint out

aby go through. fs notyeta Cera. I depends @ mater changes Becomang apparent wits regard

al ‘ough, it's not yet a cer J pends uj no ‘se mal anges ing Ap wi i

‘he ge ques, Enron's balance sheet, litigation peeps on. ms rege

It's too earty to be sure at any forensic level what went wi With Enron. But even more vertiginous drops have happened
this year across a spectrum of industries that has, at its h the competent management of financial risk. Some headline
examples are the collapse of the UK's Independent Insurance, the liquidation of Australia's

shitou/www erisk com/reference/case/ref case _hih.asp> and the fall of Superior Bank in the US.

The link between these diverse debacies is a failure in Corporate reporting, In a firm that manages risks this is important for
‘wo distinct reesons, The first is that most risk management companies - and not just banks, as Enron is discovering -
depend heavily upon market confidence in their creditworthiness in order to raise and preserve funding, and to make
‘ransactions in the markets that are their lifeblood. When that confidence disappears, a vicious spiral of fising funding
costs, asset deterioration, counterparty worries and liquidity risk begins to suck a cornpany down. (The mechanism is
discussed in this <http//www.erisk.com/news/features/liquidity odf> ERisk feature.)

The second distinct reason is that the way in which janies report risk in internal and external accounts Is critical in
companies that are, in essence, portfolios of intangible risky assets and liabilities. Last week Ellen Seidman, retiring head
of the US Office of Thrift Supervision, used her make that point

httos/wwwserisk. com/news/daily/nevs_¢ E x new

B with regard to the ssing fail upenior B ihe Said that the approval of
Superior's accounts, despite the bank's optimistic valuation of a highly volatile subprime lending portfolio, points to a larger
problem with bank accounting.

Across the risk management industries, risk-based transactions and portfolios are becoming more complex, valuations are

increasingly based on models and estimates, and in turn risk estimates are increasingly used to justify complex risk

retention or risk transfer strategies. Without a framework of sophisticated risk reporting and corporate governance, the

books of a firm can prove @ world of smoke and mirrors, held together by a collective act of faith in the executives or
corporation.

boards that rule the

Occasionally, that faith proves unjustified. And when that happens, history shows that equity investors have often walked

hand-in-hand with executives to the edge of the cliff. pen

Investors, unlike other stakeholders, are often happy that a company becomes more risky so as its prophecies of

future rewards are growing even faster, Executives that leveraging a firm's future reward profile can be achieved
vanous means: increasing market share at thin risk-adjusted margins; incurring difficult-to- measure long-tail liabilities;
ping @ fiem’s cashflows and liabilities using reinsurance contracts and options; or investing heavily in potentially

lucrative but increasingly risky ventures.

There's nothing wrong with any of these, providing a business succeeds in clearly communicating its risk position to

02584

01300000001193


Carleton, Norman

—_— — —
From: Nickoloff, Peter

Sent: Thursday, November 08, 2001 10:46 AM

To: Carieton, Norman; Schultheiss, Heidilynne

Subject: Enron to be acquired

From the New York Times:

November 8, 2001

Dynegy Is Said to Be Near to Acquiring Enron for $8 Billion

By RICHARD A. OPPEL Jr. and ANDREW ROSS SORKIN

arketwa pny 0 spk ;
mighty energy-trading company laid low by a financial crisis and government investigation, executives close to
the transaction said.
A deal would enable Dynegy to buy the much bigger Enron at a fire-sale price - about $8 billion in stock, or
roughly $10 a share, for a company that less than a year ago had a market value of nearly $70 billion. But with
stock and bond investors fleeing, some of its trading partners refusing to do business with it, Enron had few
choices but to talk to Dynegy.

As part of the deal, Chevron (news/quote </redirect/marketwatch/redirect.ctx?
MW =http://custom.markelwatch com/cus ompanyprofile &s >) Texaco
(news/quo edi a watch redirec om/‘custom/nyt-com/html-

xD lip. $ =i a
sompanprofile.aspSsyinh—TS-), which owns a 27 percent stake in Dynegy, would give Enron a cash infusion
of at least $1.5 billion up front and an additional $1 billion when the deal closed.

The executives said the companies hope to finalize the details and announce the deal today.

If completed, a takeover by Dynegy, a company only about one-quarter its size in revenue, would represent a
remarkable humbling of Enron, the nation's biggest buyer and seller of natural gas and electricity. Enron had
$139,7 billion in revenue for the first nine months of the year.

As recently as last spring Enron was lionized by investors as an innovator that had in many ways created and
cleverly dominated the nation's deregulated energy markets. It would also vindicate not only Dynegy, which
took a more measured approach to doing business in those markets, but also critics uncomfortable with energy
deregulation who said Enron's energy trading was ruthless, its finances murky and its power and influence too
extensive.

The company’s chairman and chief executive, Kenneth L. Lay, is a close friend of President Bush. He has been
one of Mr. Bush's largest campaign contributors, and no other energy company gave more money to Republican
causes last year than Enron. Mr. Lay would be on the board of the combined companies, the executives said, but
it was unclear if he would have an operational role.

Enron's problems came to light last month when the company disclosed $1 billion in write-downs and an
unusual $1.2 billion reduction in shareholder equity. The reduction in equity arose from transactions with
investment partnerships involving Andrew Fastow, the chief financial officer, who was forced to resign on Oct.
24. The Securities and Exchange Commission is investigating those transactions.

Enron is expected today to send the S.E.C. answers to questions the agency has posed in its investigation. The
answers have been reviewed by Dynegy officials, the executives said, and are expected to be released publicly.

Enron is scheduled to meet its creditors tomorrow about the company’s continuing crisis - and about the merger

02590

01300000001199


Campuigu Gitts, Loboywy buiit Larvi's Cuwer sal
Washington

By Dan Morgan and Juliet Eilperin
Washington Post Staff Writers
Tuesday, December 25, 2001; Page AQ!

During the administration of the first President George Bush, a new party fundraiser named
Kenneth L. Lay was invited to spend the night at the White House. The sleepover was an carly
coup for the chairman of Enron Corp. and a harbinger of things to come.

Over the following decade, Lay and Enron poured millions of dollars into U.S. politics,
cultivating unequaled access and using the entree to lobby Congress, the White House and
regulatory agencies for action that was critical to the energy company's spectacular growth.

Now, with Enron's sudden bankruptcy, public attention has tumed not only to the financial
practices that brought the company down, but to what its far-flung political operations say about
the country's campaign finance system.

Some Democrats in Congress are spoiling for an opportunity to use Lay and Enron to embarrass
the Republican Party, which received most of the company’s largess over the years. They want to
look into such things as Enron's relationship with Phil Gramm {R-Tgx.), ranking minority
member on the Senate Banking Committee and chairman of the commitfee at a time when his
wife, Wendy L. Gramm, was serving on Enron's board. Last year, Gramm's committee approved
legislation that included a key provision exempting parts of Enron's massive energy trading
operation from federal oversight.

"IT think the Enron story is going to turn out to be an enormous political story." said Rep. Henry
A. Waxman (D-Calif.), ranking minority member on the House Energy and Commerce
Committee.

The ties of Lay to the White House and GOP leaders, he added, were so multilayered that
Republicans are likely to be reluctant to pursue them. But he made clear that he intends to do so
and expects the Democratic-controlled Senate to follow suit.

Enron also cultivated relationships with Democrats, however. Lay played golf in Vail, Colo.
with President Bill Clinton, and Enron gave hundreds of thousands of dollars to Democratic
campaign committees and Democrats in the House and Senate. including Sen. Charles E.
Schumer (N.Y.) and Rep. Martin Frost (Tex.), the ranking minority member on the House Rules
Committee.

A Routine Cost for Some

Advocates of campaign finance reform say the Enron case vividly illustrates the tics between
polities and big money, though it's unclear that the company's political operations were radically
different from others for whom political contributions have become a routine cost of doing
business.

02158

01300000000767


2000.)

Enron stands to gain twice: first, by providing the services itself, and second, by further increasing online trade
volumes in a market where it has a clear ownership stake.

: 02572

01300000001181


Jonathan G, Katz
December 12, 2001
Page 3

Enron Corporation

As you are no doubt aware, Enron Corporation recently filed the largest bankruptcy
case in U.S. history, precipitated by a massive crisis of investor and customer confidence.
Enron has already announced plans to lay off or put on leave 7,500 workers, and the value of
Enron stock held in employees’ 401(k) retirement accounts has declined by $1.3 billion since
the beginning of 2001. The market capitalization of Enron, which was the seventh largest
company in the Fortune 500, plunged from over $60 billion at its peak last year to under $1
billion last week. Enron’s inclusion in the S&P 500 index until shortly before the
bankruptcy filing means that the broader market and the many investors who index their
equity holdings are also suffering as a result of Enron’s failure.

The AFL-CIO is a federation of trade unions that represent 13 million working men
and women who participate in the capital markets as investors through defined benefit and
defined contribution plans as well as through mutual funds and individual accounts. Our
member unions sponsor benefit plans with over $400 billion in assets, and our members are *
participants in public employee and collectively bargained single-employer plans with over
$5 trillion in assets, Our union-sponsored funds alone are the beneficial owners of
approximately 3.1 million shares of Enron stock, through both actively-managed and passive
{or indexed) portfolios.

Enron’s meltdown was caused by a number of factors, among them a cavalier attitude
toward disclosure, inadequate intemal controls and an approach to accounting that at best can
be characterized as careless and at worst constituted a conscious effort to mislead investors
and the public about the profitability of Enron's operations. These problems point to an
abject failure by Enron’s board, especially its finance and audit and compliance committees,
in the discharge of its monitoring duties. We believe that the lack of independence on
Enron's board and key committees contributed to this failure.

At first glance, Enron's board and key committees appear to be composed primarily
of independent directors. According to Enron’s 2001 proxy statement, of the 14 directors
nominated for reelection at the 2001 annual mecting,’ eight, or nearly two-thirds, lacked
disclosable relationships with Enron. Of members of the audit and compliance committee,
which was responsible for reviewing the effectiveness of internal controls and the application
of accounting principles, only one, John Wakeham, has disclosable ties to Enron, in the form
of a $72,000 per year consulting arrangement. A majority of members of the finance
committee, which oversaw Enron’s risk management activities, are similarly independent,

However, further research reveals that several of the eight ostensibly independent
directors, including two who serve on the audit and compliance committee and one who
serves on the finance committee, actually have relationships with Enron or its senior

: One of those directors, thea-CEO Jeffrey Skilling, resigned from both his executive and director positions in
August it

02390

01300000000999


T also want to talk about what I believe are some of the lessons we can already leam from Enron
— for our firm, for the accounting profession, and for all participants in the financial reporting
system.

Let me start by telling you what we know about three particular accounting and reporting issues:

* the restatements caused by the consolidation of two Special Purpose Entities, known as SPEs,
and the recording of previously “passed” adjustments as a required byproduct of the
restatement;

* $1.2 billion reclassification in the presentation of shareholders’ equity during 2001 — of
which $172 million was misclassified in the audited 2000 financial statement, and;

© the company’s disclosures about its off-balance-sheet transactions and related financial
activities.

I want to emphasize that my remarks are based on the information that is currently available. We
have made our best efforts to be complete and accurate in describing what we know. But our
review, like the work of the SEC, this Committee, Enron’s board, and others, is not yet complete.
It is always possible that new information could be developed that would change current
understanding of events or uncover new events.

Consolidation of Special Purpose Entities

Let me begin with the Special Purpose Entities. SPEs are financing vehicles that permit
companies, like Enron, to, among other things, access capital or to increase leverage without
adding debt to their balance sheet. Wall Street has helped companies raise billions of dollars with
these structured financings, which are wel] known to analysts and sophisticated investors.

Two SPEs were involved in Enron's recent restatement announcement. On one, the smaller of
them, we made a professional judgment about the appropriate accounting treatment that tumed
out to be wrong. On the one with the larger impact, it would appear that our audit team was not
provided critical information. We are trying to determine what happened and why.

Let's begin with the larger SPE, an entity called Chewco. What happened with Chewco
accounted for about 80 percent of the SPE-related restatement.

Tn 1993, Enron and the California Pubic Employees Retirement System (Calpers) formed a 50/50
partnership they called Joint Energy Development Investments Limited, or JEDI for short,
Among other factors, the fact that Enron did not control more than 50 percent of JEDI meant that

2

02350

01300000000959


Pursuant to Generally Accepted Auditing Standards (“GAAS”), an auditor has
responsibilities when an error is discovered regardless of whether the auditor or its client
discovers the error, Statement of Auditing Standards No. 1, which is part of GAAS, sets
forth the procedures an auditor should follow when, subsequent to the date of the audit
report, the auditor becomes aware that facts may have existed at the date of the report that
might have affected his or her report. When subsequently discovered information is
found both to be reliable and to have existed at the date of the audit report, the auditor
should advise the client to make appropriate disclosure of the newly discovered facts and
their impact upon the financial statements in cases where the auditor believes; (a) the
audit report would have been effected if the information had been known at the date of
the report, and (b) there are persons currently relying upon the financial statements who
would attach importance to the information.

Our capital markets are much more efficient if, instead of correcting information
in restatements, the original financial statements reflect appropriate accounting policies
and contain appropriate disclosures the first time. To that end, the staff of the SEC wants
to work together with the corporate community, the accounting profession, and private
sector standard-setting bodies to advance, not just protect, the interests of investors by
helping companies to get financial reporting right the first time.

Accounting for Special-Purpose Entities

Enron's Form 8-K filing discloses that three previously unconsolidated special-
Purpose entities (“SPEs") should have been included in Enron's consolidated financial
statements, An SPE is an entity created by a sponsor to carry out a specified purpose or
activity, such as to consummate @ specific transaction or series of transactions with a
narrowly defined purpose. SPEs are commonly used as financing vehicles in which
assets are sold to a trust or similar entity in exchange for cash or other assets funded by
debt issued by the trust. In many cases SPEs are used in a structured transaction or series
of transactions to achieve off-balance sheet treatment. In addition, use of SPEs can
provide a lower cost of financing and can create tax advantages. An SPE, however, is

10

02336

01300000000945


Derivatives Study Center Page 3 of 14

government is supposed to,” said Comall's Bailey. “But the tax cut also has to be something that will genuinely encourage people to spend. If
i's too exclusive, it's not going provide much relief to the economy in the long torm,”

Wednesday, September 19, 2001

Newscast: Terrorists may have attempted to profit from a drop in airline stocks after the four hijackings

09/20/2001
CBS News: Morning News
(c) Copyright 2001, CBS Worldwide Inc. All Rights Reserved.

SUSAN McGINNIS, anchor: Federal investigators are following a moncy trail, trying to find out if terrorists profited from stock swings blamed
on the suicide attacks. Sharyl Attkisson reports.

SHARYL ATTKISSON reporting:

Sources tell CBS News that the afternoon before the attack, alarm bells were sounding over unusual trading in the US stock options market, an
extraordinary number of trades betting that American Airlines’ stack price would fall. The trades are called "puts," and they involved at least
450,000 shares of American. But what raised the red flag is more than 80 percent of the orders were puts, faz outnumbering call options, those
‘betting the stock would rise. Sources say they've never seen that kind of imbalance before. Normally, the numbers are fairly even.

After the terrorist attacks, American Aitlines’ stock price obviously did fall,, and according to our sources, that translated into well over $5
million total profit for the person or persons who bet the stock would fall. Sources tell "60 Minutes" that the initial options were bought through
at least two brokerage firms including, including NFS, a subsidiary of Fidelity, and TD Waterhouse, a discount firm. At least one Wall Street
firm reported suspicions about this activity to the Securities and Exchange Commission shortly after the attack.

The same thing happened with United Airlines on the Chicago Board Options Exchange four days before the attack. An extremely imbalanced
mamiber of trades betting United's stock price would fall also transformed into huge profits.

Mt. RANDALL DODD (Economic Strategy Institute): We can directly work backwards from the trade on the floor of the Chicago Boards
Option Exchange, That trader is linked to a brokerage firm. That brokerage firm received the order to buy that put option ftom either someone
within their own brokerage firm speculating or from one of their customers,

ATTKISSON: Now US investigators want to know whether Osama bin Laden was the ultimate inside trader, profiting from a tragedy he's
suspected of masterminding to finance his operation. Authorities are also investigating possibly suspicious trading in Germany, Switzerland,
Traly and Japan.

The stock trail could stop at the water's edge if the money came fro banks in places that don't cooperate with the US. But insider trading is
always motivated by greed, and a senior Wall Street executive noted it would be ironic if the terrorists’ greed ended up providing one of the best
Jeads investigators have, Sharyl Attkisson, CBS News, Washington.

Saturday, September 22, 2001

CQ WEEKLY - THE ECONOMIC INITIATIVE
Sept. 22, 2001, Page 2200

A Cautious Start for Stimulus
By Julie Hirschfeld Davis, CQ Staff

The cusp of @ war, a swoon in the securities markets and the destruction at
the nation’s financial epicenter have jolted both parties in Congress and
President Bush into rethinking how the federal government should stimulate
an already weak economy.

Greenspan, at right, was among the economists urging the 107th Congress to

take a "go slow" spproach to writing legislation designed to stimulate the

economy. He and Securities and Exchange Commission Chairman Harvey Pitt (@) 2 6 1 2
1/15/02

01300000001221


Jonathan G. Katz
December 12, 2001
Page 4

Certain non-audit services pose a more significant threat to an auditor's
independence than others, The Commission recognized this in the 2000 rulemaking,
when it prohibited firms from providing certain services, like bookecping services.
However, the Commission determined that audit firms could continue to sell information
technology and internal audit consulting services to audit clients, as long as certain
requirements, designed to lodge ultimate responsibility for the systems with the client, are
satisfied, We believe this was a mistake.

The provision of information technology and internal audit services raise several
serious problems, First, in cases where an information technology project is
unsuccessful, a company may not be permitted to capitalize the costs of the project on the
balance sheet (thereby creating an asset), but rather is required to expense them, thus
reducing income. An accounting firm that botched the consulting job will be less likely,
we think, to be assertive with management about the need to expense the item.

Similarly, if the auditor discovers, during the course of an audit, a theretofore «
undiscovered problem with software or an internal audit system the auditor designed and
installed, the auditor is in the uncomfortable position of having to inform the client about
the audit firm's own error. Finally, in a real sense the audit firm is auditing it own work
because assessing the reliability of the numbers gencrated by an information technology
or internal audit system is a part of the audit function.

We believe that the conditions imposed on audit firms in connection with
information technology and internal audit consulting services are easily manipulated and
do not mitigate the danger that the auditor and client will come to view the auditor as an
extension of management and that the auditor will experience difficulty in vigorously
auditing its own work.

Attention should be focused on another kind of consulting service, one that was
not raised in the 2000 rulemaking but that has been brought to the fore by the Enron
debacle. Enron's restatement of several years’ worth of financial statements stemmed in
part from the acknowledgment by Enron that the financial results of off-balance-sheet
special purpose entities (“SPEs”) set up by Enron—and in some cases managed by Enron
officers—should have been consolidated with Enron's own results. In one case, Enron
conceded that consolidation was necessary because the SPE had been inadequately
capitalized when it was established.

Enron paid Arthur Anderson $27 million in 2000 for non-audit consulting
services, including fees for “business process and risk management consulting.” We are
concerned that this category may include consulting regarding the transactions pursuant
to which one or more of the erroneously non-consolidated SPEs were established. Such
an arrangement would, we think, create an unacceptable conflict of interest, requiring
Arthur Andersen's audit personnel to question the judgment of its consultants on a matter
which could—and eventually did—have a major impact on Enron’s financial results. We
urge the Commission to consider amending Rule 2-01 of Regulation S-X to provide that

02385

01300000000994


__ 42.05/03 15:46 FAX 202 646 5199 G019-025
- |

WSI.com ; Page ] of
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| ‘SOLUTIONS
wwe carte fer

December 2, 2001
DawJones Newswires
Enrop Files For Chapter 11 Bankruptcy

HOUSTON, Dec. 2 /PRNewswire/ -- Enron Corp. (NYSE: ENE) announced today thar it along with
cenain of its subsidiaries have filed > oluntary petitions for Chapter 11 reorganization with the U.S.
Bankruptcy Court for the Southern [istrict of New York. As part of the reorganization process. Enron
also filed suit against Dynegy Inc. @ YSE: DYN) in the same court, alleging breach of contract in
connection with Dynegs's wrongful ermination of its proposed merger with Enron and seeking damages
of at least $10 billion. Enron's lawsu t also secks the court's declaration that Dynegy is not enulled to
exercise its option to acquire an Enren subsidiary that indirectly owns Norther Natural Gas Pipeline.
Proceeds from the lawsuit would ber efit Enron's creditors

a.med at prese

02263

In connection with the company's Cl apter 11 filings, Enron js in acuve discussions with leading
financial institutions for debtor-in-pr ssession (DEP) fimancing and expects to complete these discussions
shortly. Uipon the completion and cc at approval of these arrangements, the new funding wil! be
available immediately on an interim basis to supplement Enroa’s existing capital and help the company
fulfill obligations associated with of:trating its business, including its employee psyrol! and payments to
vendors for goods and services prov ded on or after today's filing.

Filings for Chapter 11 reorganization have been made for a total of 14 affiliated entities, mcluding
Enron Corp.; Enron North America “orp., the company's wholesale energy trading business, Enron
Energy Services, the company's reta | energy marketing operations; Enron Transportation Services, the
holding company for Enron's pipelire operations; Enron Broadband Services, the company's bandwidth
trading operation, and Enron Metals & Commodity Corp.

Enran-related entities not included i. the Chapter 11 filing are not affected by the filing. These non-
filing entities include Northern Natu'al Ges Pipeline, Transwestern Pipeline, Florida Gas Transmission.
EQOTT, Portiand Genera! Electric an|t numerous other Enron international entities.

|
To conserve capital, Enron will imp ement a comprehensive cost-saving program that will include
substantial workforce reductions. Ti ese workforce reductions primarily will affect the company’s

ictive.wsj.com archivere wieve.cgi7i¢=DI-CO-20011202-000436.djml&templates;.... 12/3/01

1300000000872


©2001 Bloomberg L.P. All nghts reserved. Terms ct Service <hittp:/\waw bloomberg comics html>, Privacy Policy
chiteuiwanw bloomberg compnvacy himi> and Trademarks <hiip:/Mwww blocmbers com/trademarks htmt>

Trac ing: ecipient Deli ery ead
Gross, Jared Delivered: 11/2001 4:44 PH ead; 11/20/01 4:53 PM

, 03018

01300000001628


Carleton, Norman

From: Carleton, Norman

Sent: Wecnesday, November 07, 2001 3:05 PM
To: Nickoloff, Peter; Schultheiss, Heiditynne
Subject: DJ: Calpers Board To Meet On Enron Investments Next Week

November 7, 2001

Calpers Board To Meet On Enron Investments Next Week

By JASON LEOPOLD

Of DOW JONES NEWSWIRES

LOS ANGELES -- The board of California's Public Employees’ Retirement System plans to meet next
wee ‘io discuss how best to protect its investments in Enron Corp. (ENE), a Calpers spokesman
sal Inesday.

Calpers, which holds 3 million shares in the Houston energy company and a $500 million stake in an
Enron partnership called Joint Energy Development Investments Ii, has a history of shareholder
aciiviam, but it's too early to speculate on what steps the board may take, spokesman Brad Pacheco
said.

Theoretically, the board could decide to take a more activist approach, because the energy
company’s stock is "underperforming," Pacheco said.

“If a company is underperforming, we focus on the board structure and sit down with the directors of
the company and say these are the issues," Pacheco said. “If the company does not cooperate, we
increase our shareholder propriety and we could move forward with several actions, including
litigation, to say the board has breached its fiduciary responsibility.”

Enron's shares fell to a low of $7 Wednesday before rebounding on a Wall Street Journal report the
company was in talks with Dynegy Inc. (DYN) for a cash infusion and potentially a full merger.

Concerns about the company's dealings with off-balance sheet partnerships like JEDI II have driven
the decline, which has erased three-quarters of the company’s share price since mid-October.
Enron's credit ratings have also been downgraded,

Calpers hasn't yet approached Enron executives to discuss the plunge in the company's stock and
the quality of its investment, Pacheco said.

Last week, California state Sen. Steve Peace, D-El Cajon, wrote Calpers Chief Executive James
Burton urging the pension fund to take steps to defend its investment in Enron.

ral pers may play a significantly larger and more active role in the governance of Enron to ensure

that Enron directors do not have conflicting interests, that Enron adheres to a policy of full financial

disclosure and transparency and that Enron's board is comprised of a substantial majority of truly

independent directors who understand their accountability to shareholders," Peace wrote in the Oct.
etter.

Calpers’ board will discuss the letter in a closed-session meeting scheduled for Tuesday in
Pasadena, Calif., but isn’t bound to act on it because Peace isn't a boardmember, Pacheco said.

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WS] .com i Page 2 of?

In that capacity. Mr. Lay became close to several Bush aides, including political gure Kar! Rove and
commustcations adviser Karen Hug! ss, who have taken positions al the Wiite House. He also got to
know another leading Texas busines. man: Dick Cheney, then CEO of Dallas oil concern Halliburton
Co., who would become Mr. Bush's sick for vice president.

Against this backdrop. Mr. Lay was widely considered a top candidate for Treasury Secretary in the
younger Bush's administration, Ultin ately though, he was disqualified, Bush insiders say, as too closely
identified with Mr. Bush, Mr. Chene-' and others who worked in the Texas energy business for an
administration that wanted to show | wasn't in the pocket of big oil companies

Early on, Mr. Lay had unrivaled acci'ss to the administration. When the president's advisers debated a
new energy policy in the spring, Mr. Ly was the only energy executive to be invited for a one-on-one
session with Mr. Cheney, who led th: effort. Mr. Lay also worked with Mr. Rove and others to
successfully push for appointments t. the Federal Energy Regulatory Commission, which oversees
much of Enron's business.

As Enron's problems multiplied and ts fortunes plummeted, however, the White House was silent.
During a several-hour long interview in the spring, Mr. Lay mused that his Bush connections could
boomerang someday. “It could hurt, ‘tom the standpoint that, at some point, they Jean in the other
direction to make sure they don't fac - criticism,” he said

Write to Bob Davis at hob davis@y s.comTM

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01300000000868


Jonathan G. Katz
December 12, 2001
Page 2

Stock Exchange and the Nasdaq market require listed companies of a certain size to maintain
audit committees composed of independent directors, and the Commission requires
companies to disclose information regarding the mandate, membership and functioning of the
audit committee,

Current Disclosure Requirements

The Commission's rules also, in essence, define independence by requiring
disclosure in the proxy statement of certain relationships between directors (or director
nominees) and the registrant (and in some cases its executive officers) that could compromise
the director's objectivity. These requirements focus on employment, family, and business
relationships, Currently, the following relationships involving directors and director
nominees must be disclosed:'

1. Current or past employment by the registrant;

2. Family relationships between the director or nominee and the registrant's
executive officers;

3. Transactions with the registrant or any subsidiary in which the ammount involved
exceeds $60,000 and in which the director or nominee has a direct or indirect material
interest;

4. Indebtedness to the registrant or any subsidiary in an amount in excess of $60,000;

5. The ownership of certain equity interests in, or service as an executive officer of,a
business or professional entity (a) that is a significant customer of the registrant, (b)
that is a significant supplier of the registrant, or (¢) to which the registrant is indebted
in an amount exceeding a threshold;

6. Status as a member of, or of counsel to, a law firm that the registrant has retained
during the last fiscal year or proposes to retain during the current fiscal year, subject
to a minimum threshold;

7. Status as a partner or executive officer of an investment banking firm that has
performed certain kinds of services for the registrant during the last fiscal year or that
the registrant proposes to have perform services during the current fiscal year, subject
to a minimum threshold; and

8. Any other relationship similar in scope and nature to the relationships listed above.

' ‘These disclosure requirements arc set forth in Items 401 and 404 of Regulation S-K.

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Derivatives Study Center

economists doubt that congressional moves to alter fiscal policy can counter
a recession because of the difficulty of enacting a stimulus quickly enough
to stop a flagging economy. Some suggest the government's options for
spurring investment and retail spending will be inadequate to countermand
the loss in consumer confidence expected to flow from the attacks. Others
say the possible tax law changes would take effect too late to counter a
downtum that may have begun before Sept, 11 and that seems sure to get
worse, at least in the near term.

"These investment stimuli tend to reinforce an expansion, but they‘re not
going to turn things around, because firms are going to be constrained on
the demand side by the market," Wykoff said. "You can't really juice up
investment if investors aren't ready to invest.”

But some lawmakers say it is important for Congress to respond in some way,
if only to demonstrate solidarity and a resolve to keep the U.S. economy on
firm footing. "Sometimes we need to take action just to give ourselves a
psychological boost,” said Ways and Means Democrat Robert T. Matsui of
California, although he added, "I don't have a lot of confidence in these
microeconomic measures having a great macroeconomic effect."

And while many Democrats want to ensure that any stimulative tax relief is
temporary -- with an eye toward controlling the loss of revenue to the
Treasury and thereby keeping long-term interest rates in check -- several
Republicans maintain that the package should make permanent changes in tax
law, in the belief that promised continuity of the tax code would help boost
economic activity.

Bang for the Buck

Not surprisingly, large differences separate Republicans and Democrats on

the question of what those measures should be, While lobbyists and lawmakers
acknowledge that any stimulus package would need to be a bipartisan product
in order to become law, talk of additional tax cuts already has revived
long-running debates.

Eager to assert his prerogative as the House's chief tax writer, just three

days after the attack Thomas recommended an ambitious tax package including
a capital gains rate cut, an increase in small-business expense deductions

and a reinstatement of the investment tax credit. He also proposed a

short-term acceleration in the business depreciation schedule. (CQ Weekly,

p. 2132)

Business groups have quictly expressed support for many of those proposals,
most of which have been on their own wish list for some time, and they began
pushing for additional tax breaks as well. This led some Democrats to begin
criticizing the GOP and the business community for political opportunism in
the heat of a national crisis. As a result, it took some personal appeals

from Rangel to get fellow Democrats to attend a Sept. 17 meeting with Thomas
to talk about stimulus options,

The situation led to some awkward positioning as business groups sought to
balance their desires for tax relief against their reluctance to look

selfish. On Sept. 17, U.S. Chamber of Commerce President Thomas Donohue
downplayed his group's zeal for immediate additional tax cuts, saying "We'll
have some discussion of a stimulus package in the future." But later in the

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Listen
Guests:

‘Randall Dodd, Professor of Economics at American University
Jeffrey Robinson, author of "The Laundrymen: Inside Money Laundering, the World's Third-Largest Business"

Wednesday, September 25, 2001

Bush goes after terrorists’ funds / President freezes assets in U.S., pressures foreign banks to aid

in financial crackdown
Carolyn Lochhead

Chronicle Washington Bureau

09/25/2001

‘The San Francisco Chronicle
FINAL

Al

President Bush threatened yesterday to freeze the U.S. operations of foreign banks that do not cooperate in a financial crackdown on 27
suspected terrorists and terrorist groups.

“Money is the lifeblood of terrorist operations," Bush said. "Today we're asking the world to stop payment,”

The executive order requires U.S. financial institutions to immediately freeze the assets of groups on the list and prohibits any U.S, citizen or
business from doing business with anyone on the list.

‘re amination has no authority to fore foreign banks todo likewise but the texto shut down ther U.S. operations could rove Powers
leverage, given the dominating role the United States plays in global finance.

se order gues wel beyond the fee fasts impose by President Bill Clintons 1998 aginst Osama bin Laden th goverment hit
empect an the Sept. 11 attacks on New York City aed the Pentagon. That freeze had lite ffest

Bush called the move "a major thrust of our war on terrorism,” making the announcement in the Rose Garden accompanied by Secretary of State
Colin Powell and Treasury Secretary Paul O'Neill.

Conceding that most terrorist assets probably are located overseas, Bush said the adeninistration had created "the international financial
equivalent of law ‘enforcement's "Most Wanted list."

"It puts the financial world on notice," Bush said. "If you do business with terrorists, if you support or sponsor therm, you will not do business
with the United States of America.”

The threat could affect such famous bank havens
as Switzerland, Grand Cayman and Dubai.

Bush said the administration will work with the governments of foreign banks that might be harboring assets of groups oF individuals on the list
and “ask them to freeze or block terrorists’ ability t0 access fands in foreign accounts. If they fail to help us, . .. the Department of the Treasury
now has the authority to freeze their banks’ assets and transactions in the United States.”

‘The administration list targets bin Laden and his al Queda network, but also includes Egypt's Ab-Jibad, the Libyan Islamic Fighting Group, and
the Islamic Movement of Uzbekistan, a group said to number as mary as 3,000 fighters trying to create an Islamic state within three nations just
north of Afghanistan, The list also includes suspected individual terrorists.

In an attempt to shut down what is believed to be bin Laden's large fund-raising network, the administration included two nonprofit groups,

Wafa Humanitarian Organization and Al Rashid Trust 0 2 604

1/15/02

01300000001213


Derivatives Study Center Page 13 of 14

or deny any such investigations.

“We are vigorously pursuing all credible leads, but at this time we have drawn no conclusions,” the SEC said ina
statement last week. “We are working closely with other federal law enforcement authorities, as well as the self-
regulatory organizations and our foreign regulatory counterparts, to provide all possible assistance.”

Short selling and activity in so-called “put” options on airlines and hotel stocks soared to “levels we have not seen
in years,” according to Phil Erlanger, a former senior technical analyst at Fidelity Investments.

“Puts” are essentially bets that a particular stock or other security is going to fall in value.

Erlanger, who now tracks shorts and options via his Web site www erlangersqueezeplay.com, has just released new
data on option and short trading prior to the attack, gleaned from the New York Stock Exchange.

“] saw these charts, and I said, ‘This is not normal activity,” Erlanger said.

In his technical analysis of the charts created from the options data, Erlanger said the “footprint for taking
advantage of prior knowledge fof the attacks] is definitely there.”

Erlanger has turned his data over to the NYSE and SEC.

“It's up to the agencies to find the shoe that fits the footprint to see whether this was indeed action taken with prior
knowledge,” Erlanger said.

Although not a sure sign of illegal activity, the activity in put options is only seen “under extraordinary
circumstances,” Erlanger said, such as when the country is at war. To have seen the activity in the airlines and hotels
balloon right before the attack is highly suspicious, he said. “It doesn’t prove that XYZ terrorists or associates of
terrorists or even a country or government of a terrorist did these trades or someone with prior knowledge did these
trades,” Erlanger said, However, he said with a heavy sigh,” it’s so out of the ordinary that it’s walking like a duck and
quacking like a duck.”

For example, United Airlines saw a 40 percent jump in shorts — some 4.4 million shares — compared with a
month earlier. And American Airlines saw 4,078 put options sold on Sept. 10, compared with an average of 200.
According to Erlanger’s calculation, if one person carried out that transaction on the 4,000 AMR puts, he would have
netted a profit of $4.8 million.

“The potential is for hundreds of millions of dollars (to have been made here),” Erlanger said of all the combined
activity on Sept. 10.

In an apparent act of trader hubris, Erlanger says some investors were also making huge speculative bets in
American Airlines doing “naked call selling” in which an investor pledges to sell stock he or she doesn’t own.
Normally, in selling “calls” the investor actually owns the underlying security, If a naked call sell goes sour, the losses
could be huge.

But in the wake of American Airlines stock tumbling, making moncy on the naked calls “was a layup, it was easy
money,” Erlanger said.

GREEN AND GONE

Although such trades leave a well-documented paper trail, actually finding those involved or freezing any illegal
assets may be moot.

“My suspicion is that if they had a U,S. account I’m sure they took the cash out and split,” said Randall
Dodd, of the Washington-based Economic Strategy Institute and head of its Derivatives Study Center. “These
guys don’t appear to be stupid,” Dodd said, “and they could have taken their money out shortly after the

exchange Fr
Making matters tougher on USS. investigators would be if the deals and profits were funneled through a network of

offshore accounts and murky banking franchises whose dealings help lubricate the impoverished economies of countries
known for their status as secretive tax havens.

“More likely they didn’t work in cash and had the funds transferred to an overseas, account that I can only
suspect was ina country that wasn’t as cooperative (with U.S. banking investigations),” Dodd said. “A clear
audit trail can quickly disappear” once it has gone overseas, he said,

Indeed, other countries also have been looking into suspicious trades but have so far come up empty or have
declared nothing out of the ordinary occurred.

However, Bundesbank President Emst Welteke said in Liege, Belgium, on Saturday there were “ever clearer signs
that there were activities on international financial markets which must have been carried out with the necessary expert
knowledge” that the tragic events in New York and Washington were about to take place,

If the profits are still inside U.S. banks, the SEC can take some action to at least keep the money from being spent
or disappearing into the world’s shadow financial networks of money laundering and coded accounts.

1/15/02 02608

01300000001217


the continuing operations of our trading and other core energy businesses.”

In canceling the proposed merger, Dynegy said it would exercise its option to buy Enron's Northern
Natural Gas Pipeline, something it was entitled to because Dynegy's partner, ChevronTexaco,
pumped $1.5 billion cash into Enron when the Nov. 9 merger agreement was struck

Many in the industry believe Enron will be forced to file bankruptcy as a result of the Dynegy pull-out.

Enron would not comment on whether a bankruptcy filing is in the works, but the company says it is
reviewing its option to repay Dynegy the $1.5 billion cash, which would allow it to retain Northern
Natural Gas Pipeline.

Should Enron file for bankruptcy protection, it would be the largest corporate bankruptcy in U.S.
history. Enron's third quarter balance sheet lists $61.8 billion in total assets, which eclipses the $35.9
billion worth of assets Texaco Inc, listed when it filed for bankruptcy in 1987.

aeeee

November 26, 2001

Reload

October 30, 2000
www. internetweek.com/transformation2000/coverstory/enron.htm

shttp://www.internetweek.com/t lor

Enron's Web Retreat

Many of Enron Corp.'s online businesses may not make the cut as the company, exposed to billions
of dollars in debt from off-balance-sheet deals, prepares to be acquired.

Enron's pioneering moves in online trading eamed the company the cover of InternetWeek's
Transformation Of The Enterprise issue in October 2000. At its apex last year, Enron had a market
value of around $80 billion, as it posted $100 billion in revenue.

But Enron's stock plunged over the last month amid revelations that company executives had created
limited partnerships which reportedly left Enron exposed to $3.3 billion in outstanding notes, With its
market value and image decimated, Enron this month accepted an $8 billion buyout offer from rival
Dynegy Inc., which has agreed to inject $1.5 billion to keep Enron's trading desk afloat.

Enron pioneered Web trading of energy commodities with EnronOnline, where the company buys
and sells futures on up to 1,500 products, doing more than $4 billion in daily transactions. Most of
that trading is still in energy products, though Enron had diversified into bandwidth, paper, steel,
freight storage and other commodities. With the Dynegy deal, however, Enron plans to focus on
“core” energy activities and dump other assets.

The first casualty is Enron Broadband Services, which owns about 15,000 miles of optical fiber and

25 network interconnection facilities in the United States. EBS envisioned buying and selling
bandwidth as a pure commodity like natural gas, but bandwidth trading volumes never approached
the level needed for a liquid market. Enron is looking to sell EBS, a spokesman says.

Enron has yet to make a decision on its other online trading businesses, including Net Works, the
incubator that developed most of the technology that underpins EnronOnline. Each business will be
reviewed "based on their capital requirements and near-term growth prospects,” the spokesman

, 02271

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Derivatives Study Center

shift in political rhetoric on Capitol Hill. Republicans and Democrats --

who were hurling accusations of fiscal mismanagement at each other until the
moment the airliners struck the World Trade Center and Pentagon -- have cast
that rhetoric aside,

“The definition of how much is: enough to get America going again," the
president declared Sept. 19, when he was asked how much he was willing to
spend of the surplus revenue once dedicated to the Social Security trust

funds -- the so-called lockbox. (Background, CQ Weekly, pp. 2126, 2050)
"The leaders from the Congress are very reasonable, and they are mindful
about government money as well as anybody else,” Bush said, with the top
Republicans and Democrats from the House and Senate seated beside him in the
Oval Office. "But we are dedicated -- we are dedicated to saying to the
American people, this is an emergency the likes of which we have not seen in
a long time in this country, and this government will come together and deal
with it.”

The next day, after members of the House Ways and Means Committee met in
private with several economists to discuss options for economic stimulus
legislation, Chairman Bill Thomas, R-Calif., said "one of the things that

there was genera] agreement on was the fact that the budget constraints are
probably not a major obstacle in the current environment.”

What Can Congress Do?

Participants in the week's discussions said one reason for the lack of
consensus about what taxes to cut next is that there is no clear

understanding yet about the scope of the attacks’ consequences for consumer
confidence, the stock markets and the gross domestic product.

“It's open because there are so many unknowns," Senate Finance Committee
Chairman Max Baucus, D-Mont., said after a Sept. 21 mecting with O'Neill,
Thomas, Finance ranking Republican Charles E, Grassley of lowa and Ways and
Means ranking Democrat Charles B. Rangel of New York.

But the talks nonetheless illustrated the new framework for the federal

budget debate: It is no longer about which party is a more studious guardian
of the shrinking surplus. It is about how best to spend the surplus to

stimulate the economy, That is a change many economists say was a long time
in coming.

"If the economy is slowing down, you want to lean in the direction of
deficits, and until Tuesday, this was clearly not understood on cither side

of the aisle,” Frank C. Wykoff, a professor of economics at California's
Pomona College, said in describing the Sept. 11 attack, "Up until now this
bipartisan agreement on Social Security has essentially been Hoover
economics, and now they finally woke up and realized you have to stimulate
the economy.”

In the Ways and Means meeting -- to which cach party invited three
economists to share their views of the current economic situation and how to
improve it -- participants were said to be split on three key questions:

Should Congress even try to legislate an economic stimulus? If so, should

the package's provisions be permanent or temporary? And should its emphasis
be on long-term or short-term concerns?

In a Sept. 17 report, the Congressional Research Service noted that many
1/15/02

Page 5 of 14

02614

01300000001223


Carleton, Norman

From: Carleton, Normen

Sent: Tuesday, November 20, 2001 4:51 PM

To; Lori Sanatamorena (E-mail)

Subject: FW: Bloomberg: Enron Falls Amid Concern Debt Threatens Dynegy Bid (UpdateS)
----Original Message-—--

From: Carterton, Norman

Sent: Tuesday, November 20, 2001 4:41 PM

Tor Roseboro, Brian; Bair, Sheila; Bitsberger, Timothy

Subject: Bloomberg: Enron Falls Amid Concern Debt Threatens Dynegy Bid (Update5)

11/20 16-08

Enron Falls Amid Concern Debt Threatens Dynegy Bid (Update5)
By Stacie Babula

Houston, Nov. 20 (Bloomberg) -- Enron Corp. shares and bonds dropped after the energy trader disclosed it may have to
pay $9.15 billion in debt due by 2003, suggesting the company may run out of cash before its takeover by Dynegy Inc. can
be completed.

Shares of Enron fell $2.05, of 23 percent, to $7.01. Earlier they touched $6.58, the lowest price in more than a decade_
Enron's 6.4 percent notes due in July 2006 were bid as low as 69 cents on $1 of face value and offered at 73 cents, down
more than 13 percent in light trading, traders said.

Enron, whose dealings with affikated partnerships led to earnings restatements, credit-rating Cuts, a federal investigation
and a management shakeup, said in a regulatory filing that it has less than $2 billion in cash or credit lines. Dynegy plans
to complete its buyout by October, and Enron may have to ask lenders to restructure payment schedules to survive.
"This filing shows that Enron is in a precarious financial situation," said Commerzbank Securities analyst Andre Meade,
who rates Enron shares “hoki” and doesn't own them. "They have to stay afloat for the Dynegy deal to go through, and
that now looks difficult."

Enron and Dynegy wouldn't comment on the stock drop today. Standard & Poor's Investors Service said that Enron's credit
rating remained on negative watch, indicating it would not immediately downgrade the company’s debt.

$690 Million Surprise

“Enron's near-term liquidity position is... expected to be sufficient to carry the company through the completion of its
proposed merger with Dynegy.” S&P said in a report.

Investors were concemed the debt, including a $690 million note that Enron disclosed it may have to pay off next week,
would lead to a cut in Enron's credit rating, analysts said,

The filing was a “distraction” that will not threaten the merger, said Todd Shipman, 2 director at S&P who follows Enron.
“Our approach to this has been on the basis that the Dynegy deal is a good thing for credit quality.” Shipman said.

Moody's Investors Service, which didn't issue a statement on Enron's debt today, kept the company's credit rating at
investment grade on Nov. 9, the day Dynegy announced it would buy Enron in a deal now valued at $25 billion

The ruling came after executives from Lehman Brothers Holding Inc., J.P. Morgan Chase & Co. and Citigroup Inc.'s
‘Salomon Smith Barney lobbied the credit-rating company, people familiar with the situation said.

Avoiding Junk

A junk rating would have led Dynegy to abandon the acquisition, Dynegy Chief Executive Officer Charles Watson said. It
would also have triggered debt repayment of at least $3.9 billion, Enron said in a Securities & Exchange Commission filing

— 03032

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66€20

PE LEEEPEIEFELEFEFEEESEEEEES

oF

or

G= OS Bucs "f= ploy 4 = Ang Buoys
UOHEPUsWIWOI0Y SNSUesUOD UOIUQ

01300000001008


Carleton, Norman

Sent Fruseoay y, January 10, 2002 5:54 PM
To: Abdelrazek, Rawan — ,
Subject: FW: Bloomberg: Attormey General Ashcroft Recuses Himself From Enron Probe

From:

Sent: ‘Thursday, January 10, 2002 2:54 PM

Tor Cetina, Jil; Bair, Shela; Berardi, Steve; Bitsberger, Timothy; Bichner, Matthew; Gabllondo, Jose; Gross, Jared; Hammer, Viva; Lori
Seratamorene (E-ml}; Nickoloff, Peter; Novey, Michael; Pictrangel, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Whaley, Jean;
Wiedman,

‘Subject: Bloomberg: Attorney General Ashcroft Recuses Himself Fram Enron Probe

0110 14:35

Attorney General Ashcroft Recuses Himself From Enron Probe
By Anna Marie Stolley

Washington, Jan. 10, (Bloomberg) -- U.S. Attorney General John Ashcroft said he won't participate in the Justice
Department's investigation into Enron Corp's collapse due to his “relationship with the company

The announcement followed a call to step aside by U.S. Representative Henry Wexman. The California Democrat pointed
to political contributions that Enron and its Chief Executive Officer Kenneth Lay made to Ashcroft’s unsuccessful 2000
Senate campaign.

The Justice Department said yesterday that it is creating a task force in Washington to investigate the events that led to
the biggest corporate bankruptcy.

Ashcroft announced today that he and his chief of staff, Davis Ayres, have recused themselves from anything to do with
the Enron investigation ‘due to the totality of the circumstances of the relationship between Enron and the attorney
general,”

“The attorney general has not been involved in any aspect of initiating or conducting any investigation involving Enron,”
the Justice Department said in a statement

rac in: Reci lent all ery Rea
Abdetra ek, Rawan Delivered 11002 M Read 1110222 M

; 02976

01300000001585


Carleton, Norman

From: Carleton, Norman

Sent: Wednesday, November 21, 2001 1:23 PM

To: Gabilondo, Jose

Subject: FW: Bloomberg: Enron Gets Extension on $690 Min Note Due Next Week (Update1)
~--—-Original Message----

From: ‘Carleton, Norman

Sent: Wednesday, November 21, 2001 1:14 PM

To: Roseboro, Brian; Bair, Shela; Gross, Jared; Wiedman, Mark; Cetina, Jil; Sharer, Janes; Pletrange’, Fred; Berardi, Steve; Whaley,

Jean; Nickolof, Peter; Schulthess, Heitlynne; Novey, Michael; Hammer, Viva; Eichner, Matthew; Bitsberger, Ti

Subject: Bicemberg: Enron Gets Extension on $690 Min Note Due Next Week (Update!)

1928 12:38

Enron Gets Extension on $690 Min Note Due Next Week (Update1)
By Mark Johnson

Houston, Nov. 21 (Bloomberg) -- Enron Corp., whose shares had dropped 92 percent this year amid a financial crisis, seid
lenders extended to mid-December the payment date on a $690 million note due next week

Enron, which agreed to be bought out by rival energy trader Dynegy Inc. in a transaction now valued at more than $23
billion, said earlier this week a drop in its credit rating may force it to repay the $690 million note. The repayment would
strain cash reserves Enron needs to back its trading operations, investors and analysts said

The Houston-based company didn't say in its release who holds the note, which is owed by an affiliated partnership that
owns Brazilian natural-gas assets and was backed by Enron.

The note is held by a group of banks led by the Citibank unit of Citigroup Inc., Standard & Poor's said in a press release
yesterday.

Enron aise is in discussions with other lenders on a restructuring of its dabt, the company said in a statement distributed by
PR Newswire,

“We believe the interests of Chase and Enron's other primary lenders are aligned in this restructuring efor,” James Lee,
vice president of JP Morgan Chase & Co., said in the Enron statement. “We will work with Enron and its other primary
lenders to develop a plan to strengthen Enron's financial position up to and through its merger with Dynegy.” Morgan has
been advising Enron on its merger with Dynegy.

Enron said yesterday it may have to pay $9.15 bilion in debt due by 2003, suggesting the company may run out of cash
before the merger closes. Dynegy has said the merger should close before the end of the third quarter of 2002.

Enron said in a regulatory filing that it has less than $2 billion in cash or credit lines.

Shares of Enron, the most active stock in U.S. trading, fell $1.79, or 23 percent, to $5.20 in midday trading. Before the
announcement that it had renegotiated the $690 million note, its shares had fallen as much as 42.76 percent, the lowest
level in more than a decade.

Dynegy fell $2.50, or 6 percent, to $39.20, Shares of ChevronTexaco Corp., which owns 26 percent of Dynegy, rose 49
cents to $87.02

ra kin: eipient Deli er ead
abilondo, Jose Delivered 112101123 PM Read 112301946 M

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week, the Chamber's top lobbyist, Bruce Josten, said business groups were
indeed pushing for quick action on items like eradication of the alternative
minimum tax for corporations and the revival of the investment credit. Also,
a coalition of business groups sent Bush and congressional leaders a letter
urging them to move promptly.

Democrats signaled that they are loath to consider a cut in the capital

gains rate. The GOP says the move might raise revenue in the short term by
encouraging people to sell their assets to take advantage of the lower rate.
Democrats say the new rate would do little to bolster new investments and
would disproportionately benefit the wealthy.

Similarly, some Republicans have said they are against a leading Democratic
idea: cutting payroll taxes for lower-income workers. "We're worrying about
ensuring the future of Social Security and Medicare, and if we cut the
payroll taxes now, that could cause problems for us later,” said Jill

Gerber, a spokeswoman for Grassley.

Republicans also are unlikely to submit to demands to revisit the tax cuts
between 2005 and 2010 under the $1.35 trillion tax cut law (PL 107-16)
enacted in June, Many Democrats say this is necessary to control interest
rates in the long run considering the explosion in federal spending that is
sure to follow the attacks. (CQ Weekly, p. 1304)

Even before Sept. 11, Rubin had been counseling Democrats to press to reopen
the debate on the tax cuts for the second half of the decade, arguing that

the lost revenue would cause long-term rates to rise and hurt the current
economy. "Maintaining our fiscal discipline going forward will be key to
economic well-being," he told the U.S. Hispanic Chamber of Commerce on Sept.
2I.

Keeping Focused
But both Republicans and Democrats were sounding a conciliatory note at the
end of the week of Sept. 17.

"I don't think we ought to emphasize poison pills, but if we search for

common ground, we'll find the poison pills,” Sander M. Levin of Michigan,

the ranking Democrat on the Ways and Means Trade Subcommittee, said Sept. 20
in declining to say what proposals would be non-starters in his party's

eyes. "I think we all have a choice, including the president: to search for

common ground, or to try to shove through our agenda. And | think the answer
should be searching for common ground.”

And while Thomas emphasized the need for investment stimuli, he said it also
might be appropriate to “do a bit of a demand side" -- for instance, he

said, by providing tax relief similar to Bush's tax cut for those who do not

pay income taxes. Such a cut has been anathema to the GOP in the past.

In the absence of bipartisan agreement on how to proceed, economists have
counseled lawmakers not to cobble together a stimulus package in the image
of most tax relief measures that move through Congress, which frequently
turn into “Christmas trees" littered with special provisions to satisfy
important constituencies.

“You don't do a little bit of this and a little bit of that in creating a
1/15/02

Page 7 of 14

02616

01300000001225


In an “Op Ed Discussion” in the December 11, 2001 issue of The Wall Street
Journal, Chairman Pitt has enumerated many initiatives for improving and modernizing
the current disclosure and regulatory systems. A copy of the article is attached as
Appendix B. Chairman Pitt, with significant input from those inside and outside the
Commission, began development of these initiatives prior to the announcements by
Enron. These initiatives, not yet adopted by the Commission, include:

* More current disclosure, including “real-time” disclosure of unquestionably
material information,

* Disclosure of significant trend data and more “evaluative” data,

« Financial statements that are more clear and informative for investors,

* Disclosure of the accounting principles that are most critical to the company's
financial status and that involve complex or subjective decisions by management,

© Private sector standard setting that is more responsive to the current and
immediate needs of investors,

* A regulatory environment that continues, as always has been the case, to
encourage public companies and the auditors of their financial statements to seek
the advice of the SEC staff on new or unusual accounting questions so that they
may “get it right the first time” and avoid restatements and the possibility of
enforcement proceedings,

* A comprehensive and effective self-regulatory process for the accounting
profession, as discussed above, with effective oversight by the Commission and
its staff,

* More involvement by audit committees with management and the auditors
regarding the selection and application of accounting principles used by the
company, and

* Analysts not expressing views or recommendations when they do not have an
adequate data foundation or when confused by company presentations.

As noted above, the accounting profession has announced its intention to assist
the Commission in these efforts.

02342

01300000000951


works. As I have testified before to this committee, the investor needs a
two level decoder.

The first level of the decoder gets all the brokers on a common
recommendation scale. The most common scale is a five tiered one, where
the top category is a strong buy, the second is a buy, the third is hold,
the fourth is sell, and the fifth is strong sell. Most brokers have a
five tier scale, some have a four tier one, and a few have a three tier
scale. In addition, many have very different terminology. The term “buy”
may be the term used for the top category at some brokers, or for the
second best category at many brokers, or, in at least one case, for the
middle category. There are more than a dozen different terms used for
each of the top three categories, and almost as many for the bottom two.

Unfortunately, getting all the firms on a common scale is not the end of
the decoding. Analysts are overly biased on the positive side in their
recommendations. The typical distribution is about 33% of all
recommendations are in the top or strong buy category, about 33% in the
second or buy category, about 33% in the middle or hold category, and only
about 1% in the remaining sell and strong sell categories combined.

If the recommendations are put in numeric terms where 1 is a strong buy
(or whatever the broker's term is for their top category), 2 is a buy, 3
is a hold, 4 is a sell, and 5 is a strong sell. Using“this numerical
scale, consensus recommendations can be calculated for each company. Most
of the time the average consensus recommendation for either the companies
in the S&P500, or for the roughly 5000 companies that analysts cover, is a
2.1. Occasionally, the average may be a 2.0 or a 2.2.

Therefore, the second level of the decoder would move the recommendations
into three more meaningful categeries. Those in the 1 or strong buy
category would really be saying buy, at least in relative terms. Those in
the 2 or buy category would really be saying they were neutral on the
stock, and those in the 3 or hold, the 4 or sell, and the 5 or strong sell
categories all would be saying sell the stock.

For Enron, the consensus recommendation, as shown on the accompanying
graph, was about a 1.5 from May 2000 until the end of September 2001.

Even if we had our decoder to compensate for analyst optimism, it is clear
that the analyst covering Enron were very positive with their
recommendations.

But during that same period, the analysts had similar or higher consensus
recommendations on competitors like Calpine and Dynegy. While the
consensus recommendation for Enron was much better than the average for
S&P500 companies, there enthusiasm was not limited to Enron.

In early October 2001, the consensus recommendation spiked up from a 1.5
to a 1.3 as several analysts raised their recommendations ahead of Enron

reporting its 3001 earnings on 16 October. On the day of the earnings
announcement one analyst raised their recommendation, pushing the

02396

01300000001005


works. As I have testified before to this committee, the investor needs a
two level decoder. .

The first level of the decoder gets all the brokers on a common
recommendation scale. The most common scale is a five tiered one, where
the top category is a strong buy, the second is a buy, the third is hold,
the fourth is sell, and the fifth is strong sell. Most brokers have a
five tier scale, some have a four tier one, and a few have a three tier
scale, In addition, many have very different terminology. The term “buy”
may be the term used for the top category at some brokers, or for the
second best category at many brokers, or, in at least one case, for the
middle category. There are more than a dozen different terms used for
each of the top three categories, and almost as many for the bottom two.

Unfortunately, getting all the firms on a common scale is not the end of
the decoding. Analysts are overly biased on the positive side in their
recommendations. The typical distribution is about 33% of all
recommendations are in the top or strong buy category, about 33% in the
second or buy category, about 33% in the middle or hold category, and only
about 1% in the remaining sell and strong sell categories combined.

If the recommendations are put in numeric terms where 1 is a strong buy
(or whatever the broker’s term is for their top categgyy), 2 is a buy, 3
is a hold, 4 is a sell, and 5 is a strong sell. Using this numerical
scale, consensus recommendations can be calculated for each company. Most
of the time the average consensus recommendation for either the companies
in the S&P500, or for the roughly 5000 companies that analysts cover, is a
2.1. Occasionally, the average may be a 2.0 or a 2.2.

Therefore, the second level of the decoder would move the recommendations
into three more meaningful categvries. ‘Those in the 1 or strong buy
category would really be saying buy, at least in relative terms. Those in
the 2 or buy category would really be saying they were neutral on the
stock, and those in the 3 or hold, the 4 or sell, and the § or strong sell
categories all would be saying sell the stock.

For Enron, the consensus recommendation, as shown on the accompanying
graph, was about a 1.5 from May 2000 until the end of September 2001.

Even if we had our decoder to compensate for analyst optimism, it is clear
that the analyst covering Enron were very positive with their
recommendations.

But during that same period, the analysts had similar or higher consensus
recommendations on competitors like Calpine and Dynegy. While the
consensus recommendation for Enron was much better than the average for
S&P500 companies, there enthusiasm was not limited to Enron.

In early October 2001, the consensus recommendation spiked up from a 1.5
to a 1.3 as several analysts raised their recommendations ahead of Enron

reporting its 3001 earnings on 16 October. On the day of the earnings
announcement one analyst raised their recommendation, pushing the

02360

01300000000969


wee ved

A2°05/02 18:47 FAX 202 646 5199

‘9
be
oa
e
we
2
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we

WSI.com

Enron Corp, markets electricity anc natural gas, delivers energy and other physica! commodities, an¢
provides financial and nsk manage: aeni services to customers around the world. Enron's Imemet
address is www.enron.com

Forward-looking Statements

This press release contains szateme-ts that are forward-looking within the meaning o7 Section 274 of
the Securities Act of 1933 and Sect an 2E of the Securities Exchange Act of 1935. Invesiors are
caution: that any such forward-lo: king statements are not guaranzees of future performance and that
actual resulis could differ materall: as a result of known and unknown nsks and uncertainties,
including: verious regulatory issue: , the outcome of the Chapter 11 process, the outcome of the

KS, Unce
and factors disclosed in the Compa -y's most sesent reperts on Forms 10-K. 10-Q and 8-& filed wits ti
Secunties anc Exchange Cot an. SOURCE Enron Corp

CONTACT Mark Palmer. -1-713 833-4738. cr Karen Deans. 1-713-853-9737. both of Enron
Web site: hip.‘ wuw enron.com !

(ENE DYN}

NEW YORK -- Enron Corp. (ENE announced Sunday that it and some of its subsidiaries have filed

volumtary petitions for Chapter 1] 1 organization with the US Banksuptcy Court for the Southern
District of New York.

The compary said chat it had also f ved suit against Dynegy Inc, (DYN) in the same court alleging
breach of contract in connection wi h Dynegy's wrongful termination of its proposed merger with Enron
and seeking damages of at least SI billion,

Enron's lawsuit also seeks the court s declaration that Dynegy is not entitled to exercise its option to
aequire an Enron subsidiary that in irectly owns Northern Natural Ges Pipeline.

Enron said the proceeds from the le-wsuit would benefit its creditors.

Enron said that it is in “active discu ssions” with financial institutions to recapitalize and provide credit

support for its North American ene. gy trading business under a new ownership structure.

Enron said in a statement that "it is anticipated" that the company would provide the new entity with

traders, back office capabilities and technology. The new entity would conduct counterparty transactions .
through EnronOnline, the company s existing energy trading platform. Any such arrangement would be

subject to the approval of the Bank~uptcy Court, Enron said in the statement.

To conserve capital, Enron will implement a comprehensive cost-saving program that will include
substantial workforce reductions. ©

These cuts will primarily affect the company's operations in Houston, where Enron currently employs

ee 02265

stp: inleraciive,wsj.com archive r-mievs,eg!?'¢=DI-CO-200] 1202-000436.djmi&temp! ate=z,. 12/3/01

01300000000874


Testimony of Richard L. Trumka

House Financial Services Committee

December 12, 2001

Page 13

the wake of Enron’s bankruptcy, the Amalgamated Bank took the last step remaining
open to investors, bringing suit in federal district court in Houston on behalf of Enron's

shareholders against both Arthur Andersen and Enron's Board and officers.25

‘The most important lesson to be learned from the collapse of Enron and from our
unsuccessful efforts to protect workers’ investments is how hard it is to repair the damage
done by rampant conflicts of interest aided by regulatory loopholes. We have to get the
regulatory system right in the first place. And though the Securities and Exchange
Commission has made great efforts in recent years to strengthen investors’ regulatory
protections, the truth is that too often steps that were necessary have not been taken duc
to resistance by a variety of entrenched interests. Union pension funds have tried through
corporate governance efforts like the building trades funds’ support of independent

auditors to strengthen these protections firm by firm, but we cannot do it alone,

Therefore, the AFL-CIO is today submitting two rulemaking petitions to the Commission
aimed at addressing the structural problems in our securities laws that gave rise to the
Enron fiasco, which are attached to our testimony. We ask in these petitions that the
Commission act to tighten the definition of who is an independent director, and require
the disclosure of the full range of ties that can exist between directors and the corporate
officers they oversee, In the accounting area, our proposals address most of the practices
Ihave discussed. Our proposals include a prohibition on accountants reviewing

transactions they themselves structured, direct audit committee approval of any auditor

02378

01300000000987


22°08/0! 15:43 202 646 5199 @oro-og3

WSJ.com Page | of 2

November 30, 2001
Review & Outlook
Investigating Enron

You can cut the Schadenfreude with a machete these days as Enron careens toward failure. Like any
fast-rising, innovative business, the energy trader made enemies, some with a fair grievance and some
not. We hope the inevitable (and necissary) investigations keep in mind the difference.

Enron was a forthright advocate of c »mpetition, as every obituary of the past few days has noted. Some
see the firm's collapse as discreditins the market economics it championed, though the opposite is closer
to the truth

ft strikes us that Enron was partly a + ictim of its own success. Its revenues quadrupled in a year, thanks
to the fillip that California's roubles provided to the wholesale power market. But profits were up much
less -- L¢., Enron was caming thinne’ margins in the energy-trading business it pioneered. The new
industry quickly became too compet tive and transparent to afford any windfalls, just as deregulation
admirers would have predicted.

Enron does not own U.S. power plarts and generally did not seem to make oursized profits on power for
resale in. say, California. But that di-In't stop California's ecceninc attorney general, Bill Lockyer, from
blaming Enron CEO Ken Lay for thit state's electricity mismanagement, Last summer he told 2 Wal!
Surcet Journal reporter that, "I woul love to personally escort Lay to an 8x10 cell that be could share
with a tattooed dude who says. "Hi my name is Spike, honey."” Consider that an unfair grievance

Accountag matters are more troublijig. The struggle for # century has been to make sure corporate
managers don't pursue their own ageindas at the expense of owners. The emergence of special
partnerships, controlled and owned I'y Enron's own senior officers, with which the company did some of
its murliest deals, would cause even libertarians to wonder what's been going on. Clearly Mr. Lay didn’t
fully understand what former Enron [EO Jeffrey Skilling was up to, and shareholders weren't told
either

‘At the same time, Enron officers hac! a large amount of personal wealth tied up in Enron stock, which
has fallen from $90 to 6] cents. So the mere existence of these partnership deals does not automatically
indicate corrupt intent. Only a detaili:d investigation can resolve whether these deals were honestly
motivated, and whether Enton’s (anc Arthur Andersen's) interpretation of accounting rules was
defensible. In any case, trial lawyer: wil] descend to squeeze every penny out of Enron's troubles for
themselves (and for shareholders or :mployees who held Enron stock in their 401(k)s}

As for the investigations, we hope they won't be influenced one way or another by long connections
berween Mr. Lay and President Bus!:, Even the hint of special treatment would be a political disaster,
especially for an Administration tha promised to clean up after Bill Clinton.

While tradition has been not to mak" criminal matters out of sccounting scandals, exceptions have arisen
recently. Federal prosecutors in Nev York have gone after Walter Forbes, who sold his company to
Cendant, giving rise to what before inron was the nation’s most costly stock meltdown due te bad
accounting. San Francisco prosecuti'rs recently extracted guilty pleas from executives of Aurora Foods

02246

hop. interective.wsj.com/archive'z crieve.cgi7id=SB 10070851 16787679680 djmétempiac-.. Liesl

01300000000855


consensus to a remarkable 1.2. But as the Enron story began to unravel
over the next few days, the recommendation downgrades exploded, plus six
of the seventeen analysts dropped coverage.

Conclusions

In these kind of situations, it is easy to point a finger at the analysts
for mistakes made. In my prior testimony, and in other forums, I have
taken the analysts to task for not performing to an acceptable standard in
certain situations. While the analysts are certainly not without blame on
Enron, they are not the real culprits in this situation.

IT am not an expert in doing the actual accounting at a company, or in
auditing a company’s accounting, but having been an analyst for 22 years,

as well as closely observing analyst behavior at First Call for the last

ten, I can say without reservation that thie was a situation where either
the company or its auditors or both were at fault in not providing

investors, especially including the analysts, with the tools necessary to -
understand Enron's business.

Whether the letter of the accounting rules were met or not, it is patently
obvious that the spirit of the rules was violated in that Enron‘s
financial statements did not fairly convey enough information for
investors to reasonably analyze the company's operations.

In that climate, it ig hard te be too critical of the analysts’ optimism.
Enron had a long history of showing consistent and substantive earnings
growth. If it had been up to me if I was in that situation, I would have
dropped coverage long before October 2001. The financial reports and
details of operations had become more and more inscrutable well before
then. But as I mentioned earlier, most, if not all, analysts did not have
that operation. All things considered, they probably did as well as could
be expected until October 2001, although in hindsight it is easy to say
that they could have at least tempered their bullish recommendations to
some degree,

However, once the issues of the off balance sheet items became an
unexplained issue on the 16 October 2001 conference call on 3001 results,
it does seem that the analysts could have moved quicker to either suspend
their recommendation or dramatically drop the level of their
recommendation. The unexplained $1.2 billion balance sheet writedown was

not a caution flag, it was a red flag.

But Enron is not the situation on which to challenge analyst performance.
There are far more significant situations were analyst conflicts and
performance are at issue. The lessons to be learned here is how to insure
that company’s and their auditors can be relied on to openly provide the
necessary tools for investors to meaningfully analyze the company's
business,

02361

01300000000970


Testimony of Richard L. Trumka

House Financial Services Committee

December 12, 2001

Page 2

We are here today because Enron's bankruptcy was of a size and speed not experienced
since some of the famous debacles that followed the Great Crash of 1929. And we must
begin by recognizing that its collapse has had a real impact not just on big Wall Street

firms, but on millions of working people and their pension funds.

This is a catastrophe rich in irony. Enron was a company that talked about a future of
transparent markets, but whose CFO openly bragged to the financial press that its own
accounting was a black box, saying "We don't want anyone to know what's on those
books. We don’t want to tell anyone where we're making money.” This was a company
that complained about the costs of corruption in the global economy, but made campaign
contributions an integral part of its business strategy; a company whose own governance
was a web of conflicts of interest that completely stymied the protections our legal
system provides investors. And final!y this was a company whose mantra was
deregulation and privatization, but which has ultimately become an advertisement for
why workers need both defined benefit pension plans and a Social Security system safe

from the conflicts of interest rampant in the capital markets.

We must, however, begin with those who have been hurt worst and most unconscionably
by the conduct of the Board and officers at Enron--the employees of Enron, more that

5,000 of whom have already lost their jobs, and more than 12,000 of whom participated

02367

01300000000976


Enron shares are selling for almost 32 percent less than the value of Dynegy's offer, showing investors have doubts the
dea! will be completed. Dynegy shares fell $1.90 to $41.70 today

“I's become more clear that the chances of this deal going through aren't 90 percent, but much closer to fifty-fifty,” said
Edward Paik, who helps manage the Liberty Utilibes Fund, with 7.6 million Enron shares. ‘There's just so much
information that is unknowable" about Enron's financial position, he said.

Most of the $9.15 billion in debt is due before the end of the third quarter, when the Dynegy buyout is scheduled to close,
Enron said yesterday in a third-quarter filing with the SEC.

Asset Sales Planned

Last week, Enron Chief Operating Officer Greg Whalley said the company will sell assets of "’non-core businesses” to
raise money, It has $8 billion invested in the businesses, including broadband telecommunications and the Dabho! power
plant in India. Enron expects to get “billions” from the sales, Whalley said, without being more specific.

Enron reported yesterday that Its U.S. operations had $1.2 billion in cash left. It has added at least $5 billion since Sept. 30
from credit lines, loans and a $1.5 billion investment from ChevronTexaco, part owner of Dynegy.

Enron used $1.9 billion of the money it raised to retire commercial paper, which is short-term debt. It gave no details on
how it spent the remaining $3.1 billion.

Enron Chief Financial Officer Jeffrey McMahon said last week that the company also was looking to get another $500
million to $1 billion from private investors.

Asset sales valued at about $800 million are expected to close by the end of this year, according to the SEC filing. Enron
spokeswoman Karen Denne wouldn't comment on whether it could sell assets fast enough to keep current on its debts.

Dynegy will have to help Enron sell assets, said Mitchell Stapley, who manages $3.5 billion in fixed-income assets
including Enron bonds for Fifth Third Investment Advisors inc.

Dynegy and ChevronTexaco Corp., which owns 26 percent of Dynegy, also will have to help Enron negotiate with its
lenders, said Kathleen Vuchetich, who helps manage the $1.4 billion Strong American Utilities Fund, which is § percent
Dynegy shares.

Debt Questioned

“I never dreamt (the $9.15 billion) would be that large, coming due all at once,” Vuchetich said. “It calls into question their
decision to schedule it that way in the first place.~

ChevronTexaco, the second-largest U.S. oil company, is providing $2.5 billion in cash as part of the Enron buyout It
provided the first $1.5 billion a week ago.

‘Shares of ChevronTexaco, based in San Francisco, rose $3.62 to $86.53

Enron yesterday reduced third-quarter results by 3 cents a share, bringing the period's loss to 87 cents, or $664 million. On
Nov. 8, Enron lowered earnings back to 1997 by $566 million to reflect losses by affiliated partnerships that were wrongly
kept off the books. That included a third-quarter reduction of $17 million.

A drop in Enron's senior unsecured debt rating ta“ BB8-" by Standard & Poor's on Nov. 12 may force Enron to pay off a
$690 million note by Nov. 27 if it doesn't find collateral to guarantee the debt taken on by an affiliated partnership thal owns
Brazilian netural-gas assets, the filing said

Without repayment or collateral, investors can begin to liquidate the partnership's assets, Enron said, The company said
it's working with lenders to come up with an acceptable agreement on the debt.

Making good on debt owed by its Whitewing affiliated partnership may cut Enron's fourth-quarter earings, Enron said.
Enron is obligated to back Whitewing by issuing junior convertible preferred stock, Because Enron's stock has plunged, it
may have to write down its assets by $700 million, the filing said

; 03017

01300000001627


Enron Executives Face subpoenas

Senate Panel Also Orders Testimony of Directors
By Peter Behr and Dan Morgan

Washington Post Staff Writers

‘Thursday, January 3, 2002; Page E01

A Senate committee announced yesterday that it is subpoenaing top executives and directors of
the bankrupt Enron Corp. to determine their roles in the Houston company’s epic collapse.

Three other congressional committees already are digging into the Enron failure, but the
subpoenas announced yesterday are believed to be the first of the congressional probes. Among
the likely recipients is Wendy Gramm, an Enron director who is the wife of Sen. Phil Gramm (R-
Tex.).

Sen. Carl M. Levin (D-Mich.), chairman of the Governmental Affairs Committee's permanent
subcommittee on investigations, said the panel also will subpoena financial and trading records
front Enron and audit documents from its accountant, Arthur Andersen LLP.

Enron's attorney, Robert Bennett, called the subpoenas “totally unnecessary” and said "we are
fully cooperating with Congress."

a
Although Enron Chairman Kenneth L, Lay did not show up for two earlier congressional
hearings on Enron's bankruptcy, he has agreed to testify next month before the Senate Commerce
Committee, Bennett said.

Enron has tumed over nearly three dozen boxes of documents to the House Energy and
Commerce Committee, Bennett said. "I don't question the legitimacy of an inquiry [into Enron's
failure}, but it's not a measured approach 1 have a half-dozen different committees doing this at
the same time," he said. "It can lead to a circus atmosphere and a Jot of wasted time and effort."
The ful] Governmental Affairs Committee has scheduled a hearing for Jan. 24 on Enron's use of
a large number of partnerships that kept billions of dollars of corporate debt off the company's
books. The hearing will also examine whether federal regulators missed waming signs of the
company’s trouble.

Accounting errors involving the private partnerships caused Enron to overstate its earnings by
half a billion dollars over the past four years, Enron's disclosure of the overstatement, in
November, triggered a final plunge in the company's stock price and the company's bankruptcy
filing Dec. 2.

Sen. Joseph I. Lieberman (D-Conn.}, chairman of the full committee, said, “The focus is, how
did this corporation collapse, and what can we do to make sure that something like this never

happens again?”

Lieberman's committee joins an already crowded field of Enron inquiries. The House Energy and
Commerce Committee has sent investigators to interview Enron officials in Houston.

02164

01300000000773


The thing that stands out most visibly about the analyst’s analyses of
Enron, is that over the three years up to October 2001, their estimates at
the beginning of each year for that year had minimal changes. The few
changes that did occur were always upward and usually followed the
guidance given by the company when they reported quarterly earnings, The
narrowness of the spread of estimates among analysts was remarkable,
especially for an energy company. The coefficient of variance for Enron
estimates was consistently below the average for the S&P500 during the
same period.

This pattern is highly suggestive that the analysts were being spoon fed
as to what Enron expected earnings to be. The analysts might have been
willing to accept company guidance, be it overt or inferred, as long as
the company kept meeting expectations each quarter. Since at least the
beginning of 1998, Enron has met or exceeded analyst estimates every
quarter.

One reason that analysts may have been more willing than normal to accept
company guidance for Enron was that it was becoming increasingly difficult
to understand how Enron was achieving its revenue growth and
profitability, Extensive use of derivatives, particularly when the
company is using mark-to-market accounting is extremely difficult in the
best of situations. We now know that a big additional reason for the
difficulties in analyzing Enron’s financials was that there were
significant parts of Enron’s business that were hidden from the balance

sheet.

Often the way out for analysts when faced with difficult to analyze
situations like Enron is to drop coverage. Why take the risk when there
are plenty of companies that are transparent enough to do meaningful
analysis with confidence? The problem with dropping Enron was that it had
become the giant in the industry. If you were an analyst covering that
industry, you essentially had to cover Enron. That was further reinforced
if your firm was one of Enron’s investment bankers or investment banker
wannabe .

The real problem though was having sufficient information about the off
balance sheet items. Whether the accounting for each of these items was
within FASB rules or not ig not yet clear, although the announced
restatement of prior periods earnings is a strong signal that at least not
all was kosher. Sut what is clear is that Enron was not providing what
could even be considered minimum transparency in its financials and that
the analysts did not have all the tools necessary to make a reasonable
analysis.

Valuation of Enron Stock by Broker Analysts

In evaluating analyst performance on recommending Enron stock, one first
has to understand how the brokerage community’s recommendation really

02395

01300000001004


TESTIMONY OF RICHARD L. TRUMKA
SECRETARY-TREASURER, AFL-CIO
BEFORE THE SUBCOMMITTEES ON CAPITAL
MARKETS, INSURANCE, AND GOVERNMENT
SPONSORED ENTERPRISES AND THE
SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS

DECEMBER 11, 2001

02365

01300000000974


Page | of 2
Carleton, Norman

From: Carleton, Norman
Sent: Wednesday, August 22, 2001 10:12 AM

To: Nickoloff, Peter; Schultheiss, Heidilynne
Subject: FW: Enron article
Tracking: Recipient Delivery Read
Nckoloff, Peter Delivered; 8/22/01 10:12 AM Read: 8/22/01 10:13 AM

Schultheiss, Heidilynne Delivered; 8/22/01 10:12 AM Read: 8/28/01 6:54 AM

-----Original Message----~

From: Norman Carleton [maltto:Norman,Carleton@worldnet att.net]
Sent: Thursday, August 16, 2001 11:39 PM

To: Norman Carleton; norman.carleton@do.treas.gov

Subject: Enron article

a)
AUG 15, 2001
Enron's Chief Executive Quits After Only 6 Months in Job

By RICHARD A. OPPEL Jr. with ALEX BERENSON

ae ALLAS, Aug. 14 — Jeffrey Skilling, the chief executive of the Enron Corporation (news/quote), stunned Wall

Street today by announcing that he would quit after just six months in the job, calling the move a "purely
personal decision.”

But the abruptness of the departure lefi many analysts questioning whether a series of setbacks the company has
suffered played a part in the decision.

Kenneth Lay, Enron's 59-year-old chairman, will step back into the position he left carly this year after 15 years as chief
executive.

Mr. Lay, who originally recruited Mr. Skilling to Enron, said tonight that he had agreed to stay on through the end of
2005 to "make sure we've got plenty of time to work out an orderly succession.”

Mr. Skilling, 47, had been at the heart of the transformation of Enron from an old- line natural gas pipeline company to
the biggest and most aggressive of the new breed of unregulated energy traders that buy and sell billions of dollars of
electricity and other commodities daily.

‘That strategy helped Enron's stock price soar during the last decade. But this year the company’s shares have fallen
sharply, as Enron has suffered from problems with its new broadband telecommunications trading unit, its investment in
a large power plant in India, and criticism from officials in California, who blame Enron and other energy companies fo
the collapse of the state's electricity market.

‘A former energy consultant at McKinsey & Company who joined Enron in 1990, Mr. Skilling built its energy-trading
operations into the company’s most profitable unit, accounting for nearly $1.7 billion — or 85 percent — of ‘operating
income last year. He became president and chief operating officer in 1997, and in February of this year became chief
executive.

visioz 02941

01300000001550


Jonathan G. Katz
December 12, 2001

Page 4

executives that could interfere with those directors’ ability to be objective and to challenge
company decisions and policies.’

© Audit committee member John Mendelsohn is the president of the University of
Texas M.D. Anderson Cancer Center. The Cancer Center has received
contributions from Enron, and Enron chairman and CEO Kenneth Lay was part of
what the Houston Chronicle characterized as a “coalition” to lobby the Texas
legislature for $20 million worth of infrastructure improvements to support the
development of the Southeast Texas BioTechnology Park, which will be built on
University of Texas land and house the Cancer Center’s Life Sciences Center.
Compensation committee chairman Charles LeMaistre is the Cancer Center's
president emeritus and serves on its Board of Visitors.

* According to Enron's 2001 proxy statement, directors Norman Blake and John
Duncan own common units of EOTT Energy Partners, L.P. (“EOTT"), a limited
partnership whose general partner is a wholly-owned subsidiary of Enron. Enron
thus exercises significant control over EOTT, which could affect the economic
return available to Messrs, Blake and Duncan. Mr. Blake serves on Enron's finance
coramittee; Mr. Duncan is a member of the audit and compliance committee.

*® Wendy Gramm, a member of the audit and compliance committee, is director of
the Mercatus Center at George Mason University. According to a December 10,
2001 article in Time magazine, Enron contributed $50,000 to the Mercatus Center.

Uncovering the relationships described above was neither easy nor inexpensive. An
investor thus cannot evaluate the independence of the board and key committees at all or
even a substantial number of the companies in its portfolio without expending significant
funds. Because of the economics involved in undertaking such research, even proxy voting
and research services such as the Investor Responsibility Research Center—which exploit
economies of scale in assembling corporate governance data—rely solely on the disclosures
set forth in the proxy statement when evaluating boards and key committees. Accordingly,
we believe that additional proxy statement disclosure regarding relationships between
directors and director nominees, on the one hand, and registrants and their senior executives,
on the other, is vital in enabling investors to select investments wisely, monitor companies in
which they have invested and cast informed votes in director elections.

Specifically, we urge the Commission to amend the rules to require disclosure of:

1. Relationships between the registrant or any executive officer of the registrant and
any not-for-profit organization on whose board a director‘ or immediate family
serves or of which a director or immediate family member serves as an officer or in a similar
} We raised these concerns in a letter to Enson’s special committee, which is attached to this petition.
* For the sake of simplicity and readability, “director” also refers to director nominees.

* “fmmediate family member" should be defined to include a person's spouse, parents, children, siblings, in-
Jaws and first cousins.

02391

01300000001000


Testimony of Richard L. Tramka

House Financial Services Committee

December 12, 2001

Page 11

while other large investment managers reduced their stake in the former energy giant

during the same time period.”

The result was that for years the marketplace set the price of Enron’s stock artificially
based on fictitious accounting, passed on by a conflicted Board and conflicted auditors,
and hyped by conflicted analysts. And both sophisticated institutions and the average
investor, following the advice of experts, bought at that price. And at least some of us
were buying from insiders, who all this past year were unloading stock at an astounding

rate.

Of course I have just described what happened before the attempted Dynegy acquisition.
In the weeks that followed the annocnoenent, the same dynamics that appear to have
prompted the crisis led to the creation of a new myth-- that the problems at Enron were
manageable. Many people had an interest in that myth-- most importantly Enron
executives, the investment bankers who stood to reap large fees if the deal went through
and the commercial lenders whose ability to avoid an Enron bankruptcy depended on
steering the company into the Dynegy safe harbor. No one wanted to disclose what the
real state of Enron's finances was, clearly because some very scary things were hidden
there, But what this secrecy did was make certain that once the news of the extent of the

problems began to leak, no one could stop the collapse.

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Derivatives Study Center Page 10 of 14

Bank analysts gencrally praised the move but said cutting off terrorist money is no easy task. Many are believed to use informal money
networks that skirt financial institutions altogether. Moreover, the amounts involved are sometimes small; some estimate the cost of mounting
the Sept. 11 hijackings and terrorist attacks was about $200,000.

Because the United States has cut its economic ties to several nations that could be most helpful, the government also lacks vital financial
information,

“The groups that are named are only the ones we suspect,” said Bruce Zagaris, a partner in the Washington law firm, Berliner, Corcoran &
Rowe. "The U.S, doesn’t even have relations — and hasn't for many, many years — with a number of countries that are the biggest and most
important countries in the Middle East, such as Iraq, Iran and Libya."

As a result, Zagaris said, "We have very few resources on the ground to know anything about what's going on in these countries. We necessarily
are having to rely on other countries or entities for normal intelligence that we would have had if we had an embassy and all kinds of other
private-sector contacts,”

COOPERATION VITAL

‘The effectiveness of the crackdown will hinge in part on getting other countries and institutions throughout the Middle East to add names to the
list.

Monitoring and enforcement is another problem. Former Yugoslavian President Slobodan Milosevic hid his assets for years, Zagaris noted,

“It was only last week that the Greek central bank finally ordered a number of Greck banks where Milosevic's money was thought to exist to
cooperate,” Zagaris said. "For all those years, the money was first in Cypress, and it took a while to convince Cypress to crack down. By the
time that was caforced, the money had been moved to Greek branches of Cypriot banks, Only now are we catching up with the assets.”

Randall Dedd, director of the nonprofit Derivatives Study Center, praised the administration's moves.

Dodd said terrorists could also be using offshore tax havens in the Caribbean such as Grand Cayman, Barbades and Antigua, where
banking fees are a major source of revenue.

COMPENSATION MAY BE NEEDED

The administration's threat to shut off economic relations with those nations could prove a powerful weapon, Dodd said, but might
require some kind of compensation in return, The Organization for Economic Cooperation and Development, a group of industrialized
nations, tried to harmonize banking laws in the Caribbean but met resistance from some islands that feared a substantial loss of

‘The United States itself has not joined several international money-Leundering agreements, including the 1990 Council of Europe's Convention
on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime, ratified by 47 nations, including Russia,

Bush called on the Senate yesterday to ratify the United Nations Convention on Suppression of Terrorist Financing.

International cooperation could prove effective, Dodd said, noting that within minutes of the Sept. 11 attacks, US, law enforcement was
able to track credit-card receipts across the country, resulting in immediate arrests,

“That's the difference between having record-keeping and reporting in place, versus starting after the fact," Dodd said. "It's a good
idea. I don't know why it took them this long to do it.”

Wednesday, September 26, 2001

(1) Miami Herald
If terrorists manipulated markets, money may be gone
MIMI WHITEFIELD

(2) Knight-Ridder Tribune Business News
Federal Securities Agency Hot on Trail of Possibly Attack-Related Profits

1/15/02 02619

: 01300000001228


Derivatives Study Center Page 13 of 14

or deny any such investigations.

“We are vigorously pursuing all credible leads, but at this time we have drawn no conclusions,” the SEC said in a
statement last week. “We are working closely with other federal law enforcement authorities, as well as the self-
regulatory organizations and our foreign regulatory counterparts, to provide all possible assistance.”

Short selling and activity in so-called “put” options on airlines and hotel stocks soared to “levels we have not seen
in years,” according to Phil Erlanger, a former senior technical analyst at Fidelity Investments,

“Puts” are essentially bets that a particular stock or other security is going to fall in value.

Erlanger, who now tracks shorts and options via his Web site www.crlangersqueezeplay.com, has just released new
data on option and short trading prior to the attack, gleaned from the New York Stock Exchange.

“I saw these charts, and I said, “This is not normal activity,” Erlanger said.

In his technical analysis of the charts created from the options data, Erlanger said the “footprint for taking
advantage of prior knowledge [of the attacks] is definitely there.”

Erlanger has turned his data over to the NYSE and SEC.

“It’s up to the agencies to find the shoe that fits the footprint to see whether this was indeed action taken with prior
knowledge,” Erlanger said.

Although not a sure sign of illegal activity, the activity in put options is only seen “under extraordinary
circumstances,” Erlanger said, such as when the country is at war, To have seen the activity in the airlines and hotels
bailoon right before the attack is highly suspicious, he said, “It doesn't prove that XYZ terrorists or associates of
terrorists or even a country or government of a terrorist did these trades or someone with prior knowledge did these
trades,” Erlanger said. However, he said with a heavy sigh, ” it's so out of the ordinary that it’s walking like a duck and
quacking like a duck.”

For example, United Airlines saw a 40 percent jump in shorts — some 4.4 million shares — compared with a
month earlier. And American Airlines saw 4,078 put options sold on Sept. 10, compared with an average of 200,
According to Erlanger’s calculation, if one person carried out that transaction on the 4,000 AMR puts, he would have
netted a profit of $4.8 million.

“The potential is for hundreds of millions of dollars (to have been made here),” Erlanger said of all the combined
activity on Sept. 10.

In an apparent act of trader hubris, Erlanger says some investors were also making huge speculative bets in
American Airlines doing “naked call selling” in which an investor Pledges to sell stock he or she doesn’t own,
Normally, in selling “calls” the investor actually owns the underlying security, Ifa naked call sell goes sour, the losses
could be huge.

But in the wake of American Airlines stock tumbling, making money on the naked calls “was a layup, it was easy
money,” Erlanger said.

GREEN AND GONE

Although such trades leave a well-documented paper trail, actually finding those involved or freezing any illegal
assets may be moot.

“My suspicion is that if they had a U.S. account I'm sure they took the cash out and split,” said Randall
Dodd, of the Washington-based Economic Strategy Institute and head of its Derivatives Study Center. “These
guys don’t appear to be stupid,” Dodd said, “and they could have taken their money out shortly after the
exchange re-opened.”

Making matters tougher on U.S. investigators would be if the deals and profits were funncled through a network of
offshore accounts and murky banking franchises whose dealings help lubricate the impoverished economies of countries
known for their status as secretive tax havens.

“More likely they didn’t work in cash and had the funds transferred to an overseas account that I can only
suspect was in a country that wasn’t as cooperative (with U.S. banking investigations),” Dodd said. “A clear
audit trail can quickly disappear” once it has gone overseas, he said.

Indeed, other countries also have been looking into Suspicious trades but have so far come up empty or have
declared nothing out of the ordinary occurred.

However, Bundesbank President Emst Welteke said in Licge, Belgium, on Saturday there were “ever clearer signs
that there were activities on international financial markets which must have been carried out with the necessary expert
knowledge” that the tragic events in New York and Washington were about to take place.

If the profits are still inside U.S. banks, the SEC can take some action to at least keep the money from being spent
or disappearing into the world’s shadow financial networks of, money laundering and coded accounts.

1/15/02 02 62 2

01300000001231


Appendix A

Chronology of the Public Events Surrounding Enron

Enron, based in Houston, Texas, describes itself as a provider of products and
services related to natural gas, electricity, and communications to wholesale and retail
customers,

In 1999, a series of private investment limited partnerships, LIM Cayman, L.P.
(“LJMI") and LJM2 Co-Investment, L.P. (“LJM2”), were created with Enron's then
Executive Vice President and Chief Financial Officer serving as the managing member of

the general partners. The CFO operated these partnerships as the managing member of .
the general partners while at the same time serving as an Enron senior executive,

In July 200], the CFO relinquished his operating position in LIMI and LJM2 and
sold his interests to a non-executive officer of an Enron division who had previously
reported to the CFO, This individual resigned ffom Enron immediately before
purchasing the CFO's interests in the partnerships.

In August 2001, the President and CEO of Enron resigned citing personal reasons
while acknowledging the pressure associated with the decline in the price of Enron's
common stock during his six-month tenure as CEO, The current Chairman and former
CEO reassumed the CEO title.

On October 16, 2001, Enron announced that it had recorded a $1.01 billion after-tax
charge to its third-quarter earnings to recognize asset impairments, restructuring costs, and
losses associated with certain investments. Enron subsequently disclosed that $35 million
of this charge was related to transactions with LIM2.

In a conference call on October 16, 2001, Enron disclosed that shareholders’ equity
was reduced in the third quarter by $1.2 billion related to the company’s repurchase of its

02344

01300000000953


a derivative”? in its entirety (as defined by GAAP). If the contract is not a derivative,
then the company would determine if the contract is an energy-trading contract. '*

If the contract is determined to be an energy-trading contract, then GAAP requires
that the nonderivative energy-trading contract be marked to market with gains and losses
included in earnings and separately disclosed in the financial! statements or footnotes
thereto. GAAP provides a set of indicators to consider when determining whether an
operation's energy contracts are entered into for trading purposes,

Consistent with GAAP for financial instruments such as debt and equity securities
and denvatives, GAAP does not specify how to compute fair value for energy trading
contracts, other than that it should be done on an individual contract basis. Instead,
GAAP provides a general principle, stating that fair value is the amount at which a
contract could be bought or sold in a current transaction with willing parties, that is, other
than in a forced or Liquidetion sale.

Pursuant to GAAP, a quoted market price in active markets is considered the best
evidence of fair value and shall be used as the basis for the measurement, when available.
Ifa quoted market price is not available, GAAP requires companies to estimate fair value
based on the best information available in the circumstances. As quoted market prices
may not exist for many cnergy trading contracts, companies must consider prices for
similar energy contracts and the results of valuation techniques to the extent available in
the circumstances. When valuation techniques or models are used, the best information
for companies to consider includes recent spot prices and forward prices. An energy
Price curve is constructed by compiling forward prices of what the energy commodity is
expected to be onc to five years in the future. Specifically, observable forward prices are

» A derivative is an instrument whose value is derived, in part, by reference to a stated index or
other means, Derivative instruments are defined in Statement of Financial Accounting Standards
No, 133, Accounting for Derivative Instruments and Hedging Activities,

" EITF Issue No, 98-10, Accownting for Contracts Involved in Energy Trading and Risk
Management Activisies, These criteria require an analysis of many factors including capacity,
‘customers, volume, internal controts and the contracts themselves.

14

02340

01300000000949


22/05/02 18:47 FAX 202 646 5199 we ea Use

WSIcom Page Poof §

Enron Corp. markets electricity anc natural 252, deli energy ane other paysical commodities, ant
rovides finzncia! and risk manage! xent services lo customers around wa2 world, Earon’s Imemet
address is wew.erron.com

Forward-looking Statements

. gene a econom! > sondidons, punaze wends, and sche
Da :¥'s ost 1 reposts on Fi “K. 10-Q and 8-3
an. SOLRC Corp

34738, cr Karen Denne. *1-715-853-9757. t

CONTACT. Mark Pats

Wed site: hap. we enron.com !
(ENE DYN)

NEW YORK -- Enron Corp. (ENE announced Sunday that it and some of ils subsidiaries have lec

voluntary petitions for Chap: 7 Ll rtorganization with the U.S. Bankruptcy Cour for the Souzhern
District ef New York

The compacy said that it had alse f ied suit against Dynegy Inc. (DYN) in the same court alleging -
breach of contract in conneetion wi h Dynegy's wrongful termination of its proposed merges with Enron
and seeking damages of at leam SI billion.

Enron's lewsuit also seeks the court 5 declaration that Dynegy is not eniiled to exercise its option to
acquire an Enren subsidiary thai inv ireetly owns Northern Natura] Gas Pipelins.

Enson said the proceeds from the le-wsuit would benefit tts creditors

Enron said that it is im “active discy sions" with firancial institutiors to recapitalize and provide credit
support for its North American ene gy trading business under a new ownership structure.

Enron said in a statement that "it is anticipated” that the company would provide the new entity with
waders, back office capabilities and technology. The new entity would conduct counterparty transactions
through EnronOnline, the company 5 existing energy trading platform. Any such arrangement would be
subject to the approval of the Bank-uptey Court, Enron said in the statement.

To conserve capital, Enron will imy:lement a comprehensive cost-saving program that will include
substantial workforec reductions

These cuts will primarily affect the :ompany’s operations in Houston. where Enron currently employs

approximately 7,500 people
02255

nleractive.wsj.com ‘archive romievs.cgiid=D!-CO-200) 1202-000436.¢jmigcemp 2301

01300000000864


Page 2 of 2

participants say, involved the sale of hundreds of thousands of ofa Run on a Bank (November
Eurodollar futures, some of which matured in two or three years. 29, 2001)

Such contracts are frequently used to bet on the direction of interest ‘The Chief E .

rates. Enron could also have used the Eurodollar contracts to hedge Fomine Gives Way von
against fluctuations in oil prices. In a weak economy, oil prices usually Chief's Big Dream (November
fall. But so do interest rates, so a bet on lower rates would produce gains 29, 2001)

to help offset the decline in oil prices. When data showed signs of life in

the economy, traders surmised that Enron began to sell its Eurodollars Bay joe re mnkruptcy
, i i jaght st
and started an avalanche of selling among other traders, ining Choice (November
29, 2001)

There were huge Eurodollar positions being liquidated, said Gemma
Wright, director of market strategy at Barclays Capital. "We don't know ~The Lenders: Citigroup and J.
for certain who it was, but the amount of the loss was high.” P. Morgan Are Left With

Exposure to Loans (November
One reason that traders suspect Enron may have been forced out of sucha 79" "#00
Position was that the company had neither the cash flow nor the bank Ra .
credit to meet calls for additional cash from traders at other firms. Het ci a the
Typically, companies have cash reserves to mect such calls or have Deal Fizzled First (November

access to temporary lines of credit to cover shortfalls. Enron appears to 29, 2001)
have neither. Yesterday, the company said it was suspending all

" intai ji " ‘The Derivatives; Market That
payments except for those "necessary to maintain core operations. Deals in Risks Foes » Novet
One (Ni iber 29, 2001
In addition to the recent interest rate spike, Enron has had to contend with pe (Neveu )
falling oil prices. The price of crude oil has dropped 28 percent since the [|

end of October.

Caught in a vise, Enron has almost certainly been selling securities to =)
raise cash. Treasury securities and Eurodollar contracts, because their
markets are large, are among the easiest to sell. In both cases, Enron was [-

probably selling into a falling market. | a

Adding to the turmoil in the bond market, traders said, was less
participation by Wall Street firms, which were unwilling to take on big Newsletters
new trading positions near the end of their fiscal year. Several firms end __Subseribe to e]

their years on Nov. 30, Pemeal daity |

: briefing with the | |
Some traders say Enron's problems started with comments on Tuesday by atest and most
Laurence H. Meyer, @ governor of the Federal Reserve. Mr. Meyer comprehensive news about the
suggested that additional rate cuts might be coming, and that remark deal-making industry, delivered

helped stabilize prices of Treasury securities, "It's my view that there are bY €-mTMail before the market's

no coincidences," Mr. Jonas said. “Laurence Meyer is a big hawk on opening bell
interest rates, and he basically talked a 180. That was their big gun. The => =>
only bigger gun would have been Greenspan." Get Stock Quotes

Look Up Symbols

|

Pontolio| Company Research
(OS, Markets | Inn. Mietats
Mutuy! Funds| Bank Rates

Commodities & Currencies

1/16/02
: 0130000001646


The SEC staff also monitors the activities of the standard setting functions of the
AICPA’s Auditing Standards Board (“ASB”) and the AICPA's self-regulatory programs,
designed to enhance public confidence in the audit process.

Regarding the ASB, the SEC staff attends many of the ASB's public meetings,
reviews exposure drafts of proposed auditing standards and sclected comment letters
responding to those exposure drafts, and periodically meets with representatives of the
ASB to discuss current and future projects and other matters of mutual concer.
Recently, the ASB was placed under the oversight of the Public Oversight Board
(*POB"), which is chaired by former Comptroller General of the United States, Charles
A. Bowsher.*

The POB was created in 1977 to oversee and report on the self-regulatory
Programs of the AICPA’s SEC Practice Section, which until recently consisted
principally of the AICPA’s peer review and quality assurance programs. Under the peer
review program, accountants from outside the member firm assess the firm's quality
control systems over its accounting and auditing practice and test compliance with those
systems, Under the quality control inquiry process, a committee of professionals reviews
allegations of audit failure contained in litigation filed against a member firm for
indications of needed improvements in the firm's quality control systems.

Starting in 2001, the POB’s responsibilities have been expanded to include not
only oversight of the peer review, quality control inquiry, and auditing standards setting
functions, but also to improve the communication and coordination among the various
bodies that make up the self-regulatory process and to conduct oversight reviews and
other projects that are deemed to be appropriate to protect the public interest.

‘ Other members of the PO include former FASB Chairman, Donald Kirk; the Chairman of the
Executive Committee for Lockheed and former Under Secretary of the Army, Norman Augustine;
former Counselor to the President and former Secretary of Defense, Melvin Laird; and former
SEC Commissioner, Aulana Peters.

02331

01300000000940


staff also works closely with domestic and international private sector accounting and
auditing standards-setting bodies, consults with registrants, auditors, and other
Commission staff, such as the staff in the DCF and the Division of Enforcement,
regarding the application of accounting standards and financial disclosure requirements,
and assists in addressing problems that may warrant enforcement actions.

Having now reviewed the role of the SEC and the FASB in the financial reporting
process, | would like to discuss three accounting issues that were raised by Enron in its
November 8, 2001 Form 8-K filing: (1) restating previously issued financial statements,
(2) accounting for special-purpose entities, and (3) the reduction in Enron’s shareholders”
equity in connection with the receipt of notes receivables. Finally, as requested by some
members of the Subcommittees, | will give a brief overview of a subject that is not
mentioned in Enron's filing — mark to market accounting as it applies to nonderivative
energy-trading contracts.

Restating Previously Issued Financial Statements

In its November 8, 2001 Form 8-K filing, Enron announced its intention to restate
previously issued financial statements dating back to 1997, Various groups have reported
increases in the number of companies restating their financial statements over the last
several years, with one study citing 233 restatements in 2000." Let me briefly explain
the accounting and auditing literature regarding restatements.

Management is responsible for the preparation and presentation of financial
Statements in conformity with GAAP. If management discovers an error in previously
issued financial statements, it should account for the error in accordance with Accounting
Principles Board Opinion No. 20 (APB 20), Accounting Changes. APB 20 concludes
that correction of an error related to a prior period discovered after the issuance of
financial statements for that period should be reported as a prior period adjustment.

" ‘Two separate studies by Financial Executives International and Arthur Andersen indicate
increases in the number of restatements by public companies over the past four years,

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market, perhaps Enron was too quick to eschew refineries and pipelines for the volatile, information-
based business of trading.

But it wasn't Internet that killed the beast; it was management's insatiable appetite for expansion and,
by all accounts, personal enrichment.

It's too easy to kick Enron now that it's down. It did a lot right. The competition and deregulation and
vertical "de-integration" Enron drove are the future of all industries, even energy. Enron was making
markets on the Internet well before its competitors knew what hit them.

Was Enron on to a better business model? You bet it was. But like any business model, it wasn't
impervious to rules of conduct and principles of economics.

freee

une , 200
Services

Trader Reaps Benefits Of E-Market Leadership
*Liquidity’ is the key to Enron's position at the center of online value chains

By JADE BOYD <MAILTO;jchovd@cmp,.com>
[ENRON Headquarters:Houston t Line of business: Energy production and marketing; online exchange operator 2000
Revenue: $100.79 billion 2000 Net Income: $979 million Percentage of revenue from e-business activity: N/A CEO:
Jeffrey K. Skilling Top e-business executive: Philippe Bibi, president and CEO, Enron Net Works E-business
highlights:EnronOnline conducted its millionth transaction in May; total trade volumes on the commodity-trading site have
exceeded $550 billion since it was established in November 1999. Enron Broadband Services conducted 580 online
transactions in the first quarter, compared with 321 for all of 2000 E-business challenges:Re-creating its success in
online energy trading in dozens of cther commodity businesses including bandwidth, data storage, forest products, metals,
coal and freight logistics Top e-business accomplishment:With EnronOnline, Enron brought immediate and transparent
pricing to eneray markets; the site is one of the world’s leading e-commerce platforms, with daily trade volumes in excess
SUSIY ern

of $4 billion Services: eaders <http://W vetweek com/100-01/servieed.him> Services: By The Numbers.
<htip-Jiwww intemetweek conv100-01/sery.htm> ONL TRA—R: N Enron

<http www internetweek com/100-01/serv-01.him=

Uncertainty has debilitated many e-businesses, with staffers and managers alike wondering when things will
pick up. But optimism is still in the air at Enron Net Works, the e-business arm of Fortune 7 energy company
Enron Corp., which continues to expand its electronic trading mode! into all manner of commodity markets,

Net Works oversees EnronOnline, where Enron buys and sells more than $4 billion a day of mostly natural gas
and electric power, plus stecl, coal, telecom bandwidth, data storage, freight services and 1,500 other products.

Net Works is also a new-business incubator, repackaging applications Enron originally developed for internal
use into revenue-generating online services. For example, ~redi <hittps//w n >, an
offshoot of software Enron created to help its traders manage credit risk, offers a service to some 10,000
companies to quickly determine the cost of extending credit to their own trading partners. EnronCredit.com,
which broke even in its first year, is expected to tum a profit this year.

Net Works is part software development house and part IT department, responsible for routine tasks, such as
desktop support, and critical functions, such as keeping Enron's e-business infrastructure running. The group,
with 1,500 employces, grew some 30 percent in the past year, occupying more than four floors of Enron's
downtown Houston headquarters.

"Our job is in two parts,” says Net Works COO Greg Piper. "Help Enron expand horizontally in markets for
new commodities like forest products and freight services, and build a business around the tools that helped to

| ; 02569

01300000001178


Page | of 2
Carleton, Norman

From: Lori.Santamorena@bpd_treas.gov

Sent: Monday, December 10, 2001 2:47 PM

To: norman, cerleton@do.treas,gov; peter.nickolof@do.treas.gov
Subject: 1BN ) Enron Records at SEC Sought by House Energy and

—- Forwarded by Lon SantamorenalBFD on 12/10/01 02:45 PM mm

“PUBLIC DEBT, US DEPT OF TREASURYTM <GSRS¢iblocmborg.net>
To: — LSANTAMORENA@)BFO TREAS. GOV
ce
12/1001 0234 PM ‘Subject — 1BN_} Enron Records at SEC Sought by Mouse Energy and Comme

Enron Records at SEC Sought by Howse Energy and Conmerce Panel
2002-12-10 13:25 (Mew York)

Enron Records at SBC Sought by House Energy and Commerce Panel

Washington, Dec. 20 (Bloomberg) -- The U.S. Nouse Brergy and
Commerce Committee auked the securities and Exchange Comisgion to
produce by next Mondsy sll reviews and reports it hax doee ca
Enron Corp, since 1997.

Committee chairman Representative Billy Tauzin and Janes
Greeawood, chairman of the panel's oversight and investigations
subcommittee, nade the request in # Dec, 7 letter to SEC Chairman
Harvey Pitt released by Tauzin’s office today.

““the apparent collapse of the company has resulted in the
lows of substantially ai] of the equity value in Enren, and the
lose by many perticipante of aixeable portions of their retivemont
savings, '' said Tsuzin of Lovisisns and Greenwood of Pennaylvania,
both Kepublicans. ~“It also highlighted the lack of transparency
in Enron's derivative positions in the energy merket-"'

Tauzin and Greenwood requested SEC reviews of all Bnron
quarterly and anqual filings with the agency beginning January
2997 up to the date the SEC launched tts own formal probe into
Ehren. Tauzin and Greanwood also want all proposed adjustments to
Foren filings aubeitted to the SEC by Enron auditors

-Vicky Stamas in Washington (202!) 624-1958, or
vetanageblecrberg.net /ba

Story Illustration) To compare Enzon's stock performance with
market indexes, type {BNE US «Equity» COMP «GO>}.

Company news:
ERE US <equity> CH

RESRRS RSH ERE

a
E |

BR

= 02534

01300000001143


208/01 15:45 FAX 202 6468 5293 Goss

4:

WS! com

Enron jot sbout five weeks and hs -n? aad enough time w asses
SEC civil allegations could lead tc fines and sanctions.

SEC Chairman Harvey Pin, who tas taken some heat for some policies viewed being too soft on

business, has made the Enron investigation a top priority show he will be a tough enforcer. In remarks
Thursday to the Consumer Feders ion of America. Mr. Pin said promised a thorough and swift probe of
Enron. The SEC has 2 team of ah lf-dozen eaforcement attorneys and accountants working the case.

Gregery Bruch. a forsuer SBC enforcement attorncy who has litigated complicated accounting fraud
invest.yations, said Enron's involwsment with parmerships and extensive energy derivatives trading
likely would take a year for the SEC unravel. He said the SEC would have to “cut comers" to bring a
ease more quickly, meaning the rezulator would name fewer defendants than it might in a broader, more

time-consuming case.

On Capitol Hill, the House Enerz! and Commerce Committee said it would investigate Enron's
accounting practices and Senate C ammerce Committers announced it would assess the impact on U.S

natura] gas and electricity market:

Write to Michael Schroeder at mixe.schroccer@ws) com!

URL tor this Article:
hits interactive wsj.comvarchivelratr awe egi?id=S81007087266825656840 djm

Hyperlinks in this Article:
(1) matte: mike schroeder@wsj.com

Copyright © 1001 Dow Jones & Company, Inc. Ali Rights Reserved.
Printing, distribution, and use of this ‘aterial is governed by your Subscription Agreement end copyright laws.

For informution about subscribing, go to http://wsj.com

02250

bitp://imeractvs. sem/archive tetricve syi?id~SB 1 007087266825656840.djm&templaces... 11/30/01

01300000000859


Page 1 of 3
Carleton, Norman

From: Lori Santamorena@bpd.treas.gov

Sent: Friday, December 07, 2001 1:47 PM

To: norman.carleton@do.treas.gov

Subject: 1BN ) Derivatives Dealers Fret as Bankruptcy Overhaul

you may have already seen this...

oo Forwanted by Loe Santamorena/BPD on 1207101 01:47 PM n=

“PUBLIC DEBT, US DEPT OF TREASURYTM <GSRSQbioomberg.net>
To LSANTAMORENAGGPD. TREAS.GOV

oe
12/07/01 01:42 PM Subject —1BN_) Derivatives Dealers Fret as Gankrupicy Overhaul Lage

Derivatives Dealers Pret
2001-12-07 13:03 [New York!

Bankruptcy Overhas) Lage (Updates)

Derivatives Dealers Fret au Bankruptcy Overhaul Lago (Updated)
{adda Enron comment in 12th paragraph.)

Washington, Dec. 7 (Bloomberg! -- J.P. Morgan Chase & Co.,
Merrill Uynch & Oo, and other securities firms are trying to
perguade Congress that failure to change bankruptcy rules by

year end will disrupt the market for the products companies wi
te hedge against fluctuations in interest rates and currenci
The banks want Congress to require that #8 compan holdings

of derivatives be considered as a whole if it goes broke, That
way, bankruptcy trustees can't cash in sone derivatives that
gettle in the company's favor and void others on wnich the company
owes the bank. Federal Reserve Board Chairman Alan Greenspan and
Treasury Secretary Paul O'Neill support the concept.

The change is something derivatives dealers have wanted tor
yeara. They aay the seed ig more presging now because the
economy's slump ban driven record numbers of companies into
bankruptcy, Otherwi banks will hesitate to deal in derivatives
without the guarantee that they'll be paid, thus denying
businesses of all kinds « key tool to pin down future costs.

“"Me are fearful that in the current negative ecceonie
climate, these products are going to be tested in # way that they
have not been teated,"' maid Stacy Carey. a lobbyist for the
International Swaps and Derivatives Association.

legislation requiring derivatives to be dewlt with as « net
asset ig tucked into @ larger bankruptcy overhaul Bill, the thruat
ef which would make it harder for consumers to escape all of their
credit card and other unsecured debt when filing for bankruptcy.

“Cherry-Picking’

Action oa the bankruptey measure has stalled for fourth
consecutive yenr over disputes unrelated to che derivatives
“*netting’' provisions, which have drawn no opposition. Dealers
want Congress to move the derivatives proposal as separare
legisiation

Derivatives are designed to protect from wild awiege in
prices or interest rates; a company buys contracts that will
produce gsins if other assets yield lceses. Almost inevitably, «
large holding af derivatives will contain winners and losers.

Under bankruptcy law, bankrupt companies may cancel
ebligations amd contracts that are onerous te them and cash thoi

with favorable returns to pay creditors. Canceling losing
contracts and keeping winning core is unfair, deslers say.
W15/02

01300000001 162


indicated that they overstated both total assets and shareholders’ equity by $172 million
due to a transaction first reported in the financial statements for the quarter ended June
30, 2000, and by an additional $828 million due to a transaction first reported in the
quarter ended March 31, 2001. As a result, Enron has announced it intends to restate the
financial statements for the second and third quarters in 2000 and its annual financial
statements for 2000 for $172 million. The aggregate restatement for the first and second
quarters for 2001 will be $1.0 billion

Enron also has disclosed that in the third quarter of 2001, it purchased a limited
partnership's equity interest in an SPE, and that transaction resulted in a further reduction
of shareholders’ equity by $200 million. Enron also disclosed, without further
explanation, that the $200 million related to the excess of the fair value of contracts
deliverable by Enron over its notes receivable.

Mark-to-Market Accounting

Some members of the Subcommittees have requested that | also discuss mark-to-
market accounting issues as applied to energy contracts. It should be noted, however,
that Enron has not indicated that it intends to restate its financial statements due to mark-
to-market accounting issues.

Entities commonly enter into contracts for the purchase and sale of energy
commodities. Historically, most energy contracts were settled by physical delivery.
However, in recent years companies have entered into energy contracts, at rapidly
increasing rates, to speculate on market movements, to conduct hedging transactions, or
otherwise to generate gains from market price differences.

To determine the proper accounting for these contracts pursuant to GAAP, a
multi-step process must be undertaken. The first step is to evaluate whether a contract is

13

02339

01300000000948


Sciers’s toh pratt :

siay joined the Union ef Co, 2a Ur Visine ts eabdag ler vases us
carbon in the atmosphere. The Clinton administration was supportive, but this year the Bush
administration reneged on a campaign pledge to impose limits on greenhouse gas emissions from
coal-burning power plants.

A multimillion-dollar lobbying campaign in Congress to secure legislation requiring states to
institute retail electricity deregulation fared even worse.

Enron hired former New York representative Bill Paxon, a leading conservative, to run
Americans for Affordable Electricity, which commissioned studies and recruited business
support for deregulation. But the legislation never made it out of a congressional subcommittee.
At the same time, Enron was growing restive over the slow pace of deregulation in the wholesale
electricity market, the core of its business. Large parts of the country, especially the Southeast,
were still monopolized by regulated utilities that limited the opportunity for trading gas,
electricity and energy derivatives.

Political Pragmatism

Enron's political pragmatism was demonstrated in the 1998 New York Senate election, when it
dropped its support of the Republican incumbent, Alfonse M. D'Amato, after Democrat Schumer
endorsed Enron's goal of wholesale deregulation, sources said. Lay reciprocated by hosting
several fundraisers for Schumer, and Enron's political action committee contributed $7,500 to the
Schumer campaign.

The company's lobbying team expanded along with its Political spending, It outgrew the two-
Person operation that existed in 1989 and began to reflect Enron's interest in everything from
Pipeline safety and derivatives trading to Overseas Private Investment Corp. loan guarantees, By
last year, its lobbying expenses exceeded $2 million a year and covered a raft of big-name
consultants, such as former Montana governor Marc F. Racicot, the new Republican National
Committee chairman, and former top aides to House Majority Leader Richard K. Armey (R-
Tex.) and House Majority Whip Tom DeLay (R-Tex.)

The hazards of Enron's efforts to connect with both parties were evident last year, when shortly
before the November election, the company picked a Clinton administration Treasury official,
Linda Robertson, to run its Washington office.

A perturbed DeLay, whose campaign and related funds had received more than $100,000 from
Enron and Lay, briefly "excommunicated" Enron, a House source said, Robertson was not
invited to a series of meetings of electricity lobbyists held in DeLay’s office last July, though an
Enron official did finally attend the sessions,

Enron had more success when Congress overwhelmingly approved legislation last year
containing @ provision precluding the Commodity Futures Trading Commission (CFTC) from
regulating Enron's trading in energy derivatives. These instruments are traded largely between
electricity dealers and big wholesale consumers, which use them to hedge against price swings
that could adversely affect their businesses.

02161

01300000000770


Derivatives Study Center Page 4 of 14

grected Phil Gramm, R-Texas, far left, and Paul S. Sarbanes, D-Md., left
center, before a Sept. 20 hearing of the Senate Banking Committee.

No longer bickering over whether more spending will threaten Social
Security, all of them say the nation can afford a substantial defense
build-up, the rebuilding in New York City, a bailout for the airline
industry and perhaps more tax cuts without jeopardizing the nation’s
long-term fiscal health. (Airlines, p. 2206)

Members of the House Ways and Means and Senate Finance committees will be
continuing a series of bipartisan discussions in the coming weeks about what
the congressional role should be in trying to stimulate the economy -- all

the while seeking to avoid public battles over tax policy at a time when
lawmakers are determined to show unity.

But through the week of Sept. 17 -- both in private and in public -- many
economists cautioned Congress to move slowly on any additional stimulus
package,

"Nobody has the capacity to fathom fully how the tragedy of Sept. 11 will
play out," the nation's most influential economist, Federal Reserve Chairman
Alan Greenspan, told the Senate Banking Committee on Sept. 20, "But in the
weeks ahead, as the shock wears off, we should be able to better gauge how
the ongoing dynamics of these events are shaping the immediate economic
outlook.

"It's far more important to be right than quick," Greenspan added.
Republican and Democratic leaders say they are planning to mect again the
week of Sept. 24 with Greenspan, as well as with top White House economic
adviser Lawrence Lindsey and former Clinton administration Treasury
Secretary Robert E. Rubin, before they decide on a package.

"We need to get a better assessment of the overall impact," House Majority
Leader Dick Armey, R-Texas, said after the meeting Sept. 19. "The nation's
had a terrible jolt and, quite frankly, the jolt is more widespread, both in
terms of the physical performance of different markets and in terms of the
national psyche, than what we've been able to measure,”

The administration has signaled an openness to additional tax cuts this

year, but has not endorsed any of the ideas being floated. In discussing
other stimulus options, Treasury Secretary Paul H. O'Neil! has suggested the
administration is not now planning to endorse federal aid for industries
other than the airlines, such as insurance firms. And federal regulators say
they have adequate powers over the financial markets. (Markets, p. 2202;
insurance, p. 2203)

"There is a sense we ought to do something, and I think there is a sense

that we ought to wait a week or so to see what that is," said Rob Portman of
Ohio, a Ways and Means member and a conduit between the White House and
House GOP leaders. "That's about as much consensus as I've seen.”

"Enough to Get America Going’

One week after the deadliest foreign attack on American soil, the
government's budget picture has brightened considerably, judging by the 0 2 6 1 3

1/15/02
01300000001222


Page | of 3
Carleton, Norman

From: Carleton, Norman

Sent: Tuesday, August 28, 2001 9:58
To: Belinda Biaine (E-mail)
Subject: FW: Enron article (2)

----Original Message---—~

From: Carleton, Norman

Sent: Wednesday, August 22, 2001 10:13 AM
To: Nickoloff, Peter; Schultheiss, Heidilynne
Subject: FW: Enron article (2)

-----Original Message-----
From: Norman Carleton [mailto:Norman.Carieton@worldnet.att.net]

Sent: Thursday, August 16, 2001 11:43 PM
To: Norman Carleton; norman.carleton@do.treas.gov
Subject: Enron article (2)

fe)
AUG 16, 2001

Enron Head Seeks to Reassure Staff

By REUTERS

Filed at 4:48 p.m. ET

HOUSTON (Reuters) - The chairman of Enron Corp. (news/quote) (ENE.N) on Thursday sought to reassure
employees that the energy giant's business was on firm footing as its stock faced a second day of brutal
pressure on Wall Street, following a top executive's shock resignation.

Kenneth Lay told employees at a companywide meeting that Enron's business was strong, despite the
extended pressure on its stock and heir apparent Jeff Skilling's unexpected resignation as president and
chief executive officer.

Lay, who was met with a standing ovation when he took the podium, touched on a wide variety of topics
during the 90-minute meeting during which he took questions and presented financial data he said proves
the company is strong

“We've got a lot of great stuff going on and we're not getting much credit for it in the marketplace, but we
will," Lay said. “! do think the next several months and few years are going to be great for Enron,”

His comments came as Enron's stock saw its worst day in 19 months, closing down $3.40 or 8.5 percent at
$36.85 on the New York Stock Exchange. That brings its losses to roughly 13 percent since Skilling
announced his resignation after the market's close Tuesday.

Lay said he believed the energy giant's stock can sustain a Price-to-eamnings (P-E) multiple of 25-30 going
forward. It is about 20 right now, based on Wednesday's close.

1/1602 02984

~ 01300000001593


and power supplier, on

Tuesday.

At the same time, the parent company is trying to salvage its stricken core north American trading
business. UBS, the Swiss banking group and JP Morgan Chase have both registered an interest in

forming a joint venture,

The latest of at least two dozen lawsuits was filed on Wednesday against Enron executives and

board members, together with a request for an order to freeze their assets.

Bill Lerach, lead attommey for the new suit said: "Our investigation is revealing to us the fraud thus far
disclosed was the tip of the iceberg.”

Additional reporting by Elizabeth Wine and Sheila McNulty

Tracking:

Recipient

Catina, All

Bar, Shela

Berardi, Steve
Bineberger, Timothy
Eichner, Matthew
Gaptondo, Jose
‘Gross, Jared

Hammer, Viva

Lori Sanatamorena (E-mail)
Nickolotf, Peter

Novey, Michael
Piatrangali, Fred
Resedoro, Brian
‘Schultheiss, Heidilynne
Whaley, Jean
Wledman, Mark

Delivery

Doliverec: 12/501 7:18 PM
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Derivatives Study Center

week, the Chamber's top lobbyist, Bruce Josten, said business groups were
indeed pushing for quick action on items like eradication of the alternative
minimum tax for corporations and the revival of the investment credit. Also,
a coalition of business groups sent Bush and congressional leaders a letter
urging them to move promptly.

Democrats signaled that they are loath to consider a cut in the capital

gains rate. The GOP says the move might raise revenue in the short term by
encouraging people to sell their assets to take advantage of the lower rate,
Democrats say the new rate would do little to bolster new investments and
would disproportionately benefit the wealthy.

Similarly, some Republicans have said they are against a leading Democratic
idea: cutting payroll taxes for lower-income workers. "We're worrying about
ensuring the future of Social Security and Medicare, and if we cut the
payroll taxes now, that could cause problems for us later," said Jill

Gerber, a spokeswoman for Grassley.

Republicans also are unlikely to submit to demands to revisit the tax cuts
between 2005 and 2010 under the $1.35 trillion tax cut law (PL 107-16)
enacted in June. Many Democrats say this is necessary to control interest
rates in the long run considering the explosion in federal spending that is
sure to follow the attacks. (CQ Weekly, p. 1304)

Even before Sept. 11, Rubin had been counseling Democrats to press to reopen
the debate on the tax cuts for the second half of the decade, arguing that

the lost revenue would cause long-term rates to rise and hurt the current
economy. "Maintaining our fiscal discipline going forward will be key to
economic well-being,” he told the U.S. Hispanic Chamber of Commerce on Sept.
21.

Keeping Focused
But both Republicans and Democrats were sounding a conciliatory note at the
end of the week of Sept. 17.

“ don't think we ought to emphasize poison pills, but if we search for

common ground, we'll find the poison pills,” Sander M. Levin of Michigan,

the ranking Democrat on the Ways and Means Trade Subcommittee, said Sept. 20
in declining to say what proposals would be non-starters in his party's

eyes. "I think we all have a choice, including the president: to search for

common ground, or to try to shove through our agenda. And I think the answer
should be searching for common ground.”

And while Thomas emphasized the need for investment stimuli, he said it also
might be appropriate to "do a bit of a demand side" -- for instance, he

said, by providing tax relief similar to Bush's tax cut for those who do not

pay income taxes, Such a cut has been anathema to the GOP in the past.

In the absence of bipartisan agreement on how to proceed, economists have
counseled lawmakers not to cobble together a stimulus package in the image
of most tax relief measures that move through Congress, which frequently
tum into "Christmas trees" littered with special provisions to satisfy
important constituencies.

"You don't do a little bit of this and a little bit of that in creating a

1/15/02

Page 7 of 14

02602

01300000001211


paid for their audits, It is slightly more than the audit fees paid by two others -- JPMorgan Chase
and Merril! Lynch.

Because of the way the fee categories for new proxy statement disclosures on auditor fees were
defined, many services traditionally provided by auditors — and in many cases only provided by
auditors — now are classified as “Other.” Regrettably, without knowledge of the underlying
facts, this leads some to believe that such fees are for “consulting” services,

Tn fact, $2.4 million of the $27 million in “Other” fees reported by Enron last year related to
work we did on registration statements and comfort letters. This is work only a company’s audit
firm can do.

Another $3.5 million was for tax work, which has never even been mentioned as a conflict with
audit work. Audit firms almost always do tax work for clients.

Another $3,2 million of the “Other” fees Enron paid us last year related to a review of the
controls associated with a new accounting system —a service highly relevant to the auditor's
understanding of the company's financial reporting system. Another Big Five firm installed that
financial accounting system -- for about $30 million. ‘

Finally, $4 million of the fees listed as having been paid to Andersen were, in fact, paid to
Andersen Consulting, now known as Accenture. As most of you know, our firms formally
separated last August and had been operating as independent businesses for some time.
Nevertheless, the rules said Enron had to report any fees it paid to Andersen Consulting as
having been paid to its audit firm.

If you take all these factors into account, the total fees thet Arthur Andersen received from Enron
last year amounted to $47.5 million, And of this, about $34.2 million, or 72 percent, was audit-
related and tax work. Total fees for other services paid to our firm amounted to $13.3 million.
This was for several projects, none of which was for systems implementation or for more than $3
million.

Some may still assert that even $13 million of consulting work is too much — that it weakens the
backbone of the auditor, There is a fundamental issue here. Whether it’s consulting work or audit
work, the reality is that auditors are paid by their clients, For our system to work, you and the
investing public must have confidence that the fees we are paid, regardless of the nature of our
work, will not weaken our willingness to do what is right and in the best interest of the investors
as represented by the audit committee and the board.

02356

01300000000965


22/05-01 15:47 FAX 202 646 S189 @ozo-o29

-WS).com Page 2 of §

operations usien Whe employs anproximately 7.06 pecpie. in acetion
company conunus its ta 2d program to divest or wind Jown non-core assets and oF.
Details of the units to be affected vill be communicated shortly.

The Dynegy Lawsuit

In its lawsuit filed today in U.S. B: nkruptcy Court in New York, Enron alleges, among other things, that
Dynegy breached its Merger Agre: ment with Enron by terminating the agreement when it had no
contractual right to do so; and that Dynegy hus no nght to exercise its option to acquire the entity that
indire.tly owns the Northem Natw al Gas pipeline because that option can onls be triggered by 2 valid

termination of the Merger Agreem :nt.
The Chapter 11 Filings

In conjunction with today’s petitio: s for Chapter 11 reorganization, Enron will ask the Bankruptcy Court
to consider a variety of “first day rvotions” to support its employees, vendors, trading counterparties,
customers and other constituents. “hese include motions seeking court permission to continue payments
for employee payroll end health be nefits; obtain interim financing authority and maintain cash
management programs, and retain iegal, financial and other professioaals to support the company’s
reorganization actions. In accordar.ce with applicable law and court orders, vendors and suppliers who
provided goods or services to Enrvn Corp. or the subsidiaries that have filed for Chapter 1! protection

_, before today’s filing may have pre petition claims, which will be frozen pending court authorization of
payment or consummation of a plr a of reorganization.

The Wholesale Energy Trading Business

The discussions currently underwi y with various leading financial institutions are aimed at obtaining

credit support for, recapitalizing a id revitalizing Enron's North American wholesale energy trading .
operations under a new ownership structure in which Enron would contmue to have a sigmficant .
ownership interest

"Tf these discussions are successft |, they could result in the creation of a new trading entity with a suong
and unencumbered balance sheet, -he industry's finest trading team, and its leading technology platform,
al] backed by one or more of the s-orld’s leading financial institutions." said Greg Whalley. Enron
president and chief operating officer. "We understand that it may take time for counterparties (o resume
eormal trading levels with this eni ty, but we are confident that this business can be put back on a solid
footing. Obviously, our potential ; armers share our confidence or they would not be at the table with us
We intend to take steps to retain employees who are key to the future success of our wholesale enerzy
wading business and to regain the support and confidence of its trading counterpartics." 7

Comment by Ken Lay 0 2 2 6 4

“From an operational standpoint, »ur energy businesses-including our pipelines and uulites-are
conducting normal operations anc. will continue to do so, * said Kenneth L. Lay, chairman and CEO of
Enron. “While uncertainty during che past few weeks has severely impacted the market's confidence in
Enron and its trading operations, ve are taking the steps announced today to help preserve capital,
stabilize our businesses, restore the confidence of our trading counterparties, and enhance our ability to
pay our creditors." Enron's princijia) legal advisor with regard to the proposed merger with Dynegy,
Enron's Chapter 11 filings. the Dynegy lawsuit, and rejated matters is Weil, Gotshal & Manges LLP.
Enron's principal financial adviso with regard to its financial restructuring is The Blackstone Group

teractive. ws}.com/archiv: retrieve.c -CO-2001 1202-000435.djml&template=z... 123/01

01300000000873


In the third quarter, Enron closed out the transactions that included the $172 million and the
$828 million equity amounts, and we and Enron reviewed the associated accounting. This review
included third-quarter impacts on the profit and loss statement and on the balance sheet. This is
when the erroneous presentation of sharcholders’ equity came into focus,

We had discussed the proper accounting treatment for similar types of transactions with Enron’s
accounting staff, and therefore, the scope of our work on the year 2000 audit and this year’s
quarterly reviews did not anticipate this sort of error. When we informed the company of the
error, the company made the necessary changes in its financial statements.

Questions about disclosure

Questions have been raised about the sufficiency of Enron's disclosures, especially about
unconsolidated entities. I ask you to keep in mind that the company disclosed in its financial
statements that it was using a number of unconsolidated structured financing vehicles.
Unconsolidated means, by definition, that the assets and liabilities of these entities were not
recorded in Enron's financial statements. However, in certain circumstances, footnote disclosures
are required.

With that disclaimer, let me offer one man’s view of what investors were told. Enron had
hundreds of structured finance transactions, Some were simple; others, very complex. The
company did not disclose the details of every transaction, which is acceptable under GAAP, but
it did disclose those involving related parties and unconsolidated equity affiliates.

* JEDI and other entities are listed in footnote nine of Enron’s 2000 annual report.

© LJM1 and LJM2, involving the company's former CFO, both were described in the 1999 and
2000 annual reports and described more fully in its annual proxy statements.

In footnote 11 to the 2000 annual report, Enron also disclosed under the heading "Derivative
Instruments” that it had derivative instruments on 12 million shares of its common stock with
JEDI and 22.5 million with related parties.

Some people say we should have required the company to make more disclosures about
contingencies, such as accelerated debt payments, associated with a possible decline in the value
of Enron's stock or changes in the company’s credit rating.

I ask you to keep in mind that the company’s shares were coming off near record levels when we
completed our audit for 2000. No one could have anticipated the sudden, rapid decline we

02354

01300000000963


Carleton, Norman

Page | of 2

From:  Catina, Jill
Sent: Thursday, November 29, 2001 8:36 AM

To: Gross, Jared; Malvey, Paul; Carleton, Norman; Bitsberger, Timothy; Roseboro, Brian, Sobel, Mark; Byrne, Kathleen;

‘Sherer, James; Quinn, Lois; Dulaney, Tim
Subject: Interesting piece in today’s NY Times that pins recent spike in vol in Eurodollars & UST market on Enron

1/15/02

Had heard participants speculate that something might up with Enron's Eurodollar portfolio but
no one I talked to had seen the flow.

Enron's Woes Exacerbate Turmoil

02577

&r |he swift downfall of Enron (news/quote) has contributed to extreme turbulence in the United
!States Treasury market in recent weeks, causing violent swings in interest rates not seen since
Russia defaulted on its debt and the Long-Term Capital Management hedge fund nearly collapsed in late
1998.

By GRETCHEN MORGENSON

Even though the exact makeup of Enron's large trading portfolio remains a mystery, traders said that the
energy company had bet that interest rates would continue to decline because of continuing weakness in

the economy.

Then two weeks ago, the economy began to show signs of revival. As investors decided that the days of
Federal Reserve rate cuts were over, rates began to rise and prices on Treasury securitics fell. The move

out of Treasuries crushed traders who still expected the weak economy to push interest rates lower.
Scrambling to cut their losses, those traders sold even more, depressing prices and pushing up rates

further.

The sense among many market participants is that Enron's woes made a bad market excruciating. "I
think the Street in general lost half of its year or more in the last week or two,” said Stan Jonas,
managing director at Fimat USA, a broker dealer. "Everyone was long the bond market, thinking the
economy was going to be bad. Then everything shifted, and Enron drove it to extremes."

How extreme? In the two weeks beginning Nov. 12, two-year Treasury
notes plummeted in price, pushing their yields up to 3,18 percent, from
2.41 percent. In the same period, yields on Treasuries with five-year
maturities went to 4.4 percent, from 3.62 percent.

The trade that appears to have gone awry for Enron, market

Enron Collapses as Suitor
Cancels Plans for Merger
(November 29, 2001)

Market Place: A Big Fall

participants say, involved the sale of hundreds of thousands of Evoking Nasty Old Memories

Eurodollar futures, some of which matured in two or three years, (November

Such contracts are frequently used to bet on the direction of interest. 29 2001)

rates. Enron could also have used the Eurodollar contracts to hedge

against fluctuations in oil prices. In a weak economy, oil prices usually “Te Chie! Execute: on

fall. But so do interest rates, so a bet on lower rates would produce gains n ream (November

to help offset the decline in oil prices, When data showed signs of life in —-29, 2001)

the economy, traders surmised that Enron began to sell its Eurodollars

and started an avalanche of selling among other traders. The Last Resort: A Bankruptcy
Filing Might Be the Best

There were huge Eurodollar positions being liquidated, said Gemma Remaining Chaise (November

Wright, director of market strategy at Barclays Capital. "We don't know
for certain who it was, but the amount of the loss was high."

‘The Lenders: Citigroup and J,

01300000001186


APPENDIX B

How to Prevent Future Enrons
By Harvey L. Pitt

12/11/2001

The Wall Street Journal

Page A18

(Copyright (c) 2001, Dow Jones & Company, Inc.)

The Securities and Exchange Commission is investigating Enron ‘s meiidown and its tragic
consequences. Until all the facts are known, there is nothing that can or should be said about
who may be responsible for this terrible failure. The public can be confident, however, that we will
deal with any wrongdoing and wrongdoers swiftly and completely, to ensure full protection of
investor interests,

Even before the Enron situation, we were working to improve and modemize our disclosure
system -- to make disclosures more meaningful, and intelligible, to average investors. Our
immediate concem in the wake of this tragedy should be to understand how to prevent more
events like this. Of course, those with intent and creativity can override any system of checks or
restraints. Believing that we can create a foolproof system is both illusory and dangerous. But
investors are entitled to the best regulatory system posse, and we can achieve more than we
presently do if we focus attention on finding solutions instead of scapegoats.

‘Our current reporting and financial disclosure system has needed improvement and
modemization for quite some time. Disclosures to investors are now required only quarterly or
annually, and even then are issued long after the quarter or year has ended. This creates the
Potential for a financial “perfect storm.” information investors receive can be stale on arrival and
mandated financial statements are often arcane and impenetrable.

To reassure investors and restore their confidence, the public and private sectors must partner to
produce a sensible and workable approach that includes, in addition to our existing after-the-fact
enlorcement actions:

~ A system of “current” disclosure. Investors need current information, not just periodic
disclosures, along with clear requirements for public companies to make affirmative disclosures
of, and to provide updates to, unquestionably material information in real time,

~ Public company disclosure of significant current “trend” and "evaluative" data. Providing current
trend and evaluative data, as well as historical information, would enable investors to assess a
company's financial posture as it evolves and changes. It would also preclude "wooden"
‘approaches to disclosure, and encourage evaluative disclosures that begin where line-item and
Generally Accepted Accounting Principles disclosures end. This information, upon which
corporate executives and bankers already base critical decisions, can be presented without
confusing or misleading investors, Prejudicing legitimate corporate interests, or exposing
companies to unfair assertions of liability.

— Financial statements that are clear and informative, Investors and employees concemed with
Preserving and increasing their retirement funds deserve comprehensive financial reports they
Can easily interpret and understand,

~ Conscientious identification and assessment by public companies and their auditors of critical

accounting principles. Public companies and their advisers shuld identify the three, four or five
‘most critical accounting principles upon which @ company’s financial status depends, and which

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3WSi.com

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new commodities like forest products and freight services, and build a business around the tools that helped to
transform Enron.”

E-Commerce Apex

While Enron's e-business gains have been spotty in some areas—it has struggled to create liquid Web markets in
bandwidth and on paper, for instance--EnronOnline is one of the most successful e-marketplaces. It conducted
its millionth transection late last month, and the total value of trades on the site exceeds $590 billion. Online
trading now accounts for almost 75 percent of Enron's energy transactions in North America, the company says.

Enron counts both purchases and sales in its volume numbers--unlike e-marketplaces that simply take a cut of
transactions on their sites--because the company is a "counterparty" to every trade on EnronOnline. Enron
makes its money on the spread between what it pays for commodities and what it sells them for.

When a customer clicks to buy gas, electricity, steel or any other commodity, Enron guarantees price and
delivery time. The key for Enron isn't to own massive amounts of physical product or storage and delivery
capacity, but to arrange for third-party supply and logistics electronically. Enron stays informed about the vast
array of factors that can influence price and delivery on a minute-by-minute basis by employing thousands of
researchers, analysts, weather forecasters and other market specialists,

Enron isn't just moving physical product on the site. Much of its online deal-making is in financial derivatives
and risk management.

For example, Enron is now in the market for DRAM chips. But it doesn't buy and sell the chips; it sells financial
instruments that let companies lock in a price for DRAMs for a set period, Ultimately, Enron hopes to buy and
sell the chips itself, just as it buys and sells gas, electric-ity and other commodities.

Energy Trading Redone
Enron is reticent about disclosing exact volume figures for the different commodities traded on its sites. The
large majority of trades are still conducted in natural gas and clectricity.

The Internet is transforming energy trading from something of an art form, dominated by person-to-person deals
negotiated over the telephone, to an automated science. By openly displaying its "bid" and “ask” prices--and the
spread between them--Enron drove trade volumes through the roof in 2000. Forrester Research estimates that
the "notional value" of online energy trades grew 750 percent in 2000, with EnronOnline accounting for most of
them.

But competing energy firms are banding together to form online marketplaces of their own. American Electric
Power, Aquila, BP Amoco, Duke Energy and others joined with Goldman Sachs and other financial firms to
form Intercontinental Exchange, while Axia Energy, Coral, Dominion TXU and Williams have formed
TradeSpark.

While these consortia may view each other as competitors, they see EnronOnline as complementary, says
Forrester analyst Jim Walker, "Everyone loves to have Enron trade on its site because Enron brings the most
valuable thing to the market, which is liquidity," Walker says.

Enron has purchased physical assets to ensure its own supply in several key markets, such as pulp and paper and
metals, Piper says. Metals trading, he says, is up to about 1,000 transactions daily, representing about 25,000
metric tons of steel.

Enron conducted 580 bandwidth trades in the first quarter, compared with 321 in the past year, and it expects to
handle more than 2,200 trades in 2001.

However, Enron's total online trading volume represents everything from storage services to long-haul circuits
to dark fiber to IP services. None of the bandwidth commodities has achieved liquidity yet, notes Kevin

‘ 02274

01300000000883


Derivatives Study Center Page | of 14
Carleton, Norman

From:  Schultheiss, Heidilynne

Sent: Thursday, November 08, 2001 5:05 PM

To: ‘weini@sec.gov’, ‘dutth@sec.gov’, judy.ringle@ssa_gov'; 'mpenick@cftc.gov'; Carleton, Norman, Nickolotf,
Subject: FW: Derivatives Study Center in the Press

Randall is up to the same old tactics again. And | would hardly characterize him as “free market"; | think he would be offended at
the label!

---—-Original Message-—--

From: Randall Dodd [maitto:rdodd@econstrat.org)
Sent: Thursday, November 08, 2001 5:02 PM

To: Randall Dodd

Subject: Derivatives Study Center in the Press

Derivatives Study Center
Randall Dodd 1401 H Street, NW, Suite
560
Director Washington, D.C. 20006
202 326 8555 rdoddbeconstral.org
Dear Colleagues:

I thought it would be worthwhile to take a moment to write and let you know that the Derivatives Study Center
has been in the news quite a bit in the last couple of months. This has given me the opportunity to discuss some of the
suspicious sxtock trades that preceded the terrorist attacks on September 1 1% to explain some of problems in tracking
these transactions through tax haven countries, to comment on the various proposals for an economic stimulus package,
and even to talk about the possible issuance of War Bonds in the wake of the September 11" attacks. This includes
appearances on CNN’s Money Line (September qty, CBS Evening News (see transcript below) and radio appearances
on WTOP, Wisconsin Public Radio, WBUR in Boston (discussing the tracking of terrorist finances) and WAMU’s
syndicated “Talk of the Nation” (discussing War Bonds). You can listen to either of the latter two of these radio
broadcasts through links below. In addition to broadcast news, I have copied in below some examples of on-line and
print articles ~ including the Congressional Quarterly, San Francisco Chronicle and Miami Herald — where these
comments have been quoted.

Regarding current events, the Derivatives Study Center is closely following the implosion of Enron Corporation
and any impact it is having on energy and other derivatives markets, and the Center is also following the recent
disclosure that the Treasury Department bungled its announcement of plans to cease new auctions of the 30-year
Treasury bond so that the news was leaked early to some market participants. So look for the Center to show up in
articles linked to these events.

Yours,

Randall Dodd
Thursday, September 11, 2001
Taxing Issues
Washington Wants to Trim Capital Gains Tax to Spur Growth
Experts Say It Won't Work 0
ABCNEWS.COM 2 5
1/15/02 96

01300000001205


In addition, products more tailored to specific market sectors, based on the Liffe trading system, may be

designed by others in the future, Dudden said.

There is no intention to have larger participants acting as market makers in weather futures initially, Dudden
said, adding the exchange will be constantly evaluating the response to the trading system and adjusting

methods accordingly.

Also, Liffe will seek to add additional weather trading markets in the U.S. and Asia. These markets would likely

have summer season contracts in addition to winter season contracts.

"This is really about building the market,” Dudden said. "As we do that it'll become more and more apparent
where we need to channel our energies. This is not the sort of market where you can dip one toe in and then

jump right out again.”

~-Mark Long; Dow Jones Newswires; +44 (0)20 7842 9356; mark.long@dowjones.com

Tracking: Recipient Delivery
Nickolo!!, Petar Debvered: 12/6/01 4:37 PM
‘Schultheiss, Heidilyane Detvered: 12/6/01 4:37 PM
Bitsbenger, Timothy Delivered: 124001 4:37 PM
Gross, Jared Delivered: 12001 4:37 PM
Vilacman, Mark Delivered: 12/607 4:37 PM
Cetina, Jit Delivered: 121601 4:37 PM
Nowey, Michael Delivered: 120601 4:37 PM
Eicher, Mathew Debvered: 12/6/01 4:37 PM
Hamener, Viva Delivered: 1246/01 4:37 PM

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React. 12/601 4:37 PM
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generally available up to three years into the future, In addition, broker-dealer prices are
often available four to five years into the future. As ¢ result, similar energy contracts
with similar durations of five years or less have observable fair values within a narrow
range.

However, a wide range of fair value estimates may result as the duration of an
energy contract exceeds five years. Forward prices beyond the fifth year must be
estimated, so the assumed rate of volatility has an important role in the assignment of fair
value. Generally, prices are less volatile in the long run than in the short run. However,
the current accounting guidance is not specific as to the application of fair value methods,
so the assumed volatility of energy prices may vary, potentially leading to a wider range
of assessed fair values,

Enron applies mark-to-market accounting for its energy trading activities, Enron
has disclosed that the market prices it used to value its energy trading contracts reflect
“its best estimate considering various factors including closing exchange and over-the-
counter quotations, time value dnd volatility factors underlying the commitments.”

Enron disclosed that it engages in price risk management activities for both
trading and non-trading purposes. Enron's net assets from price risk management
activities were approximately $1,088 million and $300 million at December 31, 2000 and
1999, respectively. While Enron discloses that it reports changes in its market values as
part of other revenues (total other revenues were $7.2 billion for the year ended
December 31, 2000), it is unclear from its public filings what Portion of its revenues
comes from the changes in values, In its statement of cash flows, however, Enron notes
that approximately $763 and $395 million of income was recognized from price risk
management activities that did not result in the receipt of cash in 2000 and 1999,

respectively.

Improving the Disclosure and Regulatory System

15

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01300000000950


Carleton, Norman

From: Carleton, Norman

Sent: Thursday, December 06, 2001 4:37 PM

To: N . Peter, Schuttheiss, Heidilynne; Bitsberger, Timothy, Gross, Jared; Wiedman, Mark;
Cetina, Jit; Novey, Michael; Eichner, Matthew; Harmer, Viva

Subject: DJ: Europe's 1st Exchange-Traded Weather Futures Launch Mon

December 6, 2001 i

Europe's Ist Exchange-Traded Weather Futures Launch Mon

By MARK LONG
Of DOW JONES NEWSWIRES

LONDON -- The first exchange-traded weather futures in Europe start trading Monday, adding to the host of
products that are springing up around deregulating energy and agricultural markets in the region.

The London International Financial Futures and Options Exchange, or Liffe, said Thursday that it
acknowledged activity will be modest on the first day, but it remains confident that energy and insurance
companies will boost liquidity and encourage interest from other sectors down the line.

Liffe said last month that it was to launch the first exchange-based weather futures market on Dec. 10 in order to
provide a means for the many industries affected by weather to manage risk.

The U.K. Meteorological Office suggested last month that U.K. firms could save more than GPB7.6 billion a
year if they were able to fully mitigate the effects of weather on their business, according to Liffe's Thursday
briefing for reporters.

The initial listing of six Liffe weather futures contracts will be settled against the monthly and winter season
indexes which Liffe introduced earlier this year.

The Liffe monthly weather indices are based on the mean of the daily average temperature for every calendar
day of the month for each of three locations: London Heathrow, Paris Orly and Berlin Tempelhof. The index is
expressed from a basis of 100 to ensure positive figures.

For the monthly weather futures contracts, twelve delivery months will be available at any one time and the first
delivery months available to trade will be January to December 2002, inclusive.

For winter season contracts, two delivery months will be available starting with winter 2002, stretching from
November-March.

The Liffe weather futures contracts are valued at GPB3,000, or EUR3,000, per one degree change. The tick size
is 0.01, or one hundredth of a degree Celsius, giving each tick a value of GPB30 or EUR30.

So, a U.K. company could buy 50 lots of the January contract at 105 to hedge against warmer weather. If the
January temperature is two warmer than average - making the index 107 - the company would make
GPB300,000. (50 lots times 200 index points times GPB30.) This could help offset, for cxample, a lower price
received for the electricity it wanted to sell in the same timeframe.

The contracts will be cleared thr the London Clearing House, "which gives a great deal of comfort to those
market participants," said Ian Dudden, director of non-financial products for Liffe.

Exchanges all over the energy and commodities sectors have been quick to point out the higher credit quality
they offer relative to over-the-counter participants like Enron Corp, (ENE), which spectacularly collapsed last
week leaving many of its counterparties badly exposed.

While energy and insurance companies are expected to dominate early weather trading activity, the retail, travel
and tourism, agricultural and leisure sectors are expected to follow suit.

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12/08/01 15:45 FAY 202 646 $199 ; @ois-o25
|

- “ WSI.com j Page 2 of 2

Enron officiels have seid they are -ooperating fully with the SEC. which has only been inves
Enron for about five weeks anc ha in't bad enough ume to assess possible abilin of Enron exec
SEC civil allegations could lead t¢ fines and sanctions.

SEC Chairman Harvey Pin, who t.as taken some heat for some policies viewed being too soft on
business, has made the Enron investigation a top priority to show he will be a tough enforcer, In remarks
Thursday to the Consumer Federa’ion of America, Mr. Pitt said promised a thorough and swift probe of
Enron. The SEC has 2 team of a h If-dozen enforcement attomeys and accountants working the case

Gregory Bruch. a former SEC enfi rcement attorney who has litigated complicated accounting fraud
investigations, said Enron's involvement with partnerships and extensive energy derivatives trading
likely would take a year for the SEC unravel. He said the SEC would have to “cut comers" to bring @
case more quickly, meaning the rezulator would name fewer defendants than it might in a broader, more

time-consuming case.
On Capitol Hill, the House Energ: and Commerce Committee said it would investigate Enron's

accounting practices and Senate C »mmerce Committers announced it would assess the impact on U.S
natural gas and electricity market:

Write to Micha! Schroeder at mie.schroeden@wsj.com!

URL for this Article:
Dttp Jfinteractive wsj.comarchivelratr ave. cgi?id=SB1007087266825656840.gjm

Hyperlinks in this Article:
(1) maitto:mike schroeder@wsj.com

Copyright © 00) Dow Jones & Company, Inc. All Rights Reserved.
Printing, distribution, and use of this 1 :aterial is governed by your Subscription Agreement and copyright laws.

For information about subscribing, go to http://wsj.com

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brpy/interactive.wsj.com/archive retrieve cyui?id-SB1007087266825656840.djmatemplare=.. 11/30/01

7 ; 01300000000869


information with CommodityLogic software modules designed for such tasks as quality assurance, scheduling
and invoicing. The three modules in tests are InvoiceLogic, ConfirmLogic, an order confirmation system;
NomLogic, which handles delivery scheduling for natural gas trades.

"Scheduling that natural gas would typically involve three to 10 phone calls and two to three faxes, and for a
deal done over the course of a 30-day month, you might have had to repeat that every business day,” says Tom
Gros, the Net Works vice president in charge of CommodityLogic. "With NomLogic, that process now takes
seconds, I enter it on the screen and automatically, if it's a month-long deal, the previous day's data appears for
me so | don't have the chance to create an error."

The business model for developing CommodityLogic is the same one Enron used for EnronCredit.com and its
other online initiatives: Net Works develops an application to save time or improve efficiency internally and
then repackages the app for external use. The software for EnronCredit.com's Cost of Credit service, for
instance, was originally developed to help Enron's own traders manage credit risk.

Much of Cost of Credit information is free with registration to EnronCredit.com, but Enron charges a fee to
download information or get e-mail alerts of significant changes to the credit risk of companics in a prespecified
portfolio. But the main way Enron makes money from the site is by selling "bankruptcy swaps” to enterprises
that want a hedge against the possibility that a partner will go out of business.

Whereas EnronCredit.com grew out of software Net Works developed for Enron's commodity trading business,
Enron's latest ASP offering, DealBench, came out of software designed to make it easier and faster for Enron to
negotiate large structured deals for complex assets, such as power plants.

Enron’s procurement department has used the auction functions in DealBench to buy more than $1 billion of
goods, everything from broadband networking gear to carpeting for the new 40-story skyscraper Enron is
building across the street from its 50-story headquarters in downtown Houston,

DealBench’s collaboration tools manage the complex communications that are part of any large structured deal.
Features include secure two-way messaging and the ability to deliver multimedia presentations and give
participants varying levels of access to sensitive information.

Last month, Enron added Data Room, a document management system that lets companies set up “virtual data
rooms" to streamline the bidding process for complex physical assets, such as refineries and manufacturing
plants. Normally, companies selling these types of assets have to staff a physical room hosting lawyers and
engineers from every potential bidder, cach of whom require several days to pore over hundreds of thousands of
pages of technical documents. Enron has used Deal Room to syndicate some $3 billion of its own credit to more
than 81 financial institutions and sell more than $240 million in assets.

With all DealBench services, companies can host any number of potential bidders simultaneously, giving each
participant the exact level of access necessary. Bidders download a piece of client software that decodes
encrypted documents on the site, so even if sensitive documents are sent to unauthorized users, they can't be
opened, says Jeffrey Bartlett, a principal at DealBench.

Rather than take a percentage of the overall deal, Enron sells DealBench licenses to the deal managers and hosts
the platform. Enron wouldn't reveal specifics about pricing, which varies based on the length of contract,
number and size of prospective deals and the number of potential bidders.

Centerpiece Of E-biz

For the time being, energy trading--and trading in financial products related to those trades--will remain the
centerpiece of Enron's online business. Forrester estimates that notional trading for U.S. natural gas futures and
options contracts amounted to about 3.6 times the total quantity of physical trades and 12 times the amount of
physical delivery in 2000,

"Electricity in the U.S. is a $300 billion market, but the velocity at which that $300 million is being tumed over
is increasing," says Bob Christensen, an energy industry analyst with First Albany Corp. "The same power--and
all the fuels related to it--can churn and change hands a dozen times a day.”

As other companies convert their trading systems to online models, Enron hopes to sell its expertise in this area.
(Enron says its own online-cnabled back-end systems reduced its marginal cost per transaction by 75 percent in

, 02571

01300000001180


Testimony of Richard L. Trumka

House Financial Services Committee

December 12, 2001

Page 9

services, purporting to provide independent review on behalf of investors of transactions

some of which they themselves, may have designed and charged a fee for,

On the subject of auditors, some have suggested that auditors are not able to detect a
carefully hidden fraud, one where the truth is completely hidden by management. And
that may very well be true, but that was not what happened at Enron. The financial
statements themselves contain the proof that the auditors were aware of each of the
transactions that led this company to grief—the self-dealing with the CFO, creating
Partnerships to trade in the company's own stock, other partnerships whose purpose
seemed to be to generate dubious revenues, hide liabilities and otherwise bookable
derivatives positions from the investing public.'” While none of these were disclosed in a
way to make them transparent to the investing public or to Enron's employees, there was
more than enough information in those statements alone to sound warning bells among

the auditors that signed off on them.

Then finally there were the Wall Street analysts. Ultimately investors look to the expert
analyst community to interpret the numbers released by the companies they invest in.
And here we saw again the spectacle of conflict of interest triumphing over duties to
investors, Enron was such a large firm doing so much business in the financial markets
that practically every Wall Street firm and post-Glass-Steagall commercial bank had an
interest in courting the company, And in the eyes of their analysts, Enron was always a

good buy. Of course, if you knew enough to seek out independent analysts, many of

02374

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Derivatives Study Center Page 2 of 14

ty M. Corey Goldman
NEW YORK, Sept. 11 — The U.S. economy is not well. And Washington lawmakers are desperately scarching for whatever remedy they can find to
cure it.

Already they've spooned out sore $36 billion worth of rebate checks to weary consumers, part of a $1.36 trillion 10-year tax-cut package meant
to stimulate growth. And Republicans and Democrats alike have been bantering of late about another tax cut they hope will revive the sluggish
‘economy: A reduction in the capital gains taxation rate to 15 percent from 20 percent.

Dubbed the “rich man’s” tax because it tends to affect only those with very high incomes and assets, the capital gains tax was initially
implemented to bring revenue into the government's coffers from those who made money on well-heeled investments. The rate was as high as 28
percent before the former Clintan administration lowered it to 20 percent with the 1997 Taxpayer Relief Act,

With the economy looking sickiier by the day. Iswmakers in Washington are now exploring a further reduction in the capital gains tax as a way to
stimulate economic growth — a move they hope will restore consumer confidence and get the economy back on its feet. The problem is, not
everyone agrees that a reduction or outright elimination of a well-heeled tax will really do all that much to help the struggling economy.

“If's an honest debate and one that certainty has its merits, but there is a big question mark as to whether a reduction in the capital gains rate
would have any effect at all,” said Stanford University economics professor Warren Bailey, “Any talk of 2 tax cut is going to seem positive, but
there really is no way to tell what the impact might be.”

Minimal Market Gains

Currently, anyone who makes a capital gain — whether by selling stock #t a profit or selling real estate in excess of $500,000 — is required to
pay € 20 percent tax, For small gains in an IRA portfolio, that’s not too bad; for larger gains, such as buying a $1 milion country home and selling
it for $4.5 million, the implications of the tax become much more palpable.

According fo research compiled by the Congressional Research Service's goverment and finance division, only 1.8 percent of the taxpaying
Population earns more than $200,000 and pays approximately 79 percent of capital gains taxes, ‘The tax itself accounts for roughly 4.5 percent of
total federal income, payroll and excise taxes; it accounts for 14 percent of total taxes for the highest-income taxpayers.

In theory, @ reduction in the rate would add to the government's revenues like this: Anyone currently sitting on the fance as to whether or nat to
sell their investments might be encouraged to Go so if the tax rate were fess. That would then increase tax revenue and help Congress deal with
the shrinking budget surplus, which has been declining in a weaker economy and Bush's already current tax cut, and avoid dipping into Social
Security.

in practice, many economists and market-watchers don't believe a five-point reduction in the capital gains tax will have any effect whatsoever.
The only effect it might have, experts say, is to keep long-term interest rates high as longer-term revenues the government would have been
receiving dwindle away.

Alter all, at the end of the day, the government will be taking in 5 percent less,

“The vast majority of capital goes go to vary rich people, and ight now there aren any capital gains anyway,” said Randall Dodd, a director with
the Economic Strategy Institute in Washington. “If you want to stimulate the economy, that is not @ very effective way to do it.”

Tried and True
And that small percentage of American wealth has a very tried-and-true way of doing business.

“If you think @ reduction in the capital gains rate is going to stimulate the economy, you have to think that those high-income people are going to
something other than what they've been doing with their money,” said irs Lav, a senior analyst with the Center on Budget and Policy Priorities in
Washington. “That tax Is for very wealthy people, and those people are not likely to change their spending patterns.”

Ta be sure, some analysts have suggested that, if another tax cut is something Washington decides i absolutely must do, then it should be a
different kind of tax cut, such as a reduction in the 15.3 percent payroll tax that comes out of most working Americans’ paychecks.

Rolling back @ partion of the payroll tax that goes to Social Security and Medicare would give a tax cut to more than 30 million workers most
caming fess than $44,000 a year who were laft out of this year’s $40 billion in tax rebate checks because thay didnt have enough taxable income
to quality.

All the same, others believe the government should simply cut income tax rates across the board, providing broad-based tax relief for lower- and
middle-income individuats and families that might bring less cash into the Treasury, but would create more economic activity as disposable
incomes rise.

“During @ downturn economy @ government probably should cut taxes, and a government should probably run a deficit ~ that’s what a

i1si02 02611

: 0130000001220


record.’ The Commission requests that the Subcommittees respect the confidential nature
of the Commission's investigation and the Commission's reluctance to address in this
public forum specific issues related to Enron's compliance with the federal securities

laws,

Enron's announcement of its intention to restate its financial statements comes on
the heels of several other widely publicized restatements. We share your concern that
such restatements may shake investors’ confidence in our system of financial reporting
and our capital markets. We also recognize the devastating impact that such events can
have on employees whose retirement funds are invested in the company’s securities. In
the coming weeks and months, we will all learn more about what transpired at Enron, as
many of the details are unknown at this time. However, today I will discuss for the
Subcommittees what has been announced publicly as well as some of the related
disclosure and financial reporting issues.

ma

In some of the staff's discussions with congressional staff, it has been suggested
that 2 chronology of the public events as reflected in Enron's filings with the Commission
might be useful to the Subcommittees. An understanding of these public events also may
assist in understanding the company's accounting issues. A chronology, therefore, is
attached to my testimony as Appendix A.

Transparent Financial Reporting Protects the Financial Markets

A primary goal of the federal securities laws is to promote honest and efficient
markets and informed investment decisions through full and fair disclosure.
Transparency in financial reporting - that is, the extent to which financial information
about a company is visible and understandable to investors and other market Participants~

' The information contained in this statement conceming the events surrounding the bankruptcy
filing of Enron Corporation is hased upon publicly available information. The Commission is
currently conducting an investigation snto a number of aspects of these events and has not made
any findings or reached any conclusions related to these events. This statement does not discuss
Aompublic matters relating to that investigation or that may become the subject of actions by the
Commission or by other authorities,

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Testimony of Richard L. Trumka
House Financial Services Committee
December 12, 2001

Page 4

Ironically, Congress passed the Employee Retirement Income Security Act (ERISA) to
Prevent situations in which corporate bankruptcies meant workers lost their jobs and their
pensions, just like what happened to thousands of workers at Studebaker in the 1960s,

Decades later, thousands of Enron employees find themselves in the same position.

1 focus particularly on these workers because, unlike most other investors in the
company, by and large Enron workers did not have diversified portfolios. The bulk of
their retirement savings was in Enron stock. Many of the 1,000 members of the
International Brotherhood of Electrical Workers at Enron’s subsidiary Portland General
Electric have suffered catastrophic losses, members like Roy Rinard, who watched
helplessly, his accounts frozen, as his twenty two years of retirement savings dwindled
from $472,000 to less than $3,500, Ken Kahloni, 2 former information and technology
manager at Enron, lost $75,000 in his 401(k). He said, "I took a pay cut to work there

two years ago, because I wanted to work for the ‘best company,"

But the harm Enron's collapse has caused America's working families by no means stops
there. Workers” retirement funds have lost tens of billions of dollars in the collapse of
Enron. Earlier this year, Enron was the 7th largest company in America measured by
revenue.’ Enron's equity at its peak was worth about $63 billion, and its bonds another
$6 billion more, There was almost twice as much money invested in Enron stock than in

General Motors stock.’ Most pension funds and institutional investors held some Enron

02369

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Derivatives Study Center

economists doubt that congressional moves to alter fiscal policy can counter
a recession because of the difficulty of enacting a stimulus quickly enough
to stop a flagging economy. Some suggest the government's options for
spurring investment and retail spending will be inadequate to countermand
the loss in consumer confidence expected to flow from the attacks. Others
say the possible tax law changes would take effect too late to counter a
downtum that may have begun before Sept. 11 and that seems sure to get
worse, at least in the near term.

"These investment stimuli tend to reinforce an expansion, but they're not
going to turn things around, because firms are going to be constrained on
the demand side by the market," Wykoff said, "You can't really juice up
investment if investors aren't ready to invest.”

But some lawmakers say it is important for Congress to respond in some way,
if only to demonstrate solidarity and a resolve to keep the U.S. economy on
firm footing. "Sometimes we need to take action just to give ourselves a
psychological boost," said Ways and Means Democrat Robert T. Matsui of
California, although he added, "I don't have a Jot of confidence in these
microeconomic measures having a great macroeconomic effect,"

And while many Democrats want to ensure that any stimulative tax relief is
temporary -- with an eye toward controlling the loss of revenue to the
Treasury and thereby keeping long-term interest rates in check — several
Republicans maintain that the package should make permanent changes in tax
law, in the belief that promised continuity of the tax code would help boost
economic activity.

Bang for the Buck

Not surprisingly, large differences separate Republicans and Democrats on

the question of what those measures should be. While lobbyists and lawmakers
acknowledge that any stimulus package would nced to be a bipartisan product
in order to become law, talk of additional tax cuts already has revived
long-running debates.

Eager to assert his prerogative as the House's chief tax writer, just three

days after the attack Thomas recommended an ambitious tax package including
a capital gains rate cut, an increase in small-business expense deductions

and a reinstatement of the investment tax credit. He also proposed a

short-term acceleration in the business depreciation schedule. (CQ Weekly,

p. 2132)

Business groups have quictly expressed support for many of those proposals,
most of which have been on their own wish list for some time, and they began
pushing for additional tax breaks as well. This led some Democrats to begin
criticizing the GOP and the business community for political opportunism in
the heat of a national crisis. As a result, it took some personal appeals

from Rangel to get fellow Democrats to attend a Sept. 17 mecting with Thomas
to talk about stimulus options.

The situation led to some awkward positioning as business groups sought to
balance their desires for tax relief against their reluctance to look

selfish. On Sept. 17, U.S. Chamber of Commerce President Thomas Donohue
downplayed his group's zeal for immediate additional tax cuts, saying "We'll
have some discussion of a stimulus package in the future.” But later in the

1/15/02

Page 6 of 14

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White House spokesman Ari Fleischer called the collapse of Enron a "wake-up call.”

Bush said the two working groups would complement the criminal investigation into Enron's dealings
that have been started by the Justice Department.

Bush said he hadn't met with Enron's Lay personally but Lay did come to the White House early in
Bush's term as part of a delegation of businessmen who discussed the economy. Bush said former
Texas Governor Ann Richards, a Democrat, named Lay the head of Texas's Governor's Business
Council and Bush allowed him to stay on in that position,

Despite the political backing Lay pave to Bush, the president said he wanted to see the government
“fully investigate issues such as the Enron bankruptcy.”

On Iran, Bush reacted to reports that Iran may be sheltering small groups of al-Qaida fighters in
Afghanistan's lawless western provinces with a waming,

“First of all, Iran must be a contributor in the war on terror," Bush said.

He vowed once again to uphold his doctrine "either you are with us or against us.”

“Any nation that thwarts our ability to fight terror will be held to account one way or another. We had
some positive signals early in our war on terror. We would rope that they would continue to be a
Positive force in helping us bring people to justice. We would hope, for example, they wouldn't allow
al-Qaida murderers to hide in their country. We would hope that if that would be the case, if someone
tries to flee into Iran, they would hand them over to us,” Bush said.

Bush also wamed Iran against ing to undermine the authority of the newly formed Afghan
government in Kabul and urged Tehran to cooperate with Kabul.

“if they try in any way shape or form, try to destabilize the government, the coalition will deal with
them, you know, in diplomatic ways, initially," Bush said.

Bush expressed the view that a stable Afghanistan was in Tehran's interests in any case.

On a related issue, Bush said that he Suspected a shipload of weapons that was intercepted by
tsraeli commandos likely had been bound for the Palestinian Authority. Bush said it was time for
Palestinian leader Yasser Arafat to prove he is a man of peace and to renounce terrorism once and
for all.

-By Alex Keto, Dow Jones Newswires; 202-862-9256; Alex.Keto@dowjones.com

Tracking: Recipient Delivery Read
Cetna, J Detvered: 1/10/02 12:15 PM Deleted: 1/14/02 1:36 OM

; 02998

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Page 2 of 2

executive,

On a conference call, Mr. Skilling said he could not "stress enough that this has nothing to do with Enron." He added
that "the reasons for leaving the business are personal, but I'd just as soon keep that private.”

Mr. Skilling, who is divorced, has joint custody of three teenage children — a daughter, 17, and two sons, 14 and 11 —
with his ex-wife. Mr. Skilling, who will leave the board but will serve as a consultant to the company, will not receive
any severance package because his departure is voluntary, Mr. Lay said.

Since May 2000, Mr. Skilling has sold at least 450,000 Enron shares worth at least $33 million, according to Securities
and Exchange Commission filings. He still owns about 1.1 million shares, the filings show,

“Absolutely no accounting issue,” Mr. Lay told analysts, "no trading issue, no reserve issuc, no previously unknown
problem issues” are behind the departure. There will be "no change in the performance or outlook of the company going
forward," he added.

He also said the company was on track to meet analysts’ earnings expectations, which are about $1.80 a share this year
and $2,15 next year.

On the call, Mr. Skilling said that "in general there have been a lot of issues” that have buffeted the company this year,
but he said that he believed Enron had already surmounted most of them. "Now is the time" to step down, he said,
“because | think we've got a lot of these things behind us."

Nonetheless, the move jolted analysts, who, despite the stock's recent slide and the company’s other problems, saw Mr.
Skilling as the unquestioned leader to follow Mr. Lay,

In after-hours trading, shares of Enron fell about 8 percent, to $39.55. That fall follows a plunge of almost 50 percent
since January in the stock, which had closed in regular trading at $42.93, up 78 cents. The news of the executive
changes came after the market closed.

“I'm surprised and I'm stunned,” said Philip K. Verleger, an energy economist with the Brattle Group, a consulting firm
in Cambridge, Mass. "Skilling was the guy who executed the growth in the trading business.”

Investors have become increasingly concerned that a surge in new power plant construction will lead to a glut of
electricity within a few years and lower the value of Enron's role as a middleman between plant owners and electricity
users. In addition, the company’s efforts to enter the water business have fared poorly, and its broadband trading
operation has become a cash drain.

Mr. Skilling's promotion carly this year came afler several crucial Enron executives resigned, These included Rebecca
Mark, who at one time was considered a rival for the top job.

Ms. Mark became chief executive of the Azurix Corporation (news/quote) in 1999 after Enron spun off the company, its
global water business, But its financial performance was disappointing, and Ms. Mark left the company last year, Enron
later agreed to buy back Azurix stock for less than half what public shareholders had paid.

02988

1/16/02

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On November 9, 2001, Dynegy Inc. announced its intention to acquire Enron for
approximately $9 billion in Dynegy Inc. stock and the assumption of $13 billion in debt.

On November 19, 2001, Enron filed its Form 10-Q for the quarter ended
September 30, 2001. The company updated some of the disclosures made in its
November 8, 2001 Form 8-K and disclosed that it had initiated an action plan for the
restructuring of its business that would negatively impact its fourth quarter carmings.
Enron also disclosed that a note payable in the amount of $690 million related to a
limited partnership had been accelerated due to a downgrade in Enron's debt rating. In
addition, Enron disclosed additional debt amounts that would be accelerated if the
company's debt rating fell below investment grade, The filing noted that the auditor of
Enron's financial statements was unable to finalize its required review of the quarterly
financial statements prior to filing with the Commission due to an ongoing investigation
by the Special Committee,

On November 28, 2001, several rating agencies lowered Enron's long-term debt
to below investment grade. Shortly after the downgrade, Dynegy terminated the merger
agreement, citing breaches of representations, warranties, covenants and agreements in
the merger agreement including a material adverse change provision.

On December 2, 2001, Enron filed for Chapter 11 bankruptcy protection and
simultaneously sued Dynegy for $10 billion alleging breach of contract in connection
with Dynegy's wrongful termination of its proposed merger.

As noted previously, the Commission's investigation into these matters is

continuing.

20

02346

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Testimony of Richard L. Trumka

House Financial Services Committee

December 12, 2001

Page 5

stock or bonds, If any person in this room has an S&P 500 index fund in your 401(k) or
your mutual! fund portfolio, you lost money in Enron— probably about half a percent of
your total assets in that fund. And this is if you invested in index funds— in a strategy

that is designed to cheaply mitigate the risks of investing in any single company.

Let me give you some examples of the monies lost by pension funds. The Amalgamated
Bank of New York, a major index fund manager for union and public pension funds, has
filed court papers stating index funds it sponsored lost approximately $10 million in
Enron equity and debt.'° The Georgia State Board of Investment has said in court that it
has the largest losses. Filings by major commercial money managers with tens of billions
of dollars of worker retirement money under management such as Alliance, Janus and
Fidelity suggest each has losses‘in the hundreds of millions of dollars.!' Most of this
money is being invested to fund pension benefits for working families— for the public
employees we are counting on to protect us during this period of national crisis, for the
pensions of the iron workers who are as we speak clearing the rubble at Ground Zero, for
the firefighters who today, as on September 11, stand ready to give their lives to save
ours. Because of the way that our retirement system has become increasingly interwoven
with the capital markets, practically every American fortunate enough to be able to save

for retirement in any form was hurt by the collapse of Enron.

In part, the moral of this story is that conflicts of interest in the capital markets can do a

lot of damage to America’s working families. Currently, Congress is considering

02370

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Testimony of Richard L. Trumka

House Financial Services Committee

December 12, 2001

Page3

in Enron's 401(k) plan? Enron's contribution to these employees’ retirement security was
to donate stock to their accounts and to encourage employees to put their own savings
into company stock as well. They appear to have done this without even giving their
employees a prospectus, as required under current law.’ The result was that on the eve of
the collapse over half of the assets of Enron's 401(k) were invested in the company's

stock, and many individual workers had all of their 401(k) assets in company stock.

Then on October 17, 2001, the same day that the Securities and Exchange Commission
announced it was investigating Enron, the company chose to implement a plan to switch
401(k) administrators, knowing that their decision would freeze employees’ accounts,
leaving them unable to get out as the stock price went into freefall* Meanwhile the
insiders continued their insider selling, selling that netted a handful of people over $1
billion.’ The blackout continued for three weeks, two weeks longer than the industry
standard for such a change, accordins, to Plan Sponsor magazine.* Then at the end of
November when the market price of Enron’s stock was under $1, Enron placed shares of
stock it had purchased earlier this year into the frozen accounts and charged employees’
accounts $6] per share. The final insult was that as Enron laid off thousands of
employees, management tried to extort waivers of 401-k claims by threatening to
withhold portions of worker severance payments.” Now Enron employees’ only hope of
recovering the retirement money they entrusted to their own company lies in the hands of
the courts. And frankly, there does not appear to be sufficient assets available to come

anywhere near close to the claims against the company.

02405

01300000001014


Carleton, Norman

— —

From: Carleton, Norman

Sent: Thursday, January 10, 2002 5:54 PM

To: Abdelrazek, Rawan

Subject: FW: DJ: White House Says Enron Sought Help, Was Rebuffed

-—~-Original Message——-

From: Carteton, Norman

Sent: ‘Thursday, January 10, 2002 2:47 PM

Tor Cetina, Ji; Bair, Shella; Berardi, Steve; Bitsberger, Timothy; Eicher, Matthew; Gabondo, Jose; Gross, Jared; Hemmer, Viva; Lori
‘Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael; Pietrangel, Fred; Roseboro, Brien; Schutheiss, Helcitynne; Whaley, Jean;
Wiedman, Mark

Subject: D2: White House Says Enron Sought Help, Was Rebuffed

January 10, 2002

White House Says Enron Sought Help, Was Rebuffed

Dow Jones Newswires

WASHINGTON -- The Bush administration confirmed Thursday that Enron's (ENE) chief executive,
Kenneth Lay, contacted two top officials last autumn and wamed his company was headed toward
bankruptcy, White House spokesman Ari Fleischer said.

However, Fleischer said that Lay's appeal for help from the government was rebuffed. In his appeal,
Lay compared Enron to Long-Term Capital, a hedge fund that collapsed in the 1990s and sparked
fears that its collapse could cause a shock to the financial system.

"What was told to me this moming was (Treasury) Secretary Paul O'Neill said that he had been
contacted by Mr. Lay in the fall of last year and Mr. Lay brought to the secretary's attention his
concerns about whether or not Enron would be able to meet its obligations. And he expressed his
concem about the experience that Long Term Capital went through when Long Term Capital went
bankrupt,” Fleischer said.

"Secretary O'Neill then contacted (Ti reasury) Undersecretary (Peter) Fisher to ask him to evaluate
whether the comparison was apt, and the Department of Treasury was advised that it was not apt as
a result of Secretary Fisher's review," Fleischer said.

Interest in the administration's ties to Enron have been high because Enron was a major donor to
President George W. Bush's political campaigns.

Democrats on Capitol Hill have begun hearings to see to if there was any impropriety in Enron's ties
to the White House.

Further fc rlens ES the situation is that fact that many Enron employees held company stock in
their 401K plans. Enron prevented the employees from selling their shares while the company
collapsed, wiping out their savings in some cases,

Fleischer also said that Lay talked to Commerce Secretary Don Evans and expressed concerns
about Enron's credit rating as the company experienced financial troubles.

Earlier in the day, Bush announced that two government working groups would begin reviewing the

02977

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Testimony of Richard L. Trumka

House Financial Services Committee

December 12, 2001

Page 6

legislation sponsored by Rep. Boehner that would remove the ban on conflicts of interest
in the provision of investment advice to 401(k) participants.'? Mr.Boehner's bill would
leave 401(k) participants prey to the same conflicts that have so distorted the analysis of
individual stocks, and as Enron shows, conflicts of interest can truly harm 401(k)
participants’ retirement savings. Similarly, consider how much worse this situation
would be for Enron employees if their Social Security benefits had been invested in

Enron, as they would if the privatization advocates had had their way,

Now some may ask, don't people gain and lose money in the markets every day-- isn't the
Enron story just 2 particularly dramatic example of the dynamics of risk and return. Our
answer, as stewards of worker capital, is emphatically no-- this is not how the financial
markets should work. This is not a story of risk or of ignorance, It is a story of conflicts
of interest, of duties breached and duties ignored, of loyalty betrayed. This is a story of
vital information whose disclosure might have saved the company being withheld until it
was 100 late. It is a story of people so shameless and greedy that literally as the
bankruptcy papers were being drawn up they were still passing what remained of the
firm's cash out to themselves--§55 million on the last working day before they filed for

Chapter 11."°

Now obviously a lot of people have sued in court alleging some of these things. In the
end the facts, many of which today are murky, will be sorted out, But even today certain

things are clear.

02408

01300000001017


Carleton, Norman

Nickoloff, Peter

Thursday, December 27, 2001 4:10 PM

Carleton, Norman; ‘Alexander M. Brill (E-mail); ‘édow@cftc.gov'; Novey, Michael; Hammer,
Viva; Eichner, Matthew; Gabiondo, Jose; Sutton, Gary; Ellett, Martha; Schultheiss, Heidilynne;
‘Amy Mitchell (E-mail)’; "Annette Nazareth (E-mail)’; ‘Belinda Blaine (E-mail); "Bod Colby (E-
mai)’; ‘David Wall’, ‘Diane Viezera’; Eichner, Matthew, ‘Elizabeth Fox (E-mail)’; 'Eric Hirschhom
(E-mail); Hammer, Viva; ‘John Polise (E-mail); Joyce Hansen’; Kathryn Dick (E-mail)’; ‘Kurt
Withelm (E-mail); "Lori Sanatamorena (E-mail)’, ‘Miguel Browne’; Novey, Michael, ‘Pat
Parkinson (E-mail)’; Pat White’; 'k._philippa_malmgren@opd.eop.gov';

‘dombalagiano@sec.gov’
Ce: Roseboro, Brian; Bitsberger, Timothy, Gross, Jared; Stokes, Veronica; Barbour, Gaylen;
Smith, Amy; Holahan, Betsy, Wiedman, Mark; Bair, Shella; Bradshaw, Tara
Subject: Joint Report on Retail Swaps
Fes FNAL pt

The transmittal letters were sianed and dated vesterday, Deventer. 24 26, 2001.
They were delivered, along with the report, to the offices of the Sneaker and

President of the Senate this afternoon. Additional copies of the report will be be forwarded
to members and selected staff of the House Financial Services Committee and the Senate
Banking Committee later today and tomorrow.

We will put copies for your agencies in the mail tomrrow. In the meantime, the report
(sans signatures) is available today on Treasury's website at

http: //www.treas.qov/press/today.htm. Later it should be available at

http://www. treas.qov/press/releases/Olreport.htm. Also, I have attached a copy of the
report to this message.

Thanks to all of you for your work on this report.

Happy New Year,

Peter Nickoloff

Office of Federal Finance Policy Analysis
Treasury

U.S. Department of the
Room 5011 MT

Washington, D.C. 20220
t. 202/622-1692

f. 202/622-0374
e. peter.nickoloffado. treas.gov

‘ 02268

01300000000877 —


deal, if there is one,

Pcople close to the deal say the company hopes that a deal with Dynegy, and the release of the answers to the
S.E.C., will calm the crisis that has engulfed the company and led other energy companies that trade with Enron
to curtail their credit sure to the company.

Besides worries about the huge losses and the S.E.C, investigation, investors and creditors are nervously
watching Enron's credit rating. Moody's Investors Service and Standard and Poor's have already cut the rating to
two notches above junk status, and on Monday, Fitch Inc. cut it to one notch above junk.

As part of the acquisition, Dynegy would be taking on Enron's $12.8 billion debt load - a number that does not
include billions of dollars of other debt, accumulated off the balance sheet, that has played a major role in
Enron's current problems. The executives said they expected the deal would lead to the sale of some Enron
assets to pay down the $12.8 billion debt.

Should Enron lose its investment grade rating, other energy trading companies could curtail their business with
the company even further, and Enron could be forced to issue tens of millions of shares of stock to cover off-
balance sheet debts that it has guaranteed.

Early Wednesday, shares of Enron plunged 28 percent, to about $7, on fears that the company was unable to
line up new investors.

But the stock took back most of its losses in the afternoon after CNBC reported the talks with Dynegy. Shares

of Enron closed at $9.05, off 62 cents. Dynegy shares closed at $33, down $3.

In addition to both companies’ very large presence in cnergy trading, Enron owns the Portland General Electric
ire: ket ines x?7MWhitp. custom. marketwatch.com/custom/nyt-

conv/him|-companvprofile.asp&symb=PGB>), a utility in Oregon it had already agreed to sell, and Dynegy

owns the Illinova Corporation, a retail electricity and natural gas utility in Illinois.

Regulators may take a hard look at those utilities in reviewing a merger deal, said Jeff Dietert, an analyst with

Simmons & Company in Houston. "Then you've got concerns about market power,” he said. "It's just a lot of

different issues to deal with before we get too excited that this deal is going to get done."

The acquisition would combine Enron, which dominates United States trading of electricity and natural gas and

has been shedding its hard assets, with Dynegy, a company that has pursued a much different strategy of using

trading to maximize earnings from its power plants.

Enron has always concentrated on sophisticated financial trading strategies, a senior executive at a rival energy-
trading firm, said. "Dynegy has always been more of a logistical player of physical assets,” he said, "Those are
very different cultures and very different mentalities.” The executive noted that there had been an immense
talent drain from Enron in the last two wecks. "It has become a frenzy," he said.

a 02591

01300000001200


Derivatives Study Center Page 9 of 14
—Listen

Guests:
Randall Dodd, Professor of Economics at American University
Jeffrey Robinson, author of "The Laundrymen: Inside Money Laundering, the World's Third-Largest Business"

Wednesday, September 25, 2001

Bush goes after terrorists’ funds / President freezes assets in U.S., pressures foreign banks to aid

in financial crackdown
Carolyn Lochhead

Chronicle Washington Bureau
09/25/2001

‘The San Francisco Chronicle
FINAL

Al

President Bush threatened yesterday to freeze the U.S. operations of foreign banks that do not cooperate in a financial crackdown on 27
suspected terrorists and terrorist groups.

“Money is the lifeblood of terrorist operations," Bush said, "Today we're asking the world to stop payment.”

The executive order requires U.S. financial institutions to immediately freeze the assets of groups on the list and prohibits any U.S, citizen or
business from doing business with anyone on the list,

‘The administration has no authority to force foreign banks to do likewise, but the threat to shut down their U.S, operations could prove powerful
leverage, given the dominating role the United States plays in global finance.

The order goes well beyond the freeze of assets imposed by President Bill Clinton in 1998 against Osama bin Laden, the government's chief
Suspect in the Sept, 11 attacks on New York City and the Pentagon. That freeze had little effect.

Bush called the move "a major thrust of our war on terrorism,” making the announcement in the Rose Garden accompanied by Secretary of State
Colin Powell and Treasury Secretary Paul O'Neill.

Concoding that most terrorist assets probably are located overseas, Bush said the administration had created “the international financial
equivalent of law enforcement’s 'Most Wanted’ list."

“It puts the financial world on notice," Bush said. "If you do business with terrorists, if you support or sponsor them, you will not do business
with the United States of America."

The threat could affect such famious bank havens
as Switzerland, Grand Cayman and Dubai.

Bush said the administration will work with the governments of foreign banks that might be harboring assets of groups or individuals on the list
and “ask them to freeze or block terrorists’ ability to access funds in foreign accounts. If they fail to help us, . » - the Department of the Treasury
now has the authority to freeze their banks’ assets and transactions in the United States."

The administration list targets bin Laden and his al Qaeds network, but also includes Egypt's Al-Jihad, the Libyan Islamic Fighting Group, and
the Islamic Movement of Uzbekistan, a group said to number as many as 3,000 fighters trying to create an Islamic state within three nations just
north of Afghanistan. The list also includes suspected individual terrorists.

In an attempt to shut down what is believed to be bin Laden's large fund-raising network, the administration included two nonprofit groups,
Wafa Humanitarian Organization and Al Rashid Trust.
1/15/02 0 2 6 1 8

: 1300000001227


Decenibor 18, 2007

Senator Eyes End To Enron-Type Special-Purpose
Entities

Dow Jones Newswires

WASHINGTON -- U.S. Senate Commerce Committee Chairman Fritz Hollings, D-S.C.,
pledged Tuesday to introduce legislation to eliminate the sorts of financial accounting
that led to the financial collapse of Enron Corp. (ENE).

At a committee hearing on the Enron debacle, Hollings called for legislation to eliminate
the use of special-purpose entities, which are partnerships or trusts through which
companies keep their debt off the books and, in Enron's case, overstate earnings.

Hollings said such off-the-balance-sheet transactions should end in order to protect
investors. Hollings also was highly critical of the amount of insider stock selling by top .
Enron officials. He noted that Enron Chairman Kenneth Lay and former Chief Executive
Jeffrey Skilling each sold shares in recent months for more than $60 million, while
members of Enron's board sold shares worth more than $160 million.

“The seliing of Enron was prolific," Hollings said, calling the insider selling "a screaming
red flag.”

If Enron officials felt the stock was undervalued, as they publicly attested, "why were
they cashing in?" Hollings said.

Hollings also said there was plenty of blame for the "shenanigans" associated with
Enron's collapse, which he likened to a "cancer." He cited Enron's role in persuading the
Commodity Futures Trading Commission against the Clinton administration's call for
regulation of energy derivatives, and subsequent congressional action to exempt from
regulation the highly complex energy derivatives Enron's special-purpose entities
engaged in.

“We are all guilty for letting it happen," Hollings said of Enron's collapse.

Sen. Byron Dorgan, D-N.D., chairman of the committee's consumer affairs panel,
described Tuesday's hearings as the first of several that will delve into the roles in
Enron's financial collapse played by: Enron officials; Arthur Andersen, Enron's outside
auditor; Wall Street analysts, and regulators.

"This is about an energy company that morphed into a trading company involved in
hedge funds and derivatives. It took on substantial risks, created secret off-the-books

partnerships and, in effect, cooked the books under the nose of their accountants and
investors," Dorgan said.

02166

01300000000775


Sales to Partnerships

Enron's financial statements show the division was in decline since late 2000. Revenue of $162 million in the third quarter
of that year slipped to $83 million by the first quarter of 2001 and $16 million by the second quarter. At the same time,
pretax losses rose from $20 million in the third quarter of 2000 to $102 million by the second quarter of 2001.

Much of the revenue came from sources other than trading. Enron derived some of it from investments in companies such
as Rhythms Netconnections Inc., a provider of local high-speed networks whose shares rose more than fourfold in the
month after it went public in April 1999. The company filed for bankruptcy in August.

Enron generated about 20 percent of the $318 million gross profit reported for 2000 from selling a block of fiber to
partnerships controlled by Fastow, the former CFO.

Recording a Gain

In June 2000. the partnership, known as LJM2, paid $100 million - $30 million in cash and $70 million in an interest-
bearing note -- for some of Enron's fiber, according to SEC filings. Enron booked a $67 million pretax profit from the sale
and received $20 million for operating, maintaining and marketing the fiber.

Enron's profit from the transaction depended on LUJM2’s ability to find a buyer willing to pay a higher price for the fiber. in
December 2000, it found two. LJM2 sold part of the fiber to unnamed “industry participants” for $40 million and set up 2
“special purpose entity” that bought the rest of the fiber for $113 million, according to SEC filings.

In six months’ time, the value of the fiber, based on Enron's accounting, rose by $53 million. Banaszek said even the initial
$67 million profit seems unlikely because fiber prices fell during most of 2000.

Yeck decided to quit m October, after being transferred to the trading desk. She said ‘there was nothing to do” and the
staff battled over trades in the hope of winning performance bonuses that made up most of their compensation.

“Itwas like @ piece of meat in a pack of wolves,” Yeck said. “They would claw and scratch and do whatever it took to get
Py

Broadband Fails

Many of Enron's competitors had already given up on broadband. Koch, which set up a bandwidth trading business in
September 2000 under its Koch Investment Group unit, had three employees devoted to broadband. After signing one
contract, Koch stopped trading in the market because of lack of demand.

The amount that broadband cost Enron became clear in November, after the company restated earings to reduce them
by $586 million over the past 4 1/2 years.

The unit took $277 million in charges for restructuring, soured equity investments, writing down excess network equipment
and adjusting the value of a derivative investment. Enron didn't provide details on the derivative, which resutted in negative
revenue of $125 million for the quarter, according to statements filed with the SEC

With bankruptcy looming, Enron said it would sell its broadband operation, along with other assets. During a conference

call on Nov. 14 to discuss the sale, Skilling's replacement, Greg Whalley, told analysts what Dixie Yeck had suspected a
year earlier. “The return for these investments and businesses is dismal.”

Trac ing: ecipient elery ead
Catina, Jie Delivered: 1/10/02 12:16 PM Deleted: 1/14/02 1:36 FM

‘ 02992

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the news.

The future of Enron is now in question as credit-rating agencies today downgraded the company's
bonds to junk status, triggering the payment of more than $3 billion in outstanding debts.

Enron spokesman Eric Thode said all trading was halted on EnronOnline this morning in the wake of
the Dynegy announcement, but trading of core energy products, such as natural gas, resumed this
afternoon, At no time was telephone trading suspended, he said.

Enron's online business model is different from most independent exchanges, which link buyers and
sellers, Enron is a party to all transactions at its site, acting as either the buyer or seller. Enron makes
its profits by buying low and selling high, and employs an army of analysts to compile information that
could affect future prices on natural gas, electricity and the 1,500 other commodities it trades online.

Thode declined to comment on reports this week that Enron traders were working to help valued
customers by brokering deals between buyers and sellers.

"We're still in the market, and we're still conducting transactions that make commercial sense,” said
Thode.

Even before halting trading today, activity on Enron's Web-based exchange, EnronOnline, has
reportedly fallen steeply in recent weeks as trading partners abandon the site in favor of deals with
more stable firms. Dynegy and a number of other energy traders do business online, but none in
volumes approaching EnronOnline, which pioneered the field and once saw trade volumes in excess
of $4 billion per day.

Enron's Thode, however, said that trade volumes on EnronOnline have not declined signficantly in
recent weeks,

Over the past 30 days, the site has averaged about 5,300 trades per day, with a total value of $2.7
billion, Thode said. That's well within the average volumes seen on the site during any 30-day period
this year, Thode said.

The New York Stock Exchange halted trading of Enron shares ahead of the Dynegy announcement,
but Enron's stock had already lost $2.95, or 71.3 percent of its value on rumors of the dissolution.
Trading was halted at $1.19. Enron's stock traded at more than $90 last August.

Dynegy cancelled the deal citing “breaches of representations, warranties, covenants and
agreements in the merger agreement."

Dynegy had sought to renegotiate the terms of the merger after Enron's stock price continued to
plummet in the wake of the Nov. 9 merger announcement.

Dynegy's announcement came as Standard & Poor's, Moody's Investors Service and Fitch, Inc.
downgraded Enron's long-term debt to below investment-grade status. The loss of investment-grade
credit means that more than $3 billion in debts to off-balance sheet partnerships are due
immediately,

In a prepared statement, Enron said it is “taking actions designed to preserve value in the company’s
core trading and other energy businesses.” Enron said it is temporarily suspending all payments
other than those necessary to maintain core operations.

"With Dynegy’s termination of the merger and the ratings agency downgrades, we are evaluating and
exploring other options to protect our core energy businesses," Enron Chairman and CEO Kenneth L.
Lay said in the prepared statement. “To do this, we will work to retain the employees necessary to

, 02566

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One reason that traders suspect Enron may have been forced out of such a
position was that the company had neither the cash flow nor the bank
credit to mect calls for additional cash from traders at other firms.
Typically, companies have cash reserves to meet such calls or have
access to temporary lines of credit to cover shortfalls. Enron appears to
have neither. Yesterday, the company said it was suspending all
payments except for those "necessary to maintain core operations."

In addition to the recent interest rate spike, Enron has had to contend with
falling oil prices. The price of crude oil has dropped 28 percent since the
end of October.

Caught in a vise, Enron has almost certainly been selling securities to
raise cash, Treasury securities and Eurodollar contracts, because their
markets are large, are among the easiest to sell. In both cases, Enron was
probably selling into a falling market.

Adding to the turmoil in the bond market, traders said, was less
participation by Wall Street firms, which were unwilling to take on big
new trading positions near the end of their fiscal year. Several firms end
their years on Nov. 30.

Some traders say Enron's problems started with comments on Tuesday by
Laurence H. Meyer, a governor of the Federal Reserve. Mr, Meyer
suggested that additional rate cuts might be coming, and that remark
helped stabilize prices of Treasury securities. "It's my view that there are
no coincidences," Mr. Jonas said. “Laurence Meyer is a big hawk on
interest rates, and he basically talked a 180. That was their big gun. The
only bigger gun would have been Greenspan.”

Page 2 of 2

P. Morgan Are Left With
Exposure to Loans (November
29, 2001)

‘The Rating Agencies: Debt
Rankings Finally Fizzle, but the
Deal Fizzled First (November
29, 2001)

‘The Derivatives: Market That
Deals in Risks Faces a Novel
‘One (November 29, 2001)

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02578

01300000001187


Carleton, Norman

From: Carleton, Norman

Sent: Tut , November 13, 2001 12:51 PM

To: Nickoloff, Peter, Schultheiss, Heidilynne; Cetina, J@; Sharer, James; Adams, Fred; Pietrangeli,
Fred; Berardi, Steve; Anderson, Helen; Ludwick, CM; Whaley, Jean

Subject: Nice work if you can get it

Enron CEO May Get at Least $60.6 Million After Buyout (Update2)
By Margot Habiby

Houston, Nov. 13 (Bloomberg) -- Enron Corp. Chairman and Chief Executive Officer Kenneth Lay may get $60.6 million or
more in severance if he leaves after Enron's sale to Dynegy is completed, according to a regulatory filing.

Lay is entitled to receive a lump sum payment equal to $20.2 million, multiplied by the number of full calendar years
remaining on his contract, if he terminates his employment under certain circumstances, such as the acquisition by
Dynegy, Enron said in a filing with the U.S. Securities and Exchange Commission.

Dynegy says its buyout of Enron, the biggest energy trader, is expected to close in 2002's third quarter. Lay's contract
expires at the end of 2005. His contract provides that he also receive an amount to cover tax penalties if the payment he
gets is considered an “excess parachute payment," the SEC filing said

Enron agreed on Friday to be acquired by rival Dynegy for at least $23 billion in stock and assumed debt, ending a
financial crisis that threatened to bankrupt Enron and disrupt U.S. power and natural-gas markets. Lay has said he won't
be an active manager in the new company, which will be led by Dynegy Chairman and CEO Chuck Watson.

Lay's contract was extended by two years, to the end of 2005, when he resumed the CEO's job following the departure of
Jeffrey Skilling in August. If Enron's buyout by Dynegy were to close this year, or if there were another form of “change of
contro! at Enron, Lay may receive $80.8 miion, the Enron filing indicates.

Pay Package

Enron more than tripled Lay's pay package last year to $18.3 million following the company’s best share-price performance
in 20 years, according to a proxy filed in March with the SEC. Enron shares have plunged 90 percent this year. Lay made
$5.97 million in 1999, according to Enron's proxy statement filed with the SEC.

Lay also received options to buy 782,830 shares over seven years, most at $47.31 each, the March filing said. Those
options are now worthless because Enron's stock price is below the price at which they could be exercised. Lay had gains
of $123.4 million from the exercise of options in 2000.

Enron's has been battling a cash crunch and a loss of investor confidence this year because of questions about
partnerships it started and put under the control of its senior executives.

After the Enron acquisition, top managers at Dynegy will include Dynegy's Steve Bergstrom as president and chief
operating officer, Dynegy's Robert Doty as chief financial officer and Enron's Greg Whalley as executive vice president.
Whalley is Enron's president and chief operating officer.

‘Shares of Enron rose 21 cents to $9.45 in midday trading. Dynegy rose 91 cents to $45.22. Both companies are based in
Houston.

rain ¢ ipiont oli ery ead
Nickolo#, Peter Celivered 11 13.01 1251 PM Read 1113011256 PM
Schutheiss, Heiditmne Delivered 1113.01 1251 PM Read 111301131 PM
Catina, a0 Delivered 111301 1251 PM Read 111301 109PM
‘Snares, James Delivered 1113011251 PM Read 1113001 19PM
Adams, Fred Delivered 1113011251 PM Read 1113011252 PM
Pietrangel, Fred Oelweres 111301 1251PM Reac 1113011251 PM
Berardi, Steve Delivered 1113011251 PM Read 111301 1252 Pt

1

03049

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Carleton, Norman

———____—_____ —___—_ —__ -
From: Nickoloff, Peter
Sent: Friday, November 09, 2001 1:20 PM
To: , Norman; Schuttheiss, Heidilynne
Subject: Interview with Enron’s Chief Risk Officer

From Erisk.com
CRO Profile: Rick Buy ~ Enron Corporation

Asked about the biggest challenge he faces, Enron’s chief risk officer could never be accused of
aiming low: Rick Buy aims to condense all the risks of Enron Corporation into a single metric.
This would comprise operational, market and credit risk and incorporate risk- adjusted return on
capital (RAROC), value-at-risk (VaR) and extreme value theory into what Buy calls a single
“pseudo capital-at-risk figure” that can be shown to the Enron board of directors.

It’s a daunting task for the CRO of a company that encompasses business lines as diverse as
running a vast natural gas pipeline network, wholesale power marketing, energy trading, project
financing and consulting, as well as engineering and construction. That's without taking into
account new ventures such as Enron's entry into the UK water business through Azurix; its
involvement with weather derivatives through the launch of temperature-linked bonds, its launch
of a B2B exchange for trading bandwidth; and its foray into online credit risk management for
third parties, Enron Credit.

Ranked 18th in the Fortune 500 index, with revenues of $100 billion in 2000 (compared with
$40 billion in 1999) Houston-based Enron is seeing its list of counterparties growing towards the
20,000 mark, a rise that Buy attributes partly to the development of the Enron Online e-trading
platform — which has reputedly turned Enron into the world’s biggest e-commerce company
since its launch last year.

‘The size and complexity of Enron's diverse business lines and counterparty list makes the idea of
a single risk measurement for the whole firm seem almost incredible, Buy admits that one of his
other goals ~ of achieving enterprise risk management (ERM) across the whole group ~ is only
about 30 per cent complete so far, but says a lot of progress has been made in aggregating risk
across the company: “We understand that, for example, credit exposure to Shell in London has to
be added to Shell elsewhere, and we routinely assess how exposed we are in this kind of way”

Buy joined Enron from Bankers Trust in 1994, and as CRO now reports directly to president
Jeffrey Skilling as well as to the board. He is on Enron’s executive committee and heads the risk
assessment and controls (RAC) group. Enron's separate risk committee was disbanded a year
ago, and the risk function now comprises Buy and his RAC group, the board and senior
management. The board sets the firm's appetite for risk, while the RAC group measures and
Teports on risk throughout the company.

“The board tends to be vague on the details of risk positions, “says Buy. “I try to ascertain their
comfort levels with certain market moods and P&L swings. We then try to set our limits
structure to accommodate that risk appetite. You have to read between the lines of the board’s
views to some extent — they know that we need to take on risk, but also they take the view that
We're not a pure trading house.” Individual transactions to the value of $750,000 and above get
referred directly to Buy’s RAC group, while anything above the value of $75 million has to be

approved by the board. 02586

01300000001195


SEC. The primary private sector standards-setter is the Financial Accounting Standards
Board (the “FASB"), which was established in 1972. An oversight body that represents
its core constituency of investors, business people, and accountants appoints the members
of the FASB, The FASB’s standards are designated as the primary level of generally
accepted accounting principles ("GAAP"), which is the framework for accounting.
FASB standards set forth recognition, measurement, and disclosure principles to be used
in preparing financial statements.

In setting standards, the FASB follows a thorough, open, and deliberative
process, For major projects, that process can include: (i) wide distribution of discussion
memoranda; (ii) public hearings; (iii) publication of exposure drafts; (iv) solicitation of
comment letters; (v) public deliberation on comment letters; and (vi) use of field tests to
test standards before their adoption.

The SEC oversees the FASB and its accounting standards-setting process.
Specifically, the SEC staff evaluates cach project and proposed standard to make sure
that the FASB standard-setting process is being administered in an open, fair, and
impartial manner, and that cach standard adopted is within an acceptable range of
alternatives that serve the public interest and protect investors. The SEC staff: (i)
monitors the FASB’s project developments; (ii) meets with the FASB and its staff on a
regular basis to discuss pending FASB projects; (iii) reviews comment letters received by
the FASB on its projects; and (iv) after a standard is adopted, continues to consult with
the FASB, its staff, and its interpretative body, the Emerging Issues Task Force
(“EITF”),* on implementation issues

The Self-Regulatory Processes Administered by the American Institute of Certified
Public Accountants (“AICPA”)

‘ The EITF is a committee of sccounting practitioners that assists the FASB in providing timely
guidance on cmerging issues and the implementation of existing standards, If the EITF reaches a
consensus solution to an emerging ce implementation issue, Commission or FASB action may not
be considered necessary. The SEC Chief Accountant participates as an observer at FITF
meetings.

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01300000000939


Leon said Skilling already had cooperated with inquiries by the SEC and Congress. ‘When the facts are in, we expect ne
will be vindicated," Leon said.

SEC Chairman Harvey Pitt, who has been in office about five months, already has promised a comprehensive review of
rules about corporate disclosures of financial information. Pitt has said he wants to establish a system where companies
make more-frequent disclosures to investors and describe more clearly important factors for their business prospects.

Enron stock, which traded for as much $90.75 in August 2000, fell 10 cents to 69 cents in late morning trading.

Trackin : Recipient Deli ery Read
Cetin, Ja Debvered 1100212 16 PM Deleied 114021 6PM

; 02994

01300000001603


Carleton, Norman

From: Carieton, Norman

Sent: T , November 20, 2001 4:44 PM

To: Gross, Jared

Subject: FW: Bloomberg: Enron Falls Amid Concem Debt Threatens Dynegy Bid (Updates)
~-—-Original Message--—

From: Carleton, Norman

Sent: Tuesday, Nowernber 20, 2001 4:41 PM

To: Raseboro, Brian; Bair, Sheila; Bitsberger, Timothy

Subject: Bloomberg: Enron Falls Amid Concern Debt Threatens Dynegy Bid (Updates)

1120 16:05

Enron Falls Amid Concern Debt Threatens Dynegy Bid (Update5)

By Stacie Babula

Houston, Nov. 20 (Bloomberg) -- Enron Corp. shares and bonds dropped after the energy trader disclosed it may have to
pay $9.15 billion in debt due by 2003, suggesting the company may run out of cash before its takeover by Dynegy Inc. can
be completed.

Shares of Enron fell $2.05, or 23 percent, to $7.01. Earlier they touched $6.55, the lowest price in more than a decade.
Enron's 6.4 percent notes due in July 2006 were bid as low as 69 cents on $1 of face value and offered at 73 cents, down
more than 13 percent in light trading, traders said_

Enron, whose dealings with affiliated partnerships led to earnings restatements, credit-rating cuts, a federal investigation
and @ management shakeup, said in a regulatory filing that it has less than $2 billion in cash or credit lines. Dynegy plans
to complete its buyout by October, and Enron may have to ask lenders to restructure payment schedules to survive
“This filing shows that Enron is in a precarious financial situation,” said Commerzbank Securities analyst Andre Meade,
who rates Enron shares “hold” and doesn’t own them. “They have to stay afloat for the Dynegy deal to go through, and
that now looks difficult."

Enron and Dynegy wouldn't comment on the stock drop today. Standard & Poor's Investors Service said that Enron's credit
rating remained on negative watch, indicating it would not immediately downgrade the company's debt

$690 Million Surprise

“Enron's near-term liquidity position is... expected to be sufficient to carry the company through the completion of its
proposed merger with Dynegy," S&P said in a report.

Investors were concerned the debt, including a $690 million note that Enron disclosed it may have to pay off next week,
would lead to a cut in Enron's credit rating, analysts said.

The filing was a ‘‘distraction” that will not threaten the merger, sai Todd Shipman, a director at S&P who follows Enron.
“Our approach to this has been on the basis that the Dynegy deal is a goad thing for credit quality." Shipman said

Moody's Investors Service, which didn't issue a statement on Enron's debt today, kept the company’s credit rating at
investment grade on Nov. 9, the day Dynegy announced it would buy Enron in a deal now valued at $25 billion

The ruling came after executives from Lehman Brothers Holding Inc., J.P. Morgan Chase & Co. and Citigroup Inc.'s
Salomon Smith Bamey lobbied the credit-rating company, people familiar with the situation said.

Avoiding Junk

A junk rating would have led Dynegy to abandon the acquisition, Dynegy Chief Executive Officer Charles Watson said. It
would also nave triggered debt repayment of at least $3.9 billion, Enron said in a Securities & Exchange Commission filing

yesterday.
03016

01300000001626


Subcomuzittces oF ihe House Fiaancie! Services Cummines und ihe Senae Comm

Committee have already held hearings.

But Lieberman's panel is the top investigative committee of the Senate. Under Republican
feadership during the Clinton administration, then-chairman Fred D. Thompson (R-Tenn.)
headed an investigation of Bill Clinton's 1996 presidential campaign fundraising.

Levin and Lieberman said they intend to look into the close ties between Lay and President
Bush, a connection that some Democratic Party officials say they hope to take advantage of in
this year’s congressional election campaigns.

Levin said he wants to know what advice Lay, who was a large contributor to the Bush
campaign, gave to officials of the new administration as it formulated energy policy a year ago.
Enron “also had close relationships with some Democrats, it's fair to say,” Lieberman
acknowledged, He said he expected the inquiry to be bipartisan and to have Thompson's support.
“We are going to work together,” Lieberman said,

Lieberman said the committee also wants to learn whether federal regulators have the authority
to adequately oversee the complex commodity trading and financial transactions that were the
foundation of Enron's rapid growth over the past three years.

Lieberman noted that much of Enron's trading in energy derivatives was exempt from regulation
by the Commodity Futures Trading Commission, and he said a focus of the inquiry would be
whether this allowed the company to hide some transactions.

Enron was an active player in lobbying for the exemption beginning in the early 1990s,
according to sources. The exclusion was initially approved Ly the CFTC in 1992, and in 2000
Congress endorsed it as part of the Commodity Futures Modemization Act, despite concems of
some senior regulators.

At a joint hearing on the legislation by the Senate Banking and Agriculture committees in June
2000, then-CFTC chairman William J. Rainer spelled out his "reservations" about the exclusion
and said that “the case for it has not been made” with regard to energy derivatives.

© 2002 The Washington Post Company

02165

01300000000774


Page 3 of 3

They include a costly payment fight with the Indian government over the $3 billion Dabhol power plant, the
vilification of Enron by California politicians who blame Texas companies for their power crisis, and the
breakup of a marquee video on-demand broadband Internet deal with Blockbuster Inc. (news/quote) (BBI.N).

Answering an employee question, Lay said there was no truth to a rumor that Royal Dutch/Shell RD.AS
(SHEL.L) was planning a hostile takeover of Enron because of the stock's recent weakness.

1/16/02 0) 3044

01300000001654


Opening Statement
Chairman Michael G. Oxley
Committee on Financial Services

Subcommittee on Oversight and Investigations
Subcommittee on Capital Markets, Insurance and Government Sponsored
Enterprises
“The Enron Collapse: Impact on Investors and Financial Markets”

December 12, 2001

Good morning and thank you, Subcommittee Chairs Baker and Kelly, for holding
this important hearing. Today we will begin the Committee's investigation of the
facts and circumstances surrounding the largest corporate failure in history, Today
we will hear about the dramatic collapse of Enron Corporation, the seventh largest
company in the United States. Riding high as recently as six months ago, the
company has since lost more than 99% of its market capitalization, and now trades
below $1.

Until all the facts are known, it is prudent for this Committee to avoid reaching
sweeping conclusions about the causes and persons responsible for Enron's collapse.
But that does not mean we should refrain from asking the difficult questions that
demand answers.

We will ask the difficult questions. We will delve thoroughly into the facts and
circumstances surrounding Enron's collapse. And we will get answers.

This Committee, and the Subcommittees on Capital Markets and Oversight, will
vigorously pursue this matter to ensure that the Congress, and the American
public, know who to hold accountable.

We need to learn whether millions of investors were intentionally misled by Enron's
financial engineering and reluctance to disclose information.

We need to learn why financial statements that provided less than a complete
picture of Enron's financial situation were certified,

We need to learn why almost all of the securities analysts following Enron failed to
warn investors, and why exactly half of them continued to rate the company a "buy"
or "strong buy", even after it had plunged below one dollar.

We need to learn whether the current reporting and financial disclosure system
needs to be overhauled,

02324

01300000000933


Testimony of Richard L. Trumka

House Financial Services Committee

December 12, 2001

Page 2

We are here today because Enron's bankruptcy was of a size and speed not experienced
since some of the famous debacles that followed the Great Crash of 1929. And we must
begin by recognizing that its collapse has had a real impact not just on big Wall Street

firms, but on millions of working people and their pension funds.

This is a catastrophe rich in irony. Enron was a company that talked about a future of
transparent markets, but whose CFO openly bragged to the financial press that its own
accounting was a black box, saying "We don't want anyone to know what's on those
books. We don't want to tell anyone where we're making money."" This was a company
that complained about the costs of corruption in the global economy, but made campaign
contributions an integral part of its business strategy; a company whose own govemance
was a web of conflicts of interest that completely stymied the protections our legal
system provides investors. And finally this was a company whose mantra was
deregulation and privatization, but which has ultimately become an advertisement for
why workers need both defined benefit pension plans and a Social Security system safe

from the conflicts of interest rampant in the capital markets.

We must, however, begin with those who have been hurt worst and most unconscionably
by the conduct of the Board and officers at Enron—-the employees of Enron, more that
5,000 of whom have already lost their jobs, and more than 12,000 of whom participated

02404

01300000001013


Insight Equity Fund. *“They spread a ton of business around the Street, so it's no wonder these analysts were behind the
stock,”

Enron says it didn’t have a quid pro quo relationship with anyone. “At no time has Enron ever required any financial firm to
endorse our stock as a prerequisite for doing business with the firm,” says spokesman Vance Meyer,

“Taps on Shoulders’

Some Wall Street veterans say they don't find that denial persuasive. “Even if there were no spoken agreements, you can
bet analysts often got taps on the shoulders from the investment benkers making sure that they were reminded to keep
“buy' ratings intact," says Phelps. “That's just the way Wall Street works.~

Enron spread the wealth across many Wall Street firms. In May 2001, Enron used six banks - A. G. Edwards & Sons Inc.,
Banc of America Securities, Dain Rauscher Wessels, First Union Securities Inc., Salomon Smith Barney Inc. and UBS
Warburg — to manage a $151 million unit offering for Northern Border Partners LP, one of scores of Enron-controlled
partnerships.

Usually, no more than four underwriters are involved in deals that small, investment bankers say.

CSFB advised Enron on a pending $2.9 bition sale of Portland General Electric Co. in October -- one of 41 separate
mergers and acquisitions transactions Enron initiated since January 1999, according to Bloomberg data.

Enron Activity Owarts Rivals

That dwarfs the number of deals over that span announced by rivals Dynegy Inc., which struck 15 corporate combinations,
and Kinder Morgan Inc., which did a dozen deals,

Enron further cemented its relationship with Wall Street by borrowing from banks, obtaining letters of credit and trading in
derivatives -- financial instruments such as futures and options whose value is based on other assets.

When Enron filed for bankruptcy in December, its list of creditors was 54 pages long and included Citigroup Inc., CSFB's
London branch, J. P. Morgan Chase & Co. and UBS.

Goldman Sachs is a dealer for Enron's $4 billion commercial paper program and has arranged six of the company's 15
preferred share sales.

In June 1999, Merrill Lynch managed the $695 mittion initial public offering of Azurix Corp., Enron's water business, Run by
Enron's former Vice Chairman Rebecca Mark, who resigned in August 2000, Azurix failed in its strategy to buy water
companies and win large projects. It lost a bid to acquire a 49 percent stake in Berlin's water utility, for example.

Enron Buys Back Stock

Enron bought back the stock in 2001, after it had fallen more than 55 percent during the company's 18 months as a public
entity

In October, J. P. Morgan and Citigroup's Citibank unit provided Enron with $1 billion in credit ines to help it pay dawn debt
and meet day-to-day costs. Those loans came just in time for the two firms to win the business of advising Enron on its
Planned acquisition by Dynegy.

J. P. Morgan and Citigroup's Salomon were set to charge $90 million — $45 million each -- for that advice, according to
people familiar with the arrangement.

Dynegy was set to pay $15 million in advisory fees to Lehman Brothers. That would have bean Lehman's biggest such
transaction in 2001

Dynegy Deal Falls Through

In December, after the Dynegy deal fell through, Enron obtained as much as $1.5 billion in new financing from J. P-
Morgan and Citigroup. On December 11, J. P. Morgan filed a tawsuit in Enron's bankruptcy case, seeking $2.1 billion —
funds the bank said aren't part of the energy trader's assets shielded from creditors by the Chapter 11 filing

Enron traded derivatives in energy, broadband and weather with a host of investment firms, and at the time it filed for
2
03000

01300000001609


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units to he afieeted wil be communicated shortly,

ineluding Enron Corp.: Enrox Next
= Energy Services. the retaii
for Exron's pipeline

Metals & Commie

Enron said Chapce: 1) Slings were 5 ade for 14 af
Asnesica Corp., the company's whok: salz energy wading busi
energy miacke ansporaiion ices, the holding comp:
Earca Brozct2 3. 2 Dandwidth wading operz::

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Slips T.

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tandpsiz:, Our cmergy Sotinesses-inelud!

continue to do so.”

weak
achough

ts Gumng the past ew weeks bas se i
sading operations,” Enron intends to “he!p preserve capital.

we discussions with leading

1 dilings, th: company is in “a
ese discussions

pssess.0 Anancing and expects 10 complete

with Enron's T
ions" for deb

Upen the completion and court appr. val of these arrangements, the new funding will be available
immediately on an interim basis pplement Enron's existing capita! and help fulfill obligations
including payroll and payments to v: ndors. Enron said.

we

Engen will ask the bankruptcy court .0 consider 3 variety of “first day motions" to Support is employees.
vendors, wading counierpartics, cust -mers and other constituents. These in¢lude motions seeking
Permission to continue payments fer employee payroll and health benefits; obuin interim financing
authonity and maintain cash manage: aent programs; and retain legal. financia] and other professionals

The company said its legal adviser for the lawsuit and proposed merger with Dynegy and Enron's
Chapter 1! fling is Weil Gotshal & Vlanges LLP. Enron's principal financiel adviser for its financial
restructuring i$ The Biuckstone Grat p.

Enron, which hopes to ave a “signi-icant ownership interest” in the Proposed new entiry that owns its
North American wholesale energy tm iding operations, said "we understand that it may take time for
counterparties to resume normal tracing levels with this entity, but we are confident that this business
can be put back on a solid footing.”

Dynegy terminated its pian te acquir Enron on Wednesday after credit-rating agencies downgraded a
major portion of Enron's debt to "jus k" status. Enron’s energy trading ground almost to a helt because
wading partners became worried abc ut Enron's finances

Bankers involved in Enron's restruci uring discussions estimare that liabilities rota! $40 billiog, including

2256

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13/05/02 15:46 FAX 202 646 3199 ° oir 02d

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~3

Dow Jones Newswires

December 2, 2001

Chronology Of Enron Corp.'s History

HOUSTON (AP)—A look ar the b. story of Earon Corp. (ENE):

July 1985 -Houston Natural Gas merges with InterNorth, a natural gas company based in Omaha Neb.,
. 10 form the modem-day Enron, an interstate and intrastate natural gas pipeline company with

approximately 37,000 miles of pig 2.

1989 -Enron begins trading natur: . gas comunodities. Over the years, the company becomes the largest
natural gas merchant in North Am :rica and the United Kingdom.

June 1994 -Enron North America rades its first electron, Enron goes on to become the largest marketer
of electricity in the L.S.

August 1997 -Enron announces it first commodity transaction using weather derivative products. Enron
goes on Io market coal]. pulp, pape /. plastics. metals and bandwidth.

April 1999 -Enron agrees to pay $100 million over 30 years for the naming rights to Houston's new

ballpark, Enron Field. The Astros also sign 3 30-year facilities management contract Enron Energy .
Services

November 1999 -Enron launches !nronOnline, the first global Web-based commodiry trading site

December 2000 -Erron announce that president and chief operating officer Jeffrey Skilling will take

over a5 chief executive in Februar *, Kenneth Lay will remain as chairman. Shares hit 32-week high of

$84.87 on Dec 28

August 200! -Skilling resigns afi r running -he company for just six months; Lay becomes CEO again

October 16, 2001 -Enron reports ¢ $638 million third-quarcer loss and discloses a $1.2 billion reduction
in shareholder equily. partly relat: 4 lo partnerships run by chief financial officer Andrew Fastow

Oct. 22. 2001 -Enron acknowledg-s Securities and Exchange Commission inquiry inte a possible
conflict of interest related to the c »mpany’s dealings with those partnerships.

Oct. 24, 200) -Enron ousts Fastov

Oct. 31. 200! -Enron announces tre SEC inquiry has been upgraded to a formal investigation. Enron
creates special commrtee headed yy University of Texas law school dean William Powers to respond \o

02251

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01300000000860


The exemption, cick uo broader uc tia es Ge hegabiy ef surgi.
derivatives trading by tans, Was. .6 “Supported by a Clinton ‘administration working group,
largely because of opposition from the CFTC. Since the departure of Wendy Gramm, some in
the agency had lobbied for tighter control over the exploding energy derivatives market. The
legislation passed through the Senate Banking Committee, then chaired by Phil Gramm, who has
received $97,350 from Enron employees and its political action committee since 1989. A Gramm
spokesman said the senator does not recall talking to his wife, an Enron director, about the
energy provision and played "no role" in negotiating it. Wendy Gramm did not retum phone calls
secking comment.

Enron was @ primary player, with Koch Industries Inc., a large, privately held oil and gas
company based in Wichita, in pushing for the exemption, a source said. But the company's main
effort was focused on the House Agriculture Committee, where the legislation originated. Its
chairman and ranking Democrat, Texas Reps. Larry Combest (R) and Charles W. Stenholm (D),
respectively, were among the top recipients of Enron campaign donations in the House since
1989.

The CFTC objected strenuously to the initial draft marked up by the committee, but the Texas
congressmen helped work out a compromise between Enron and the agency. The compromise
was then offered by Rep. Jerry Moran (R-Kan.), the home-state congressman of Koch Industries
and a recipient of campaign donations from Enron and Koch in the last election cycle. Moran did
not return a phone call seeking a comment.

Early this year, Lay seemed to be at the height of his political power, getting a private meeting
with Vice President Cheney to discuss the administration's energy policy proposals and weighing
in on key nominations to FERC.

Curtis Hebert Jr., FERC’s chairman at the time, has reported that Lay called him and implied that
Enron would urge the newly installed Bush administration to keep him in the job -- if he changed
his views to support Enron's position for faster electricity deregulation, Lay contended that
Hebert called him to ask for support.

Hebert was not reappointed. He was replaced by Texas lawyer Pat Wood III, a strong advocate
of deregulation who had the backing of Lay and Enron.

Ironically, since Enron's fall, both FERC and Congress seem to be moving in the direction of the
deregulated markets Lay and Enron lobbyists had pushed for.

© 2001 The Washington Post Company

02162

01300000000771


And for all the talk of competition, there was a serious flaw that made
the market singularly uncompetitive.

In order to encourage generators to create as much power as possible,
deregulation guaranteed the highest price for wholesale electricity.

Through a practice known as the "market clearing pr ," the last bidders

== who are invariably the most expensive -- get the price everyone would
receive, In other words, if the first generator bids $30 for a certain amount of
megawatt but the last bide $100, those two bidders and everyone in

between receive $100. As the wholesale price of electricity skyrocketed to
$1,500 per megawatt hour this month from $30 before the storm, the high

cost has been compounded by the fact that everyone receives that amount .

Further, the law had encouraged utilities to sell their generators and
existing electricity supply without guaranteeing access to affordable
power.

Rather than arranging to buy power on long-term contracts that could
have saved money, they were put in the position of having to buy their power on
a market where profit was the ultimate goal, and they and their consumers
had to pay the price.

Perhaps in the biggest misjudgment, policymakers neglected the huge
amount of money it takes to run power companies and attract customers. Thus, they
overestimated how much competition would flourish in the market.

Running power companies is so costly ~~ $500 million to build a new
plant -- that only a handful of companies bought into the market. And once they
were here, the marketing cost of signing up new customers was
astronomical.

Indeed, since choice has become available to California, less than

1 percent of residential customers has changed electricity providers.

The same goes for just 15 percent to 20 percent of industrial customers -- the
clase that advocated deregulation in the first place.

At the end of the day, this experiment in deregulation has come at a
staggering cost: $40 billion. That includes the $23 billion already paid
by customers when rates were frozen at artificially high levels, and the
$7.5 billion in bonds financing consumers' own rate reduction,

Now a new tab is running -- whatever share of the $11 billion in debt
that state utility regulators decide customers should pay.

The state's leaders are now casting around desperately for solutions to
put Humpty Dumpty back together again.

The PERC is encouraging the utilities to enter long-term cont
suppliers, and market clearing pricing is under review. The stat
utilities commission will decide Jan. 4 how much of a rate increase to
grant to PG&E and Edison. And a dozen or 80 power plants are under
construction.

Meanwhile, consumer advocates are backing a state ballot measure that
would not only re-regulate utilities but essentially make energy supply a
government function. And they are challenging the utilities' efforts to
Pass on their debts to consumers, noting they have also reaped windfall
profita from selling electricity.

For example, in the quarter covering the summer months when power costs
first went haywire, PG&E's profits amounted to $225 million, a 22 percent
increase over the same period in the previous year.

In the short term, the state is considering ways to encourage energy
conservation the same way it did with water. And the question now being
asked is whether a commodity as central to the well-being of the economy
should ever have been placed almost entirely under the control of free
enterprise

“There's a discussion on how much we want to rely on market forces
alone when it comes to electricity," Bowen said. "Do we want to subject
ourselves to times when rates are really low and really high?"

ts with

VEU V UV YY UV

> POWER DEREGULATION CHRONOLOGY --

-April 1994: California Public UtilitiesCommission indicates it favors deregulation.
-Oeteber 1995: Pramework of deregulation laid cut in memorandums between large users,
energy providers and utilities. -~-

-January 1996: Bills introduced in legislature to codify

deregulation plan. --

-ARugust 1996: The "Steve Peace death march* hashes out fine points of law. It passes both
houses unanimously. --

-Sept. 23, 1996: Gov. Pete Wilson signs the deregulation bill. --

-April 1, 1998: After a four-month delay, deregulation begins. ~~

-June 2000: San Diego has satisfied conditions for deregulation, and the rate cap there is

; 02476

01300000001085


Testimony of
Charles L. Hill
Director of Research
Thomson Financial / First Call
before the joint session of
the House Subcommittee on
Capital Markets, Insurance, and Government Sponsored Enterprises
and
the House Subcommittee on
Oversight and Investigations
12 October 2001

BROKER ANALYST'S ANALYSIS OF ENRON
Prologue

I welcome the opportunity to again testify in front of the House Financial
Services Committee. I believe this committee has been addressing
substantive issues that are important not only to the future health of the
investment community, but important to the general public’s perception of
and confidence in the overall capitalist system.

The excesses associated with Enron that led to its bankruptcy are more far
reaching than just their impact on Enron,

There is plenty of blame to go around in the mistakes made in the Enron
situation. I am here today to focus on the role of the broker analysts in
this debacle.

In my previous testimony before this committee, I did not tread lightly on
what I thought were some serious problems in analyst behavior that needed
to be remedied.

I am here this morning, however, to say that the analysts to some degree
were more victims rather than culprits in the Enron situation. Not that
they were without blame, particularly in the late stages of the Enron
collapse, but they were not the underlying cause of the excessive rise in
Enron’s stock that later proved to be irrational.

The performance of the analysts should be judged on two fronts. The first
is their analysis of Enron’s fundamentals, particularly in regard to
earnings. The second is their valuation assessment and recommendations of

Enron stock,

Analysis of Enron Fundamentals by Broker Analysts

02394

01300000001003


We looked at “the total mix” and, in our judgment, on a quantitative basis, the passed
adjustments were deemed not to be material, amounting to less than 8 percent of normalized
camings. Normalized income wes deemed appropriate in light of the fact that the company had
reported net income of $584 million one year earlier, in 1996, $520 million in 1995 and $453
million in 1994.

It is also important to remind you that the restatement analysis presented in Enron’s recent 8-K
filing was not audited. When Enron's audited restatement is issued, the $51 million in
adjustments presented in 1997 will be reduced for the effect of adjustments proposed in 1996,
which were recorded in 1997.

Reclassification of $1.2 billion of shareholders" equity

Now let me turn to the issue of shareholders’ equity. Shareholders’ equity was incorrectly
presented on Enron's balance sheet last year and in two unaudited quarters this year.

Auditors do not test every transaction and they are not expected to. To do so would be
impractical and would be prohibitively expensive. EnronOnline alone handled over 500,000
transactions last year,

Auditing standards require an audit scope sufficient to provide reasonable — not absolute --
assurance that any material errors will be identified, This testing is based on a cost-effective and
proven technique known as sampling. If appropriate accounting is found in a properly chosen
sample, this generally provides reasonable assurance that the accounting for the whole
population of transactions has been done in accordance with GAAP and is free of material
misstatement.

Shareholders’ equity was initially overstated last year for a transaction with a balance shect
effect of $172 million. This amount was recorded as an asset, but should have been presented as
a reduction in shareholders’ equity. That arnount, $172 million, was less than one third of one
percent of Enron's total assets and approximately 1.5 percent of shareholders’ equity of $11.5
billion. It was a very small item relative to total assets and equity and had no impact on earnings
or cash flow. Accordingly, the transaction fell below the scope of our audit.

In the first quarter of this year, Enron accounted for several more transactions in a similar way,
increasing the size of the incorrect presentation of shareholders’ equity by about $828 million.

The quarterly financial statements of public companies are not subject to an audit, and we did not
conduct an audit of Enron's quarterly reports. Consistent with the applicable standards, our work
primarily was a limited review of the company’s unaudited financial statements.

02353

01300000000962


Carleton, Norman

From: Carleton, Norman

Sent: Thursday, January 10, 2002 12:16 PM

To: Cetina, Jill

Subject: FW: Bloomberg: Bush Task Force to Study Disclosure Rules After Enron

--~-Onginal Message-——-

From: Carleton, Norman

Sent: Thursday, Jenuary 40, 200 2002 12:07 PM

To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Ehner, Matthew; Gabilondo, Jose; Gross, Jared; Hammer, Vive; Lori
‘Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael; Pletrangeli, Fred; Roseboro, Brian; Schulthess, Hekdiynne; Whaley, Jean;
Wiedman, Mark

Subject: Bloomberg: Bush Task Force to Study Disclosure Rules After Enron

O10 11:16

Bush Task Force to Study Disclosure Rules After Enron (Update2)
By David Morris

Washington, Jan. 10 (Bloomberg) -- President George W. Bush said he ordered Treasury Secretary Paul O'Neill and other
Officials to review the adequacy of corporate disclosure rules after Enron Corp.'s bankruptcy.

“In light of the most recent bankruptcy, Enron, there needs to be a full review of disclosure rules to make sure the
American stockholder, or any stockholder, is protected,” Bush said.

The review marks Bush's first official public act in response to Enron’s financial collapse. Multiple investigations of

Houston- based Enron, including a criminal probe by the Justice Department, carry political risks for the president who was
close te Enron Chairman Kenneth Lay, a large contributor to Bush's political campaigns.

The White House released a letter Tuesday saying Enron representatives met with Vice President Dick Cheney's energy
task force six times in seven months last year to talk about energy policy

Bush, the former Texas governor, said he hasn't talked with Lay about Enron's financial troubles and most recently saw
the Enron chief last spring at a literacy fundraiser held by the president's mother, former First Lady Barbara Bush

Nest Eggs

The disclosure-rule task force, including O'Neill and Commerce Secretary Donald Evans, should look into ways to protect
pensioners from losing their nest eggs if their employer goes out of business, Bush said,

Enron, which was the biggest energy trader, said on Nov. & that profits had been inflated by $585 million since 1997
because of accounting errors. After the restatement, Enron shares plunged about $9 percent, to as little as 25 cents,
before the company on Dec. 2 filed the biggest U.S. bankruptcy case ever.

Enron's restatement involved transactions with partnerships and affikates, some of which were set up by Enron officials.

The Securities and Exchange Commission és investigating whether Enron adequately disclosed information about
Partnerships and affiliates, and whether its auditor, Arthur Andersen, acted properly in its reviews of Enron's books.

The Justice Department yesterday said it had established a task force of prosecutors to conduct a criminal investigation of
the events surrounding Enron's collapse. Six congressional committees are conducting investigations of Enron's fall and
the impact on 401(k) retirement accounts, which held much of employees’ retirement savings in Enron stock,

Former CEO

Some of the investigative focus is on what former Enron Chief Executive Officer Jeffrey Skilling knew about partnerships
that allowed Enron to shift debt off the company books. Skilling has denied having detailed knowledge of the partnerships.

Skilling's spokeswoman Judy Leon said today the former Enron CEO would cooperate fully with the Justice Department
probe and “welcomes any inquiry aimed at clearing the air and finding out what really happened at Enron.”

, 02993

01300000001602


22-05/02 15:46 FAL 202 $16 5399 E017 023

:* 7 WSheom Page | of 2

arcane Oe
DOCUMENT OUTPUT |
SOLUTIONS ©

wwwsarie.com

December 2, 2001
Dow Jones Newswires
Chronology Of Enron Corp.'s History
HOUSTON (AP)--A look at the bh story of Enron Corp. (ENE):
July 1985 -Houston Natural Gas merges with InterNorth, a satural gas company based in Omaha. Neb..
. to form the modem-day Enron, an interstate and intrastate natural gas pipeline company with
approximately 37,000 miles of pipe.

1989 -Enron begins wading natur:: gat commodities, Over the years, the company becomes the largest
natural gas merchant in Norh Am :rica and the United Kingdom,

June 1994 -Enron North America rades its first electron. Enron goes on to become the largest marketer
of elecwicity in the U.S.

August 1997 -Enron announces it’ first commodity transacnon using weather derivative products. Enron
goes on to marks coal. pulp, pepe c, plastics, metals and bandwidth

Apri) 1999 -Enron agrees to pay $100 million over 30 years for the naming rights to Houston's new

ballpark, Enron Field. The Astros also sign 2 30-year facilines management contract Enron Energy .
Services

November 1999 -Enran launches inronOnline, the first global Web-based commodity trading site.
December 2000 -Enron announce that president and chief operating officer Jeffrey Skilling will take
over as chief executive in Februar’, Kenneth Lay will remain as chairman. Shares hit 52-week high of
$84.87 on Dec, 28

August 200] -Skilling resigns afte + running the company for just six months; Lay becomes CEO again

October 16, 2001 -Enron reports : $638 milion third-quarter loss and discloses a $1.2 billion reduction
in shareholder equity, partly relate 4 to partnerships run by chief financial officer Andrew Fastow

Oct. 23. 2001 -Enron acknowledg~s Securities and Exchanre Commission inquiry into a possible
conflict of interest related to the ¢ »mpany’s dealings with those partnerships.

Oct. 24, 2001 -Enron ousts Fastov.

Oct. 3[, 2001 -Enron announces tue SEC inquiry has been upgraded to a formal investigation Enron
creates special commites headed sy University of Texas law school dean William Powers to respond to

02261

hep: Vintersetive,wsj,com/archive. cetmeve.cz!12=BT-CO-2001 1202-000301 diml&templetc=.,. 12/30]

01300000000870


E-Commerce Apex

While Enron's e-business gains have been spotty in some areas--it has struggled to create liquid Web markets in
bandwidth and on paper, for instance--EnronOnline is one of the most successful e-marketplaces. It conducted
its millionth transaction late last month, and the total value of trades on the site exceeds $590 billion. Online
trading now accounts for almost 75 percent of Enron's energy transactions in North America, the company says.

Enron counts both purchases and sales in its volume numbers--unlike e-marketplaces that simply take a cut of
transactions on their sites--because the company is a “counterparty” to every trade on EnronOnline. Enron
makes its money on the spread between what it pays for commodities and what it sells them for.

When a customer clicks to buy gas, electricity, steel or any other commodity, Enron guarantees price and
delivery time. The key for Enron isn't to own massive amounts of physical product or storage and delivery
capacity, but to arrange for third-party supply and logistics electronically. Enron stays informed about the vast
array of factors that can influence price and delivery on a minute-by-minute basis by employing thousands of
researchers, analysts, weather forecasters and other market specialists.

Enron isn't just moving physical product on the site, Much of its online deal-making is in financial derivatives
and risk management.

For example, Enron is now in the market for DRAM chips. But it doesn't buy and sell the chips; it sells financial
instruments that let companies lock in a price for DRAMs for a set period. Ultimately, Enron hopes to buy and
sell the chips itself, just as it buys and sells gas, electric-ity and other commodities.

Energy Trading Redone
Enron is reticent about disclosing exact volume figures for the different commodities traded on its sites. The
large majority of trades are still conducted in natural gas and electricity.

‘The Internet is transforming energy trading from something of an art form, dominated by person-to-person deals

negotiated over the telephone, to an automated science. By openly displaying its "bid" and "ask" prices--and the
read between them-Enron drove trade volumes through the roof in 2000. Forrester Research estimates that

the “notional value” of online energy trades grew 750 percent in 2000, with EnronOnline accounting for most of

them,

But competing energy firms are banding together to form online marketplaces of their own. American Electric

Power, Aquila, BP Amoco, Duke Energy and others joined with Goldman Sachs and other financial firms to

form Intercontinental Exchange, while Axia Energy, Coral, Dominion TXU and Williams have formed

TradeSpark.

While these consortia may view each other as competitors, they see EnronOnline as complementary, says
Forrester analyst Jim Walker. "Everyone loves to have Enron trade on its site because Enron brings the most
valuable thing to the market, which is liquidity,” Walker says.

Enron has purchased physical assets to cnsure its own supply in several key markets, such as pulp and paper and
metals, Piper éays. Metals trading, he says, is up to about 1,000 transactions daily, representing about 25,000
metric tons of steel.

Enron conducted 580 bandwidth trades in the first quarter, compared with 321 in the past year, and it expects to
handle more than 2,200 trades in 2001.

However, Enron's total online trading volume represents cverything from storage services to long-haul circuits
to dark fiber to IP services. None of the bandwidth commodities has achieved liquidity yet, notes Kevin
Hannon, president of Enron Broadband Services, which completed an 18,000-mile fiber optic network in 2000
and built 25 "pooling points" to tic in with other provider networks,

A Helping Hand

Enron has plowed ahead so aggressively onlinc that some trading partners that haven't invested in back-office
automation simply can't keep up, Piper admits. Enron is responding with CommodityLogic, software modules
designed to help trading partners streamline the fulfiliment process and reduce data re-entry errors.

Enron will create and maintain a centralized database of information pertaining to trades. Partners access that

‘ 02570

01300000001179


Page 2 of 3

Enron enjoyed the higher multiples as recently as March, but then the stock began an extended slump that
saw it lose about half its value.

WHO REPLACES SKILLING?

Though Lay took Skilling's duties over, he told employees that he expected to fill the void Skilling left in the
office of the chairman in the next few days. Skilling, 47, was chief operating officer before Lay handed him
the CEO reins in February, and the COO position has remained unfilled since then.

The executive or executives who assume the operational role Skilling had will largely be seen as the new
heir or heirs apparent to Lay, 59. Enron earlier said it would increase the office of the chairman, which
previously was occupied by Lay and Skilling, to include Lay and two understudies.

“Certainly, there is a hole in the office of the chairman, and we will be addressing that very soon. | think | told
some people yesterday that we were looking to do something probably in the next couple of days,” Lay said.

Lay reiterated that the succession will be internal, but did not elaborate on which executives he would
choose.

MANY GLOBAL ASSETS TO GO

The best way to return Enron's stock to its headier levels will be to get a higher return on capital investment,
he said, Enron hopes to glean billions from a sale of low-yield global assets, which it will then pour into high-
retum businesses, Lay said.

“The quickest way to do that is to monetize some of these assets," Lay said. ‘That doesn't mean we're
going to monetize all of them."

He said Enron will still be very active in Europe, Japan, Australia and other countries, and may start working
in developing countries at some point in the future.

Lay took more than a dozen questions from the audience, with topics ranging from work-a-day issues like
how close cubicles will be spaced in Enron's new office building to the issue of what recourse there is for
employees who have stock options that are priced in the $80 range.

While he rebuffed a re-pricing of those options because "stockholders hate that,” he did say all employees
would be issued a new round of options that are priced at current levels.

Touching on another recent issue, Lay said Enron was in advanced talks to sell Oregon utility subsidiary
Portland General, which was to be sold to utility Sierra Pacificfor $3.1 billion until regulatory issues scuttled
the deal.

“We have another transaction that is pretty far advanced and it might be a transaction where we would even

maintain some ownership interest in that business for some time. But it's not far enough advanced to talk
about right now,” Lay said, not revealing the name of the potential buyer.

Asked if Enron's broadband arm would suffer more layoffs if was not successful by year's end, Lay said he
thought *‘the odds of that are very, very small." Lay said 500 people were taken out of Enron's broadband
operation, with about half being laid off and the rest being redeployed within the company.

The underperformance of the broadband business, which coincided with the broad collapse of the
telecommunications market, is among several problems that have dogged Enron lately.

1/16/02 03043

01300000001653


——-] 2-95-01 13:44 FAY 202 646 5199 Woio23

. I
WSJ com Page 2 of 2

ent of trade prom tion expenses for their portfolio of “orphan” brands as sarit!

nen

over their Teay
expenditures,

Enron is an opportunity for the Bush team to show it can police similer Ainancial chicanery, if some is
found Sorting the capitalists from the crooks is one way of protecting cspitalism.

URL for this Article:
http //interactive ws) comarchivelretr ave cgi7id=SB1 0070851 167876796880 cjm

Copyright D :001 Daw Jones & Company, Inc. All Rights Reserved.
Printing, distribution, and use of this (vaterial is governed by your Subscription Agreement and copyright laws.

For information about subscribing, go to http.//wsj.com

02247

hitp.cinteractive.ws).com/archive cetrieve.cgi?id=SB 10070851 167876759680 .djm& templates 11/30/01

01300000000856


November 30, 2001

The Internet Didn't Kill Enron

By ROBERT PRESTON <MAILTO:rprestonf@cmp.com>
“We have a fundamentally better business model.”

That's how Jeffrey Skilling, then president of Enron Corp., summarized his company's startling
ascendancy a year ago, as Enron's revenues were soaring on the wings of its Internet-based trading
model.

It was hard to find fault with Enron's strategy of brokering energy and other commodities over the
Internet rather than commanding the means of production and distribution. EnronOniine, its year-old
commodity-trading site, already was handling more than $1 billion a day in transactions and yielding
the bulk of the company’s profits. At its peak, Enron sported a market cap of $80 billion, bigger than
all its competitors combined.

More Enron Stories

Today, Enron has filed for bankruptcy, the status of EnronOnline is touch and go, ENE is a penny
stock and Skilling is out of a job. Last year's Fortune 7 wunderkind, hailed by InternetWeek and
others as one of the most innovative companies in America, overextended itself to the point of
insolvency.

So was Enron's "better business mode!” fundamentally flawed? With the benefit of 20/20 hindsight,
what can Internet-inspired companies in every industry learn from Enron's demise?

For one thing, complex Internet marketplaces of the kind Enron assembled are fragile. Enron
prospered on the Net not so much because it had good technology -- though the proprietary
EnronOnline platform is considered leading-edge -- but because ‘online customers trusted the
company to meet its price and delivery promises,

As Skilling told IntemetWeek a year ago, "certainty of execution and certainty of fulfillment are the
two things people worry about with commodity products." Enron, by virtue of its expertise, networked
relationships and reputation, could guarantee those things.

Once it came to light, however, that Enron was playing fast with its financials — doing off-balance
sheet deals and engaging in other tactics to inflate earnings -- customers (as well as investors and
partners) lost confidence in the company. And Enron came tumbling down.

Furthermore, advantages conferred by superior technology and information-gathering are fleeting.
Competitors learn and mimic and catch up. Barriers to market entry evaporate. Profit margins narrow.

Enron, short of incessant innovation, could never hope to corner internet market-making, especially
in industries, like telecommunications and paper, that it didn't really understand. In its core energy

, 02568

01300000001177


Derivatives Study Center Page 14 of 14

There is no set of guidelines telling the SEC how or when to freeze accounts under investigation, said John Hiney,
an agency spokesman. “It depends on the situation,” Hiney said. “We can go to court to freeze an account, and that
would be a matter of public record,” he said. “We don't generally talk about investigations, although there will generally
be announcements put out about court action of one sort or another and will close with the word that the commission's
investigation continues.”

Friday, September 28, 2001

War Bonds
Over half a century ago, during World War II, War Bonds boosted both the US economy and the morale of the country.

In the wake of September 11, some are suggesting special government bonds be reintroduced to help rebuild New York
and finance our new war against terrorism. A look at the economic, political, and social impact of War Bonds.

Sen. Mitch McConnell (R-KY), United States Senate

Randall Dodd, Director of Derivatives Study Center, Economic Strategy Institute; also Professor of Economics,

American University

John Steele Gordon, author The Business of America (Walker & Co,); columnist with American Heritage
Magazine

Larry Samuel, author of Pledging Allegiance: American Identity and the Bond Drive of World War IT
(Smithsonian Institution Press

You can listen to the show by clicking on the following icon.
Listen in RealAudio!

02623

1/15/02
01300000001232


22°05°02 15:48 FAX 202 646 5199 Bo22-023

WSl.com

3 will contin ¢ its accelerated pre grat 20 divest or wind down non-core aszets

Derails of the units to be affected wil. be communicated shortly, the company said in its statement,

Enron sai¢ Chapter 11 filings were 9 ade for 14 affiliated entities, including Enron Corp.: Enren Nexth
America Corp., the company's whol: sale energy trading business: Enron Energy Services, the retail
energy markeung business, Enron T: ansportatior Services, the holding company for Enron's pipeline
operations; Enron Broadband Servic 's, a bandwidth trading operation. and Enron Metals & Commodity

Corp.

Enren-related entities not included i: the bankruptey filing are not aifected by the Sling, Enron said
Thess no ing entities include To Natural Gas Pipeline. Transwestern Pipeline, Florid2 Gas
fon, EOTT, Portland Ges:-al Elzewit and numerous othe: Enrun international entities.

‘from an operational standpoict. our energy businesses-including our pipelines ang
@ conducting norma! a! jjons anc will continue to do so.”

nm

The company said that although "wn erainty during the past ew weeks bas severely impacied che
market's conficence in Enron and its sading operations,” Enron intends to "help preserve capital.
stabilize our businesses. restore the c onfidence of our trading counterparties. and enhance our ability to
pay our erediters.”

In correction with Enron's Chapter 1 filings, the company is in “active discussions with leading
nancial mstjtutions” for debtor-in-; 2ssession financing and expects to complete these discussions

shortly

Lpon the completion and court appr ‘val of these arrangements, the new funding will be available
immedistely on an interim basis to s spplement Enron's existing capita) and help fulfill obligations
including payroll and payments to v: ndors, Enron said.

Enron will ask the bankruptcy court .o consider a variety of "first day motions" to support its employees,
vendors, trading counterparties, cust »mers and other constituents. These include motions seeking
permission to continue payments for employee payroll and health benefits; obtain interim financing
authority and maintain cash manage: aent programs; and retain legal, financial and other professionals.

The company said its legal adviser fiir the lawsuit and proposed merger with Dynegy and Enron's
Chapter 1) filing is Weil Gotshal & Manges LLP. Enron's principal financial adviser for its financial
restructuring is The Blackstone Grov p.

Enron, which hopes to have a "signivicant ownership interest” in the proposed new entity that owns its
North American wholesale energy trading operations, said "we understand that it may take time for
Sounterparti¢s to resume normal tracing levels with this entity, but we are confident that this business
can be put back on a solid footing.”

Dynegy terminated its plan to acquit? Enron on Wednesday after credit-rating agencies downgraded a
major portion of Enron's debt to "ju k” status. Enron's energy trading ground almost to a halt because
tading partners became worried abcut Enron's finances.

Bankers involved in Enron's restruct sring discussions estimate that liabilities tota) $40 billion, including

02266

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http: “ins

| 01300000000875


Derivatives Study Center Page 10 of 14

Bank analysts generally praised the move but said cutting off terrorist money is no easy task. Many are believed to use informal money
networks that skirt financial institutions altogether. Morcover. the amounts involved are sometimes small; some estimate the cost of mounting
the Sept. 1] bijackings and terrorist attacks was about $200,000,

Because the United States has cut its economic ties 10 several nations that could be most helpful, the government also lacks vital financial
information.

«The groupe that are narned are only the ones we suspects Brace Zagar, 2 parne in the Washington tw fim, Bovine Conse
Rowe. "The U.S. doesn't even have relations -- and hasn't for many, many years — with a number of countries that are the biggest and most
important countries in the Middle East, such as Irag, Iran and Libya.”

As a result, Zagaris said, “We have very few resources on the ground to know anything about what's going on in these countries. We necessarily
are having to rely on other countries of entities for normal intelligence that we would have had if we had an embassy and all kinds of other
private-sector contacts."

COOPERATION VITAL

The effectiveness of the crackdown will hinge in part on getting other countries and institutions throughout the Middle East to add names to the
list.

Monitoring and enforcement is another problem. Former Yugoslavian President Slobodan Milosevic hid his assets for years, Zagaris nated.

"It was only last week that the Greek central bank finally ordered a number of Greek banks where Milosevic's money was thought to exist to
cooperate," Zagaris said, "For all those years, the money was first in Cypress, and it took a while to convince Cypress to crack down. By the
cooperate.” 205i i ine ioncy had been moved to Greek branches of Cypriot banks. Only now are we catching up with the asses."
Randall Dodd, director of the nonprofit Derivatives Study Center, praised the administration's moves.

Dodd said terrorists could also be using offshore tax havens in the Caribbean such as Grand Cayman, Barbados and Antigua, where
banking fees are a major source of revenue.

COMPENSATION MAY BE NEEDED

The administration's threat to shut off economic relations with those nations could prove a powerful weapon, Dodd said, but might
require some kind of compensation in return. The Organization for Economic Cooperation and Development, a group of industrialized
nations, tried to harmonize banking laws in the Caribbean but met resistance from some islands that feared a substantial loss of

‘The United States itself has not joined several international money-laundering agreements, including the 1990 Council of Europe's Convention
‘on Laundering, Search, Seizure ‘and Confiscation of the Proceeds from Crime, ratified by 47 nations, including Russia.

Bush called on the Senate yesterday to ratify the United Nations Convention on Suppression of Terrorist Financing.

International cooperation could prove effective, Dodd said, noting that within minutes of the Sept, 11 attacks, U.S. law enforcement was
able to track credit-card receipts across the country, resulting in immediate arrests.

“That's the difference between having record-keeping and reporting in place, versus starting after the fact,” Dodd said, "It's a good
idea. I don't know why it took them this long to do it.”

Wednesday, September 26, 2001

(1) Miami Herald

If terrorists manipulated markets, money may be gone
MIMI WHITEFIELD

(2) Knight-Ridder Tribune Business News
Federal Securities Agency Hot on Trail of Possibly Attack-Related Profits

1/15/02 02605

01300000001214


bad a call and that Ken had told him that rating agencies wore

losking at then and there was real concern if the rating sgencies
Gowngreded then that that could effectively scupper the deal with
Oynergy,** he

On what he did following the cally

“"] gubsequently asked |Pieher} to speak with the Enroe
people. which he did. #o that we could satisfy ourselves thet the
Barca affaire were pot going to have @ negative impact on U.S.
capital mavkets,*' O'Net11 told CHBC.

on Whether he thinks ethice rules were broken:

““] thought Lt was busine usual. '* he told GWEC, “"I get
calls every day from the big players in the world. Enron was the
biggest trader of anergy in the world. Se I was not surprised at
all that I would get « call saying we've got a problem over here
and you should know about it.'*

On whether Ie was he asked by Ken Lay for a goverment batlout:
““Abeclutely not,'' he told OSC. ““Cne of things f enjoy
about Treasury ia t doen't have a lot of giveaway prograte so if he
wanted @ giveaway fron the government he sure wouldn't have called
fe, I don't know if one were inclined te make bailouts why there

would be 9 bailout for @ company that's gotten iteelf into
trouble. If you want to look at secent Chapter 11 filings or
Chapter seven filings you can lock at Bethlehem Steel and Sunbean
and they don't call the government for a bailout. I ran a Fortune
30 company, it sever would have cccurred to me to call the
government for « baileut if f got my corpany in trouble, '*

On What President George W. Bush hes asked him to de today:

“the president tasked me to che, bead # committee that
includes Doo Evans [Labor Secretary) Blaine Chac to look at
the Envon case and other bankruptcy cares to pay special atteantica
to the question of whether we need to svend the rules that govern
pension plans and 401k plans to provide a grester dea} of
aneurance to individuals whe have a stake in pension plans and
401k plans, "' be told Cuy. **That is driven by the president's
concern about the individual employees. The president said to =
we meed to eee if there is scmething we seed to do go that we
learn from this. If there ie @ weakness in our rules let's fix the
rule

‘And the second committee the president asked me to coovene
is one that’s a standing committees, the president's economic
Comittee, That includes myself and Alan Greenspan. the head of
{the Commodities Futures Trading Comnsnaion} and Maxvey Pitt of
the SEC. The charge the presidents given ua ig to look at the
Enron case and other cases and seo if we need to sdjust the
disclosure rules eo that shareholders and employees Nave all the
information they need to make intelligant decisions, Thie is not
about Enron, thie :# abaut waking sure the rules that govern the
way Our economic syster work# are worthy of the conditions that
we're dealing with these days to ausure that individusls are not
hurt because of a weakness in cur rulea.*'

--Sivea Kennedy in the Washington newsroom (703) 624-1814, or at
tkennedyeabloonberg.net /jo

Story illustyatien: For graph of Enron's stock price, type:
[mk us <Bquity> GMO D «Gds}

BME US «<Bquity» CH

SRERERAHEARAR
SER URRSTBAEGRE

Page 2 of 3

02705

01300000001314


December 11, 2001

Jonathan G. Katz

Secretary

U.S. Securities and Exchange Commission
450 Fifth Street, N.W-

Washington, DC 20549

Re: Petition for rulemaking
Dear Mr. Katz,

The American Federation of Labor and Congress of Industrial Organizations (the
“AFL-CIO”) hereby petitions ie Securities and Exchange Commission (the
“Commission”) to undertake a rulemaking proceeding to amend the rules governing
auditor independence to revise the definition of an indepeadent auditor and limit the
services accounting firms may provide to their audit clients. We also ask the
Commission to require additional proxy statement disclosure regarding the role of the
audit committee in approving both audit engagements and non-audit consulting
agreements with the audit firm. As shown by the scandal currently unfolding at Enron
Corporation, investor confidence in the U.S. capital markets requires that auditors be, and
be perceived as, truly independent from their clients.

The AFL-CIO is a federation of trade unions that represent 13 million working
men and women who participate in the capital markets as investors through defined
benefit and defined contribution plans as well as through mutual funds and individual
accounts, Our member unions sponsor benefit plans with over $400 billion in assets, and
our members are participants in public employee and collectively bargained single-
employer plans with over $5 trillion in assets. Our union-sponsored funds alone are the
beneficial owners of approximately 3.1 million shares of Enron stock, through both
actively-managed and passive (or indexed) portfolios.

02382

01300000000991


the continuing operations of our trading and other core energy businesses.”

In canceling the proposed merger, Dynegy said it would exercise its option to buy Enron's Northern
Natural Gas Pipeline, something it was entitled to because Dynegy’s partner, ChevronTexaco,
pumped $1.5 billion cash into Enron when the Nov. 9 merger agreement was struck.

Many in the industry believe Enron will be forced to file bankruptcy as a result of the Dynegy pull-out.

Enron would not comment on whether a bankruptcy filing is in the works, but the company says it is
reviewing its option to repay Dynegy the $1.5 billion cash, which would allow it to retain Northern
Natural Gas Pipeline.

Should Enron file for bankruptcy protection, it would be the largest corporate bankruptcy in U.S.
history. Enron's third quarter balance sheet lists $61.8 billion in total assets, which eclipses the $35.9
billion worth of assets Texaco Inc. listed when it filed for bankruptcy in 1987.

November 26, 2001

Reload

Enron's Web Retreat

Many of Enron Corp.'s online businesses may not make the cut as the company, exposed to billions
of dollars in debt from off-balance-sheet deals, prepares to be acquired.

Enron's pioneering moves in online trading earned the company the cover of InternetWeek's
Transformation Of The Enterprise issue in October 2000. At its apex last year, Enron had a market
value of around $80 billion, as it posted $100 billion in revenue.

But Enron's stock plunged over the last month amid revelations that company executives had created
limited partnerships which reportedly left Enron exposed to $3.3 billion in outstanding notes. With its
market value and image decimated, Enron this month accepted an $8 billion buyout offer from tival
Dynegy Inc., which has agreed to inject $1.5 billion to keep Enron's trading desk afloat.

Enron pioneered Web trading of energy commodities with EnronOnline, where the company buys
and sells futures on up to 1,500 products, doing more than $4 billion in daily transactions. Most of
that trading is still in energy products, though Enron had diversified into bandwidth, paper, steel,
freight storage and other commodities. With the Dynegy deal, however, Enron plans to focus on
"core" energy activities and dump other assets.

The first casualty is Enron Broadband Services, which owns about 15,000 miles of optical fiber and
25 network interconnection facilities in the United States. EBS envisioned buying and selling
bandwidth as a pure commodity like natural gas, but bandwidth trading volumes never approached
the level needed for a liquid market. Enron is looking to sell EBS, a spokesman says.

Enron has yet to make a decision on its other online trading businesses, including Net Works, the
incubator that developed most of the technology that underpins EnronOnline. Each business will be
reviewed "based on their capital requirements and near-term growth prospects,” the spokesman

; 02567

01300000001176


Testimony of Richard L. Trumka

House Financial Services Committee

December 12, 2001

Page 10

whose advice comes with a price tag beyond that of the average 401(k) participant, you

would have heard a different story.

As late as October, Salomon Smith Barney, whose parent Citigroup is one of the largest
creditors of Enron and a provider of investment banking services, rated Enron a “buy”
until October 26, then it went to “neutral” where it remained until the company filed
Chapter 11."* Lehman Brothers, who stood to eam a large advisory fee if the Dynegy
deal closed, rated Enron as a strong buy night through to the end; Lehman Brothers then
abruptly dropped coverage of Enron after it filed Chapter 11, stating that the “filing had
complicated [the] outlook for [Enron] stock."19 Out of thirteen analysts that covered
Enron in October, according to Forbes Magazine, eleven were bullish.20 But among
eight independent investment newsletters tracked by Forbes, by August, when Enron
CEO Skilling mysteriously resigned, four were already bearish and two more went

bearish by October.21

Finally, the last link that failed was the active money managers. And here again
investors faced conflicts of interest, including the same conflicts that compromised
analysts. But the most glaring apparent conflict is the case of Alliance Capital, a major
manager of worker pension fund assets and its link to Enron through Enron board
member Frank Savage, a former senior executive and board member of Alliance. In the
second quarter of 2001, while Mr. Savage was an executive of Alliance, Alliance Capital

increased its Enron holdings by 71 percent to become the largest Enron shareholder,

02375

01300000000984


“while they may act like it, they are not a South American country, and
Ken Lay is not the President of Argentina," declared J.P. Morgan Chase
spokesman Alex Firtilly. "They are a malfeasant U.S. corporation that
has potentially caused us to lose $500 million. And Ken Lay is from
jsouri."

"eComo?," Lay replied. "No hablo Ingles."

Recently ranked as high as No. 7 on the Portune 500 list of the largest
U.S. companies, Enron literally ran itself into the ground by fudging
its books, making secretive deals that enriched company insiders, and
relying too heavily on debt. Though it was formed in 1986 with the
merger of Houston Natural Gas and InterNorth, Enron became Argentina
only recently, said Lay, *on the advice of our attorneys."

That counsel came none tco soon. As a South American state, all pending
U.S. and European lawsuits are rendered harmless. And the company
escapes what had been a daily fusillade of scorn from its former home.

Indeed, much as the French were baffled by America's obsession with
Pregident Clinton's sexual affairs, many South Americans say they don't
understand why Enron and its leaders have been vilified. As former
Colombian President Ernesto Samper explained: “In the United States,
you look at corruption as an abomination We look at it as an art.*

EXTRADITION DENIED

The U.S. State Department has refused to recognize Enron as Argentina,
and a spok an said the Bush administration has officially requested
the extradition of Lay and the officers who allegedly fled with him.
Argentina, however, denied the request, explaining that an entire
country cannot be extradited. And besides, they added, Lay had pledged
to help pay off the nation's $132 billion debt.

Asked where the bankrupt Enron got such a eum, Lay explained that after
proclaiming its nationhood status, the company had received an
emergency IMF loan. An IMF spokesman later confirmed the payment.

"From what we knew of their fiduciary practices, Enron appeared to have
all the hallmarks of a typical IMF fundee," said IMF communications
director Nestor Svingen. "At first, we did balk when they asked for
$232 billion, but when they explained that some of the money would go
to repay overdue IMF loans, we thought, ‘Oh, that's all right then.'"

“Not that we actually expect to see any money from anyone," Svingen
added. "It's just this little game we all play, Great fun if you like
numbers. Do you enjoy quadratic equations? I could do them all day."

Asked what Enron/Argentina had pledged to do with the extra $100
billion it requested, Svingen said the application had specified
funding for "civic infrastructure improvements."

“That ugually means the president is going to build « palace," Svingen
explained.

Tracking: Recipient Delivery Reac
Cetin, Jil Detvered; 12/18/01 9:55 AM Read: 12/6001 6:56 AM

01300000001614


million of fees for consulting. Enron, a high-flying energy company which last year ranked No. 7 on
the Fortune 500 list, announced big losses last October in off-balance-sheet partnerships run by
former Chief Financial Officer Andrew Fastow. In early November, Enron acknowledged it had
overstated earnings by $569 million over a four-and-a-half year period and said investors could not
rely on its past financial statements.

The SEC launched a formal investigation into Enron's accounting on Oct. 31.

Write to Judith Burns at judith.burms@dowjones.com'

Tracking: Recipient Delivery Read
Abdelrazek, Rawan Delivered: 1/1002 6:54 PM Read: 111/02 226 PM

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j2-p5:91 15:45 FAY 202 646 5199 @oia-023

WSI.com Page | of |
shares |
+8 7 soswensts| ESET NOE. -
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seamen —_|

November 30, 2001
Dow_Jones Newswires
White House: No Objection To Congress Probe Of Enron

Dow Jones Newswires

WASHINGTON — The Bush administration Friday said it had no objection to calls in Congress to
Isunch hearings into the collapse ¢ f Enron and said such a move is well within Congress's jurisdiction in

providing oversight

“The president understands that at all times Congress should exercise its proper oversight role and that
includes anything. in a case like this...an investigation into the collapse of a company.” White House
spokesman Ari Fleischer said. |

Fleischer said that other parts of te federal government have already launched their own investigations
_» and the Treasury Department is m onitoring these.

-By Alex Keto. Dow Jones News: ires, 202-862-9256, Alex.Keto@dowjones.com

URL for this Article:
hitoWinteractive ws) com/archive/retr-wve.cgi7id= DI-CO-2007 1130-004645,)m

Copyright © 1001 Dow Jones & Company, Inc. Al! Rights Reserved,
Printing, distribution, and use of this ¢\aterial is governed by your Subscription Agreement and copyright laws

For information sbout subscribing, go to http://wsj.com

02248

hep: ‘interactive.ws) com ‘archive. retrieve.cgi7id=DI-CO-20011139-004645 djml&template-... 11/30/01

7 I
01300000000857


Testimony of Richard L. Trumka
House Financial Services Committee
December 12, 2001

Page 16

"© In 2000 Arthur Andersen received $27 million in other consulting fees and only $25
million in auditing fees. Enron Corp.’s Proxy Statement for 200] Annual Meeting of
Shareholders filed with the U.S. Securities and Exchange Commission on March 27,
2001.

"* Enron Corp.'s Form 10-K for the year ending December 31, 2000 filed with the U.S.
Securities and Exchange Commission on April 2, 2001.

'* Salomon Smith Bamey analyst reports dated July 13, 2001, October 5, 2001 and
October 26, 2001.

'’ Lehman Brothers analyst reports dated October 23, October 24, November 12,
November 28 and December 7, 2001.

® “While Enron Bumed, Wall Street Fiddled”, by Dan Ackman. Forbes.com, November
29, 2001.

2! “Enron: An Unreported Triumph For Investment Letters." Forbes.com, December 7,
2001.

* AXA Financial, Inc., Form 13-F, September 30, 2001, file with the Securities and
Exchange Commission, November 3, 2001.

* Letter dated November 2, 2001 to William Powers, Jr., Chairman of Enron Special
Committee, and Kenneth Lay, Enron Chairman of the Board and Chief Executive
Officer, from Richard L. Trumka, Secretary-Treasurer of the AFL-CIO, and Gabriel P,
Caprio, President and CEO of Amalgamated Bank.

* Letter dated November 9, 2001 to William Powers, Jr., Chairman of Enron Special
Committee, and Kenneth Lay, Enron Chairman of the Board and Chief Executive
Officer, from Richard L. Trumka, Secretary-Treasurer of the AFL-CIO, and Gabriel P.
Caprio, President and CEO of Amalgamated Bank

** Amlagamated Bank et, al. v. Kennath L, Lay et. al. Cass Action Complaint Filed in the
United States District Court Southern District Of Texas.

* Testimony of Damon A. Silvers, Associate General Counsel, AFL-CIO, before the
House Subcommittee On Capital Markets, Insurance, And Government Sponsored

Enterprise on “Analyzing the Analysts—Are Investors Getting Unbiased Research From
Wall Street”, June 14, 2001.

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Page 3 of 3

MI EXE
NI CNG
MI LAW
MI RULES
MI VOICES

#<4052398

-0- (BM) Jan/ai/2002 0:38 cw

02706

1/15/02

01300000001315


Jonathan G. Katz
December 12, 2001
Page 5

an independent auditor may not design and/or structure a transaction the audit firm must
pass on in connection with the audit.

Auditors Should be Rotated

Currently, audit firms must rotate the audit engagement partner every seven years,
in order to remove the risk of over-familiarity with the client. However, the engagement
partner may remain in a relationship management position with respect to the client,
which mitigates the effect of partner rotation.

We believe a more sensible approach is to require mandatory rotation of audit
firms every seven years. Such rotation would provide a number of important benefits.
First, a new audit firm would bring to bear a skepticism and fresh perspective that a long-
term auditor may lack. Second, auditors tend to rely excessively on prior years’ working
papers, including prior tests of the client's internal control structure, particularly if fees
are aconcem.* Relatedly, longtime auditors may come to believe they understand the
totality of the client's issues, and may look for those issues in the next audit rather than
staying open to other possibilities. Finally, an auditor may place less emphasis on
retaining a client relationship even at the cost of a compromised audit if it knows the
engagement will end after several years,

In our opinion, the benefits to shareholders, lenders and the investing public from
requiring rotation of auditors outweighs the additional cost that may be entailed in
connection with a new auditor becoming familiar with the client, We urge the
Commission to consider revising Rule 2-01 of Regulation S-X to provide for mandatory
auditor rotation,

Additional Disclosure Should be Required

We also think that additional disclosure regarding the involvement of the audit
committee in entering into the audit engagement and pre-approving non-audit consulting
arrangements would enhance the effectiveness of audit committees and provide valuable
information to investors, The Commission originally proposed in 2000 to require
disclosure of whether the audit committee, before any disclosed non-audit service was
rendered, approved and considered the effect on independence of such service. Only the
latter disclosure was included in the final rule.

Requiring disclosure about the audit committee's role with respect to both the
audit engagement and non-audit consulting contracts would advance important goals.

Disclosing whether the audit committee, rather than the registrant, entered into the audit
engagement would give investors information about whom the auditor views as its audit

* See Richard G. Brody & Stephen A. Moscove, “Mandatory Audit Rotation,” The National Puble
Accountant 32 (May 1998).

02386

01300000000995


Enron Chairman Gave Warning to Bush Officials on Company's Collapse Page 2 of 3

The spokesman had said Wednesday he did not know of anyone in the White House who
discussed Enron's financial situation.

Fleischer also brushed aside talk of any conflict in the Justice Department investigation and
said there was no reason to turn the probe over to a special counsel.

Lay gave $25,000 to a leadership committee headed by then-senator and now Attomncy
General John Ashcroft, according to the Center for Public Integrity.

An attomey for Enron welcomed Ashcroft's inquiry, the latest in a series of governmental
probes into the company's demise, saying the investigation would ‘bring light to the facts."

“We want to get to the bottom of this too,” said Robert Bennett, a Washington attorney
representing the Houston-based company. “A lot of decent and honorable people work at
Enron and we should wait until the facts are out."

Bush ordered a separate review Thursday of pension and corporate disclosure rules that could
jeopardize workers’ savings. ‘There has been a wave of bankruptcies that have caused many

workers to lose their pensions and that is deeply troubling to me," Bush said,

The Justice Department is forming a national task force to look into the company's dealings.
The group will be headed by lawyers at the department's criminal division and include
prosecutors in Houston, San Francisco, New York and several other cities, said a Justice
Department official, speaking on condition of anonymity.

‘The official declined to say when the investigation began. Enron faces civil investigations by
the Labor Department and the Securities and Exchange Commission and subpoenas from
congressional committecs.

All are looking into the energy trading company's collapse, the largest bankruptcy filing in
US. history.

‘The failure hit employees and investors hard. Workers were prohibited from selling company
stock from their Enron-heavy 401(k) retirement accounts as the company's stock plummeted.
Many lost their life's savings.

Enron executives cashed out more than $1 billion in stock when it was near its peak.

Former Enron chief executive Jeffrey Skilling, who left the helm nearly two months before the
company's swift descent, welcomes the investigation, said spokeswoman Judy Leon. Skilling
has said he had no idea, despite Enron's falling stock values, that the company was on the
brink of failure.

Formed in 1985, Enron had 20,000 employees and was once the world's top buyer and seller
of natural gas and the largest electricity marketer in the United States. It also marketed coal,
pulp, paper, plastics, metals and fiber-optic bandwidth.

Onc likely focus of the Justice Department investigation is possible fraud based on Enron's

heavy reliance on off-balance-sheet partnerships which took on Enron debt. The partnerships

masked Enron's financial problems and left its credit ratings healthy so it could obtain the cash

and credit crucial to running its trading business. re) 3 fe) 1 re)

‘The Houston-based company went bankrupt after its credit collapsed and its main rival,
file://(C:\WINDOWS\Temporary%20Internet%20Files\OLK303 1 \Enron%20Chairman%20Gave%20W arming... 1/16/02

01300000001620


Page | of 2
Carleton, Norman

From: Carleton, Norman

Sent: Tuesday, August 28, 2001 9:58
To: Belinda Blaine (E-mail)
Subject: FW: Enron article

~~~ Original Message-----
From: Carleton, Norman

Sent: Wednesday, August 22, 2001 10:12 AM
To: Nickoloff, Peter; Schultheiss, Heidilynne
Subject: FW: Enron article

-----Original Message---—--

From: Norman Carleton [mailto:Norman.Carleton@woridnet.att.net]
Sent: Thursday, August 16, 2001 11:39 PM

To: Norman Carleton; norman.carleton@do.treas.gov

Subject: Enron article

&
AUG 15, 2001
Enron's Chief Executive Quits After Only 6 Months in Job

02987

i fo ALLAS, Aug. 14 — Jeffrey Skilling, the chief executive of the Enron Corporation (news/quote), stunned Wall
‘Street today by announcing that he would quit after just six months in the job, calling the move a “purely
personal decision."

By RICHARD A. OPPEL Jr. with ALEX BERENSON

But the abruptness of the departure left many analysts questioning whether a series of setbacks the company has
suffered played a part in the decision.

Kenneth Lay, Enron's 59-year-old chairman, will step back into the position he left early this year afier 15 years as chief
executive,

Mr. Lay, who originally recruited Mr. Skilling to Enron, said tonight that he had agreed to stay on through the end of
2005 to "make sure we've got plenty of time to work out an orderly succession.”

Mr. Skilling, 47, had been at the heart of the transformation of Enron from an old- line natural gas pipeline company to
the biggest and most aggressive of the new breed of unregulated energy traders that buy and sell billions of dollars of
electricity and other commodities daily,

That strategy helped Enron's stock price soar during the last decade. But this year the company’s shares have fallen
sharply, as Enron has suffered from problems with its new broadband telecommunications trading unit, its investment in
a large power plant in India, and criticism from officials in California, who blame Enron and other energy companies fo
the collapse of the state's electricity market.

A former energy consultant at McKinsey & Company who joined Enron in 1990, Mr. Skilling built its energy-trading
operations into the company’s most profitable unit, accounting for nearly $1.7 billion — or 85 percent — of operating
income last year. He became president and chief operating officer in 1997, and in February of this year became chief

1/16/02

01300000001596


Carleton, Norman

From: Carteton, Norman

Sent: Thursday, January 10, 2002 5:54 PM

To: Abdelrazek, Rawan

Subject: FW: DJ: Arthur Andersen Says It Destroyed Documents Related to Enron Account

~—-Original Message--—~

From: Carleton, Norman

‘Sent: ‘Thursday, Jarwary 10, 2002 4:50 PM

To: Cetina, Jil; Bair, Shela; Berardi, Steve; BAsberger, Timothy; Gichner, Matthew; Gabilondo, Jose; Grass, Jared; Hammer, Viva; Lori
Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael; Pletrangell, Fred; Roseboro, Brian; Schulthess, Heidlynne; Whaley, Jean;
Wiedman, Mark

‘Subject: Dd: Arthur Andersen Says It Oestroyed Documents Related to Enron Account

January 10, 2002
Major Business News

Arthur Andersen Says It Destroyed
Documents Related to Enron Account

By JupITH BURNS
Dow Jones Newswres

WASHINGTON -- Arthur Andersen LLP, already under fire for its audits of Enron Corp., said it has
destroyed documents sought by federal law cement officials investigating the Enron debacie.
In a statement issued Thursday, Andersen said it notified the U.S. Justice Department and the
Securities and Exchange Commission that individuals at the firm “disposed of a significant but
undetermined amount” of documents relating to its work for Enron. The Houston energy company

declared bankruptcy in December after announcing it had overstated four-and-a-half years worth of
earings.

The document destruction includes paper documents and e-mail correspondence.

Andersen said it has instructed employees to retain all existing documents “until further notice.”

In addition, the Chicago-based Big Five accounting firm said it has asked former Sen. John Danforth
(R., Mo.) to conduct "an immediate and comprehensive review" of the firm's policies on document
handling and recommend improvements.

Andersen said destruction of Enron documents occurred "in recent months" by individual employees
involved in auditing the energy company.

Michael Donovan, a Philadelphia attorney with Donovan Searles, LLC, which has filed a class-action
lawsuit against Andersen on behalf of Enron shareholders, said document destruction by an audit
firm is shocking.

“Auditors save everything," including all work papers for audit clients, Mr. Donovan commented.

Enron was one of Andersen's largest clients, generating $25 million a year in audit fees and $27
1

02974

01300000001583


TESTIMONY OF RICHARD L. TRUMKA
SECRETARY-TREASURER, AFL-CIO
BEFORE THE SUBCOMMITTEES ON CAPITAL
MARKETS, INSURANCE, AND GOVERNMENT
SPONSORED ENTERPRISES AND THE
SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS

DECEMBER 11, 2001

02402

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Remarks of Joseph F. Berardino
Managing Partner — Chief Executive Officer, Andersen

U.S. House of Representatives
Committee on Financial Services
December 12, 2001

Chairman Oxley, Congressman LaFalce, Chairman Baker, Congressman Kanjorski, Chairwoman
Kelly, Congressman Gutierrez, Members of the Committee,

am here today because faith in our firm and in the integrity of the capital market system has
been shaken. There is some explaining to do. .

What happened at Enron is a tragedy on many levels. We are acutely aware of the impact this
has had on investors. We also recognize the pain this business failure has caused for Enron's
employees and others.

Many questions about Enron's failure need to be answered, and some involve accounting and
auditing matters. I will do my best today to address those.

1 ask that you keep in mind that the relevant auditing and accounting issues are extraordinarily
complex and part of a much bigger picture. None of us here yet knows all the facts. Today's
hearing is an important step in enlightening all of us. I am certain that together we will get to the
facts,

If there is one thing you take away from my testimony, I hope it is this: Andersen will not hide
from its responsibilities. That's why I’m here today. The public's confidence is of paramount
importance. If my firm has made errors in judgment, we will acknowledge them. We will make
the changes needed to restore confidence.

Today, I want to address two issues that go to the heart of concerns about our role as Enron's
auditor

First, did we do our job? I want to explain what we knew and when we knew it on several key
issues, keeping in mind that our own review — like yours — is still under way.

Second, did we act with integrity? I want to discuss the $52 million in fees we received and
respond to concerns that have been raised.

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Page 2 of 2

On a conference call, Mr. Skilling said he could not "stress enough that this has nothing to do with Enron.” He added
that "the reasons for leaving the business are personal, but I'd just as soon keep that private.”

Mr. Skilling, who is divorced, has joint custody of three teenage children — a daughter, 17, and two sons, 14 and 11 —
with his ex-wife. Mr. Skilling, who will leave the board but will serve as a consultant to the company, will not receive
any severance package because his departure is voluntary, Mr. Lay said.

Since May 2000, Mr. Skilling has sold at least 450,000 Enron shares worth at least $33 million, according to Securities
and Exchange Commission filings. He still owns about 1,1 million shares, the filings show.

"Absolutely no accounting issue," Mr. Lay told analysts, "no trading issue, no reserve issue, no previously unknown
problem issucs” are behind the departure. There will be "no change in the performance or outlook of the company going
forward,” he added.

He also said the company was on track to meet analysts’ earnings expectations, which are about $1.80 a share this year
and $2.15 next year.

On the call, Mr. Skilling said that "in general there have been a lot of issues” that have buffeted the company this year,
but he said that he believed Enron had already surmounted most of them. "Now is the time" to step down, he said,
"because | think we've got a lot of these things behind us.”

Nonetheless, the move jolted analysts, who, despite the stock's recent slide and the company’s other problems, saw Mr.
Skilling as the unquestioned leader to follow Mr. Lay.

In after-hours trading, shares of Enron fell about 8 percent, to $39.55. That fall follows a plunge of almost 50 percent
since January in the stock, which had closed in regular trading at $42.93, up 78 cents. The news of the executive
changes came after the market closed.

"I'm surprised and I'm stunned,” said Philip K. Verleger, an cnergy economist with the Brattle Group, a consulting firm
in Cambridge, Mass. "Skilling was the guy who executed the growth in the trading business."

Investors have become increasingly concerned that a surge in new power plant construction wil] lead to a glut of
electricity within a few years and lower the value of Enron's role as a middleman between plant owners and electricity

users. In addition, the company’s efforts to enter the water business have fared poorly, and its broadband trading
operation has become a cash drain.

Mr. Skilling's promotion early this year came after several crucial Enron executives resigned. These included Rebecca
Mark, who at one time was considered a rival for the top job.

Ms. Mark became chief executive of the Azurix Corporation (news/quote) in 1999 after Enron spun off the company, its
global water business. But its financial performance was disappointing, and Ms. Mark left the company last year. Enron
later agreed to buy back Azurix stock for less than half what public shareholders had paid.

03046

1/16/02

01300000001656


witnessed in this stock and its credit ratings, and accounting rules don't require a company to
disclose remote contingencies.

That said, we continue to believe investors would be better served if our accounting rules were
changed to reflect the risks and rewards of transactions such as SPEs, not just who controls them,
Putting more of the assets and liabilities that are at risk on the balance sheet would do more than
additional disclosure ever could. We have advocated changes in these accounting rules since
1982.

I offer an additional observation about Enron's disclosures. Press reports indicate that some who

analyzed the company's public disclosures came to the conclusion that perceptions about the

company — and thus the market's valuation of Enron — were not supported by what was in the .
company’s public filings.

Fees paid to Andersen

Some are questioning whether the size of our fees, $52 million, and the fact that we were paid
$27 million for services other than the Enron audit, may have compromised our independence at
Enron. | understand that the size of fees might raise questions, and I think our profession must be
sensitive to that perception.

With that in mind, I think it would be helpful for the Committee to have a deeper understanding
of the nature of the work we did for Enron, and how the fees for that work were reported.

As a starting point, it is important to recognize that Enron was a big, complex company. Enron
had $100 billion in sales last year. It operated 25,000 miles of interstate pipeline and an 18,000-
mile global fiber optic network. Enron did business in many countries. Its EnronOnline trading
system was the world’s largest web-based eCommerce system and handled more than half a
million transactions last year — for 1,200 products. Enron was the seventh largest company on the
Fortune 500.

This was not a simple company, It was not a simple company to audit, In addition to its
operations and trading, Enron, as we know, engaged in sophisticated financial transactions, Not a
few, but hundreds, Assets worldwide totaled $65 billion, both before and after Enron adjusted for
the restatements

Given this complexity, it should not surprise anyone that the fees paid to our firm for Enron’s
audit were substantial. The $25 million we were paid for Enron's audit last year is comparable to
the amounts that General Electric and Citigroup, two sophisticated financial services providers,

02355

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Page 3 of 3

The underperformance of the broadband business, which coincided with the broad collapse of the
telecommunications market, is among several problems that have dogged Enron lately.

They include a costly payment fight with the Indian government over the $3 billion Dabhol power plant, the
vilification of Enron by California politicians who blame Texas companies for their power crisis, and the
breakup of a marquee video on-demand broadband Internet deal with Blockbuster Inc. (news/quote) (BBILN).

Answering an employee question, Lay said there was no truth to a rumor that Royal Dutch/Sheil RD.AS
(SHEL.L) was planning a hostile takeover of Enron because of the stock's recent weakness.

02986

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1/16/02


12/05/0) 15.46 FAX 202 646 S199 018-023
-WSI.com Page } of 3

ory.
ES
Se ‘SOLUTION
owe earls.com
December 2, 2001

Dow Jones Newswires
Enrop Files For Chapter 11 Bankruptcy

HOUSTON, Dec. 2 /PRNewswire! -- Enron Corp, (NYSE: ENE) announced today that it along with
certain of its subsidiaries have filed - oluntary petitions for Chapter 11 reorganization wrth the U.S.
Bankruptcy Court for the Southem District of New York. As part of the reorganization process. Enron
also filed suit against Dynegy Inc. (t YSE: DYN) in the same court, alleging breach of contract in
connection with Denegy's wrongful ermination of its proposed merges with Enron and seeking damapes
of at least $19 billion. Enron's lawsu (also seeks the court's declaralion that Dynegy is not entitled 10
exercise its option to acquire an Enz n subsidicry that indirectly owas Northern Natural Gas Pipeline.
Proceeds from the lawsuit would ber efit Enron's creditors.

02253

In connection with the company's Cl apter 11 filings, Enron is in active discussions with leading
financial institutions for debtor-in-pr ssession (DIP) financing and expects to complete these discussions
shortly. Upon the completion and co at approval of these arrangements, the new funding will be
available immediately on an interim dasis to supplement Enron's existing capital and help the compuny
full! obligations associated with operating its business, including its emplovee payroll and payments to
vendors for goods and services prov ded on or after today’s filing

Filings for Chapter |] reorganization have been made for a total of 14 affiliated enuues. including
Enron Corp; Enron North Amenca “orp., the company’s wholesale energy trading business; Enron
Energy Services, the company's rets [ energy marketing operations: Enron Transportation Services, th=
holding company for Enron's pipelir ¢ operations: Enron Broadband Services, the company's bandwidth
trading operation, and Enron Metals & Commodity Corp.

Enron-related entities not included i'1 the Chapter 11 iiling are not affected by the filing. These non-
Bling entities include Northern Natuval Gas Pipeline, Transwestern Pipeline, Florida Gas Transmission.
EOTT, Portland General Electric an'! numerous other Enron international entities.

To conserve capital, Enron will imp ement a comprehensive cost-saving program that will include
substantial workforce reductions. Tl ese workforce reductions primarily will affect the company's

ee DI-CO-2001 1202-000436.djml&cemplates}.. 123°C!

01300000000862


Derivatives Study Center Page 4 of 14

greeted Phil Gramm, R-Texas, far left, and Paul S. Sarbanes, D-Md., left
center, before a Sept. 20 hearing of the Senate Banking Committee.

No longer bickering over whether more spending will threaten Social
Security, all of them say the nation can afford a substantial defense
build-up, the rebuilding in New York City, a bailout for the airline
industry and perhaps more tax cuts without jeopardizing the nation's
long-term fiscal health. (Airlines, p. 2206)

Members of the House Ways and Means and Senate Finance committees will be
continuing a series of bipartisan discussions in the coming weeks about what
the congressional role should be in trying to stimulate the economy -- all

the while seeking to avoid public battles over tax policy at a time when
lawmakers are determined to show unity.

But through the week of Sept. 17 -- both in private and in public -- many
economists cautioned Congress to move slowly on any additional stimulus
package.

“Nobody has the capacity to fathom fully how the tragedy of Sept. 11 will
play out,” the nation's most influential economist, Federal Reserve Chairman
Alan Greenspan, told the Senate Banking Committee on Sept. 20. "But in the
weeks ahead, as the shock wears off, we should be able to better gauge how
the ongoing dynamics of these events are shaping the immediate economic
outlook,

"It's far more important to be right than quick,” Greenspan added,
Republican and Democratic leaders say they are planning to meet again the
week of Sept. 24 with Greenspan, as well as with top White House economic
adviser Lawrence Lindsey and former Clinton administration Treasury
Secretary Robert E, Rubin, before they decide on a package.

“We need to get a better assessment of the overall impact,” House Majority
Leader Dick Armey, R-Texas, said after the meeting Sept. 19. "The nation's
had a terrible jolt and, quite frankly, the jolt is more widespread, both in
terms of the physical performance of different markets and in terms of the
national psyche, than what we've been able to measure."

The administration has signaled an openness to additional tax cuts this

year, but has not endorsed any of the ideas being floated. In discussing
other stimulus options, Treasury Sccretary Paul H. O'Ncill has suggested the
administration is not now planning to endorse federal aid for industries
other than the airlines, such as insurance firms. And federal regulators say
they have adequate powers over the financial markets. (Markets, p. 2202;
insurance, p. 2203)

"There is a sense we ought to do something, and I think there is a sense

that we ought to wait a week or so to see what that is," said Rob Portman of
Ohio, a Ways and Means member and a conduit between the White House and
House GOP leaders. "That's about as much consensus as I've seen."

‘Enough to Get America Going’

One week after the deadliest foreign attack on American soil, the
government's budget picture has brightened considerably, judging by the re) 2 5 9 9

1/15/02

01300000001208


Enron shares are selling for almost 32 percent less than the value of Dynegy's offer, showing investors have doubts the
deal will be completed. Dynegy shares fell $1.90 to $41.70 today.

“It's become more clear that the chances of this deal going through aren't 90 percent, but much closer to fifty-fitty,” said
Edward Paik, who helps manage the Liberty Utilities Fund, with 1.6 million Enron shares. “There's just so much
information that is unknowable" about Enron's financial position, he said

Most of the $9.15 billion in debt is due before the end of the third quarter, when the Dynegy buyout is scheduled to close.
Enron said yesterday in a third-quarter filing with the SEC

Asset Sales Planned

Last week, Enron Chief Operating Officer Greg Whalley said the company will sell assets of “non-core businesses” to
raise money. It has $8 billion invested in the businesses, including broadband telecommunications and the Dabhol power
plant in india. Enron expects to get "billions" from the sales, Whalley said, without being more specific

Enron reported yesterday that its U.S. operations had $1.2 billion in cash left It has added at least $5 billion since Sept 30
from credit lines, loans and a $1.5 billion investment from ChevronTexaco, part owner of Dynegy

Enron used $1.9 billion of the money it raised to retire commercial paper, which is short-term debt. It gave no details on
how it spent the remaining $3.1 billion.

Enron Chief Financial Officer Jeffrey McMahon said last week that the company also was looking to get another $500
mition to $1 billion from private investors.

Asset sales valued at about $800 million are expected to close by the end of this year, according to the SEC filing. Enron
spokeswoman Karen Denne wouldn't comment on whether it could sell assets fast enough to keep current an its debts.

Dynegy will have to help Enron sell assets, said Mitchell Stapley, who manages $3.5 billion in fixed-income assets
including Enron bonds for Fifth Third Investment Advisors Inc.

Dynegy and ChevronTexaco Corp., which owns 26 percent of Dynegy, also will have to help Enron negotiate with its
lenders, said Kathleen Vuchetich, who helps manage the $1.4 billion Strong American Utilities Fund, which is 5 percent
Dynegy shares.

Debt Questioned

“| never dreamt (the $9.15 billion) would be that large, coming due all at once," Vuchetich said, ‘It calls into question their
decision to schedule it that way in the first place.”

ChevronTexaco, the second-largest U.S. oil company, is providing $2.5 billion in cash as part of the Enron buyout. It
provided the first $1.5 billion a week ago.

Shares of ChevronTexaco, based in San Francisco, rose $3.62 to $86.53.

Enron yesterday reduced third-quarter results by 3 cents a share, bringing the period's loss to 87 cents, or $664 million. On
Nov. 8, Enron lowered earings beck to 1997 by $686 million to refiect losses by affiliated partnerships that were wrongly
kept off the books. That included a third-quarter reduction of $17 million

A drop in Enron's senior unsecured debt rating to “BBB-" by Standard & Poor's on Nov. 12 may force Enron to pay off a
$690 million note by Nov. 27 if it doesn't find collateral to guarantee the debt taken on by an affiliated partnership that owns:
Brazilian natural-gas assets, the filing said

Without repayment or collateral, investors can begin to liquidate the partnership's assets, Enron said, The company said
it's working with lenders to come up with an acceptable agreement on the debt

Making good on debt owed by its Whitewing affiliated partnership may cut Enron's fourth-quarter earings, Enron said
Enron is obligated to back Whitewing by issuing junior convertible preferred stock. Because Enron's stock has plunged, it
may have to write down its assets by $700 million, the filing said,

‘ 03033

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Jonathan G. Katz
December 12, 2001
Page 2

Background
auditors occupy @ central position in promoting confidence in the
integrity of the financial reporting system and U.S. capital markets. Because the
Commission requires that financial information filed with it be certified or audited by
independent auditors, auditors are, as the Commission recently stated, the “gatekeepers”
to the public securities markets.' Auditors work not only for their clients, but also for the
investing public.

The role of the independent auditor is once again in the spotlight, as it was
following relevations of accounting fraud at Sunbeam, Cendant and Waste Management.
Now, the stunningly rapid failure of Enron Corporation, where there is evidence that
Enron’s auditor, Arthur Andersen, knew about and identified accounting errors but did
not insist on their timely correction, focuses attention on the factors that might lead a
company's auditor to sign off on misleading financial statements. Foremost among these
is a dependence on a company and its management that can serve to undermine an
auditor's objectivity.

Independence can be compromised in various ways. The provision of certain
kinds of non-audit consulting services to audit clients may create economic incentives
that can lead a firm to devalue the audit services and focus on retaining the client, even at
the cost of making inappropriate audit judgments. In 2000, Arthur Andersen received
more non-audit fees than audit fees from Enron. A “mutuality of interest” not conducive
to independence may develop from the provision of certain kinds of non-audit services or
from the employment by an audit client of former employees of the auditor. Certain
services result in the auditor acting as management or an employee of the client, Finally,
auditors may not be able to audit objectively work performed by the audit firm itself
under a consulting agreement.

Over the past several decades, the proportion of audit firms revenues derived from
non-audit services, such as internal audit, information technology, financial advisory and
appraisal and valuation services, has grown steadily. At the five largest public
accounting firms, revenues derived from non-audit services grew from 13% of total
revenues in 1981 to half of total revenues in 2000.7

The 2000 Commission Rulemaking

Citing these threats to independence and their potential effect on capital
formation, as well as the increased pressure on companies to make or surpass analyst
carnings estimates, the Commission undertook last year to revise its rules governing
auditor independence. With respect to the provision of non-audit services to audit clients,

' Revision of the Commission's Auditor Independence Requirements, Exchange Act Release No. 43602
(Nov. 21, 2000) (adopting release).

Reviszon of the Commission's Auditor Independence Requirements, Exchange Act Release No, 42994
(June 30, 2000) (proposing release),

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. . i
(1 WSicom | Page 1 of 2

November 29, 2001
Major Business News

Enron CEO's Political Connections
Run Silent During Conipany's Crisis

By Bos Davis
Stail Reporter of THE Wai. STREET JOUR IAL.

For years, Enron Corp. Chairman |cenneth Lay has been George W. Bush's best frien in the board
rooms of America's top corporatictis.

Since 1993, Mr. Lay and Enron ha’e donated nearly $2 million to Mr. Bush's political career, making

them Mr. Bush's biggest backers. When Mr. Bush was Texas governor, Mr. Lay, a Houston resident,

helped him win passage of a state education-reform plan that brought Mr. Bush national acclaim. During.
that fight, Mr. Lay got to know aid -s who became power players in the Bush White House,

Mr, Lay was confiden! enough of lis friendship with Mr. Bush that he even needled him for needing
asthroscopic surgery to repair a jogzing injury. "I want you to know that st least one jogger [me] got past
50 without that surgery,” Mr, Lay scribbled in a note to then governor in 1997

Still, as Enron faces its greatest cri:is, Mr. Lay's influence and personal relationships with the
administration have amounted to li tle. There appears to be no effort by the White House or Congress to
bai! Enron out of its difficulties, wiich are widely seen as self-inflicted. The White House had no .
comment on Mr. Lay's predicamen:, a spokeswoman said, Indeed, short of an actual bailout to help
Enron meet its obligations -- such «5 an aid package approved by Congress or organized by government
officials from private sources, simitar to the rescue of the Long Term Capita] Management hedge fund --
there is little Washington can do at this stage to help the company. Nor is there likely to be a bailout,
since Enron has burned many brides on Capitol Hill with its history of strong-arm lobbying tactics,
some congressional aides say.
1 See more poverege That mzy reassure a cynical public, says Robert Mosbacher, Commerce
Wi See ree er 9 | cecsctary in the first Bush administration and a longtime friend of the current
Enron presidert as well as Mr. Lay, “I don't see anybody being let off the hook,” he
said.

Mr, Mosbacher says he introduced Mr. Lay to the Bush family around 1987, when he persuaded Mr

Lay to help raise money for Georg:: H.W. Bush's successful presidential bid in 1988. Mr. Lay
contributed $461,000 lo the young ‘r Mr. Bush's two successful gubernatorial campaigns. He also made
Enron's fleet of corporate jets avaiable to Mr. Bush and won his help in lobbying officials in other states
considering Enron projects.

His influence with then-Gov. Bust, was based on more than money. Mr. Lay was one of the state's
leading business executives and desply involved in Texas politics. Under Mr. Bush's predecessor,
Democrat Ann Richards, Mr. Lay headed the Governor's Business Council, a state advisory board. Mr.
Bush asked him to stay on the jeb |o help develop an educational reform plan and sell it to the Texas

=“ : 02258

http:interactive.wsj.com/erchive/ etreve.cgi?id=SB1006987787276109720.djm&templates... 11/30/01

01300000000867 —


fair disclosure allows markets to assign an appropriate value for the securities of all
public companies.

Under the securities laws, public companies file registration statements, periodic
reports and other disclosure documents with the Commission. The Commission's
Division of Corporation Finance (“DCF”) has primary responsibility for overseeing
disclosures by issuers of securities. The SEC, however, does not have sufficient
resources to review all registration statements and other filings that are made with the
Commission, Therefore, in 1980, the SEC implemented a “selective review” program by
which the DCF reviews some, but not all, of the filings that are made with the
Commission.” When a filing is made, it is routed to the appropriate industry group within
the DCF and it is then “screened” to determine if it will be subjected to a full financial
and legal review, a partial review for specific issues only, or no review. In order to
Preserve the integrity of the selective review process, the Commission does not publicly
disclose its screening criteria for filing reviews.

The SEC does not audit public companies, If the DCF has significant concems or
becomes aware of information that suggests that a company may have violated the
securities laws, the DCF may refer the matter to the Commission's Division of
Enforcement. The SEC has broad authority to investigate possible violations of the
securities laws and may bring actions against a company if information in its registration
Statement or other filings proves to have been materially false or misleading, including

actions to stop the sale of securities.

As Chief Accountant, I am the principal advisor to the Commission on accounting
and auditing matters arising from the administration of the federal securities laws. My

. All registration statements potentially are subject to review by the staff of the DCF. Given the
volume of filings each year, we fulfill this obligation by selectively freveewing registration
statements and other documents that companies file with the Commission when they engage in
public offerings and other transactions in publicly traded securities. ‘We also selectively review
Periodic repors, such as those on Forms 10-K and Forms 10-Q, which public companies are
required to file with the Commission, snd current reports on Forms 8-K_ These reports are
designed to Keep investors apprised of the companies” financial condition and results of operations
0m a periodic basis.

02334

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Testimony of Richard L. Trumka

House Financial Services Committee

December 12, 2001

Page 14

consulting arrangement and the audit engagement itself, and a variety of steps designed
to ensure that public auditors are always looking at the firms they audit with a reasonably
fresh eye. In addition, I would call your attention to testimony the AFL-CIO has
previously submitted to this Committee on the subject of analyst independence and the
regulatory changes that could improve that situation that contributed so significantly to

the debacle at Enron,”*

While we do not believe legislation is necessary, the fact is that without Congressional
support for these kinds of regulatory changes, the interests that profit from the loopholes
that brought us Enron will prevail again, as they so often did in the regulatory fights of
the 1990°s, We hope very much that Chairman Harvey Pitt takes up the agenda
embodied in our rulemaking, but frankly we know he cannot do so successfully without

the support of this Committee and your counterparts in the Senate.

l urge this Committee and this Congress to support both the Administration's
enforcement actions against Enron and its Board and executives, and to urge the SEC and

the Department of Labor to step forward and act against the rampant conflicts of interest
and the defects in our disclosure system that gave us the Enron debacle. Our funds will
fight as hard as we can to get our money back. But the truth is only strong government
action can ensure that investors are not victimized again in this way. The AFL-CIO

looks forward to working with you in the coming days on these important tasks, Thank

you.

02379

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Page | of 3
Carleton, Norman

From: Carleton, Norman

Sent: Wednesday, August 22, 2001 10:13 AM
To: Nickoloff, Peter, Schultheiss, Heidilynne
Subject: FW: Enron article (2)

Tracking: Recipient Delivery Read
Nickolof, Peter Delivered: 8/22/01 10:13 AM Read: 8/22/01 10:15 AM
Schultheiss, Meidlynne Delivered: 6/22/01 10:13 AM Read: 6/28/01 8:50 AM

-----Original Message——-
From: Norman Carleton [mailto:Norman.Carleton@workinet_att_net]
Sent: Thursday, August 16, 2001 11:43 PM

To: Norman Carleton; norman.carleton@do.treas.gov

Subject: Enron article (2)

a
AUG 16, 2001

Enron Head Seeks to Reassure Staff
By REUTERS
Filed at 4:48 p.m, ET

HOUSTON (Reuters) - The chairman of Enron Corp. (news/quote) (ENE.N) on Thursday sought to reassure
employees that the energy giant's business was on firm footing as its stock faced a second day of brutal
pressure on Wall Street, following a top executive's shock resignation.

Kenneth Lay told employees at a companywide meeting that Enron's business was strong, despite the
extended pressure on its stock and heir apparent Jeff Skilling's unexpected resignation as president and
chief executive officer.

Lay, who was met with a standing ovation when he took the podium, touched on a wide variety of topics
during the 90-minute meeting during which he took questions and presented financial data he said proves
the company is strong.

“We've got a lot of great stuff going on and we're not getting much credit for it in the marketplace, but we
will," Lay said, “"| do think the next several months and few years are going to be great for Enron.”

His comments came as Enron's stock saw its worst day in 19 months, closing down $3.40 or 8.5 percent at
$36.85 on the New York Stock Exchange. That brings its losses to roughly 13 percent since Skilling
announced his resignation after the market's close Tuesday.

Lay said he believed the energy giant's stock can sustain a price-to-eamings (P-E) multiple of 25-30 going
forward. It is about 20 right now, based on Wednesday's close.

“| think the current business model can easily justify a 25-30 P-E, with the current business model and in the
current market,” Lay said. “We can't get that 40-50 P-E back until we get our return on capital investment

up."

1/16/02 03042

01300000001652


the news.

The future of Enron is now in question as credit-rating agencies today downgraded the company’s
bonds to junk status, triggering the payment of more than $3 billion in outstanding debts.

Enron spokesman Eric Thode said all trading was halted on EnronOnline this morning in the wake of
the Dynegy announcement, but trading of core energy products, such as natural gas, resumed this
afternoon. At no time was telephone trading suspended, he said.

Enron's online business model is different from most independent exchanges, which link buyers and
sellers, Enron is a party to all transactions at its site, acting as either the buyer or seller. Enron makes
its profits by buying low and selling high, and employs an army of analysts to compile information that
could affect future prices on natural gas, electricity and the 1,500 other commodities it trades online.

Thode declined to comment on reports this week that Enron traders were working to help valued
customers by brokering deals between buyers and sellers.

"We're still in the market, and we're still conducting transactions that make commercial sense," said
Thode.

Even before halting trading today, activity on Enron's Web-based exchange, EnronOnline, has
reportedly fallen steeply in recent weeks as trading partners abandon the site in favor of deals with
more stable firms, Dynegy and a number of other energy traders do business online, but none in
volumes approaching EnronOnline, which pioneered the field and once saw trade volumes in excess
of $4 billion per day.

Enron's Thode, however, said that trade volumes on EnronOnline have not declined signficantly in
recent weeks.

Over the past 30 days, the site has averaged about 5,300 trades per day, with a total value of $2.7
billion, Thode said, That's well within the average volumes seen on the site during any 30-day period
this year, Thode said.

The New York Stock Exchange halted trading of Enron shares ahead of the Dynegy announcement,
but Enron's stock had already lost $2.95, or 71.3 percent of its value on rumors of the dissolution.
Trading was halted at $1.19. Enron's stock traded at more than $90 last August.

Dynegy cancelled the deal citing "breaches of representations, warranties, covenants and
agreements in the merger agreement."

Dynegy had sought to renegotiate the terms of the merger after Enron's stock price continued to
plummet in the wake of the Nov. 9 merger announcement.

Dynegy's announcement came as Standard & Poor's, Moody's Investors Service and Fitch, Inc.
downgraded Enron's long-term debt to below investment-grade status. The loss of investment-grade
credit means that more than $3 billion in debts to off-balance sheet partnerships are due
immediately.

In a prepared statement, Enron said it is "taking actions designed to preserve value in the company's
core trading and other energy businesses.” Enron said it is temporarily suspending al! payments
other than those necessary to maintain core operations,

“With Dynegy's termination of the merger and the ratings agency downgrades, we are evaluating and
exploring other options to protect our core energy businesses," Enron Chairman and CEO Kenneth L.
Lay said in the prepared statement. "To do this, we will work to retain the employees necessary to

02270

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Derivatives Study Center Page 12 of 14

offshore banking centers have lifted the veil of secrecy in an effort to combat money Jaundering. Others, however, have
balked.

If terrorists did indeed profiteer from put options, said Guzman, they could have reaped their profits on Sept, 17 --
selling their puts the day the markets reopened. "It was a good time to do it because the market was crashing," he said.

Because options are settled overnight, profiteers could have wired their money offshore the next day, Guzman said.

His theory is that if manipulation of put options did occur, the investors knew their trades would be traceable but
gambled that by the time they were tracked, they would have been paid. "Maybe the trail doesn't matter, if the payoff is
big enough,” Guzman said.

He said the case for that scenario is the most dramatic for American Airlines stock. If, for example, an investor bought
an option at $2.20 on Sept. 10 ~ the day before the attacks, that investor would have been able to sell it on Sept. 17 for
$10.80.

On both those days, there are huge spikes in the volume of put options traded, During August, around 150 American
Airlines put options traded cach day. During the first week of September the volume was even lower than that. Then on
Sept. 10, the trading volume shot up to 1,535 put contracts, each representing 100 shares. On Sept. 17, the volume was
1,219 contracts, before falling off sharply in subsequent days.

Guzman said he found a similar, though not as dramatic, spike in trading volume on Sept. 10 for Marsh & McClennan
Cos., an insurance firm with offices in the World Trade Center, and Morgan Stanley Dean Witter, whose WTC offices
also were destroyed, The big upsurge in UAL options trading came on Sept. 6.

"The interesting thing is that this (pattem) happened to several companies in different industries," Guzman said.

If there was put option manipulation, said Dodd, and the money is already offshore, it should serve as a lesson
for the future,

While the United States has a regulatory environment that permits transactions to be readily traced, he said that's not
always the case with offshore banking centers, where record-keeping and regulations may be lax.

"The long-term solution is to establish multilateral financial regulatory agreements with other countries,” Dodd
said, "In order to bring these transactions into the light, the U.S. needs to support efforts such as the OECD
(Organization for Economic Cooperation and Development) initiative on tax havens that will create proper
record-keeping and reporting requirements."

Wednesday, September 26, 2001

Watchdogs probe unusually high volumes
of pre-attack trades on hotel, airlines stocks
Brock N. Meeks 02 607

MSNBC

WASHINGTON, Sept. 26 — More evidence of suspicious options trading in the airline and hotel sectors prior to the
Sept. 11 attacks has emerged in a report from an options analysis newsletter. The Chicago Board Options Exchange is
investigating the unusual activity, a CBOE spokesperson confirmed.

THE SECURITIES and Exchange Commission and New York Stock Exchange are also investigating the suspicious

trading activity, according to sources familiar with those investigations. The SEC and NYSE have declined to confirm
1/15/02

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lifted. Shortages drive prices up 300 percent in some cases. --

-September 2000: The utilities begin to warn ef billions in mounting debt and seek an end
to the rate cap that has prevented them from passing costs on to customers, ~~

-November, December 2000: More shortages put energy system in state of perpetual crisis,
despite fall being a season of traditional low demand; state regulators consider
utilities' requests for rate increases. A decision is expected Jan. 4.

5 tiated PLAYERS IN THE DEREGULATION DRAMA -~

-Steve Peace;

> Took control of the legislative process while a state senator and drove
> deregulation into law, =>

-D.J. Smith:

> Lobbyist for large, industrial electricity customers and an early
advocate of deregulation, -~

-Diane Martinez:

> As state genator, helped with the deregulation legislation. -~

-Greg Conlan:

> Sympathetic to industrial consumers with high bille while serving on
the California Public Utilities Commission, --

-Pete Wilson:

> Saw deregulation as an answer to California's then-ailing economy. <
-Kenneth Lay:

> Noted in 1997, aa chief executive of Enron Corp. in Houston, that
little competition had emerged. "It's like California announced a party but
nobody's showing up," he said. --

-Gordon Smith:

> As chief executive of PG&E, supported deregulation, at one point noting
there had been a “ceiling on our profits" under the old system.

> E-mail Christian Berthelsen at cberthelsengsfchronicle.com.

‘ 02477

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22-05-01 18:47 FAX 202 616 5199 020-025

a)
Js of the unit

The Dynegy Lawsuit

In its lawsuit filed todzy in U.S. Bi nkruptey Court in New York, Eoron alleges, among other thinzs. that
Dynegy breached its Merger Agre: nent with Enron by terminating the agreement When it had no
contrsctual right to de so; and tha: Dynegy has no neht to exercise its option to acquire the entity that
indirectly owns che Norther Natu al Gas pipsline because that option can only be inggered dy 5 sahid
tennination of the Merger Agreem :nt.

The Chapter |] Filings

day's petitio: s for Chapter 11 reorganizetion. Enron wil] ask the Bankruptey Court
To consider a variety of “first day r.otions" to support its employees, vendors. zading counterparties,
customers and other constituents. ” heze include motions seeking court permission to continue payments
for employee payroll and health be nefits: obtain interim financing authonty and maintain cesh
management programs, and retain iegal, financial and other professionals to support the company's
reorganization sections. In accordar.ce with applicable law and court orders. vendors and suppliers who
provided goods or services to Enrr n Corp. or the subsidiaries that have filed for Chapier 11 protection
before today’s filing may have pre petition claims, which wii] be frozen pending court authorization of
payment or consummation of a pl: a of reorganizsion.

The Wholesale Energy Tracing Brsiness

-
The diseussions currently underwi » with various leading financia! institutions are aimed at obtaining
credit cupport for, recapitalizing a id revitalizing Enron's North American wholesale energy tading
operations under a new ownership structure in which Enron would continue to have a significant
ownership interest.

“If these discussions are successfii, they could result in the creation of a new trading entity with a strong
and unencumbered balance sheet, -he industry's finest trading team, and its leading technology platform.
al] backed by one or more of the + orld’s leading financia) instimtions," said Greg Whalley. Enron
president and chief operating offic er. "We understand that it may take time for counterparties 1 resume
normal] trading levels with this enmity, but we are confident that this business can be put back on a solid
footing. Obviously, our potential parmers share our confidence or they would not be at the table with us
We intend to take steps to retain employees who are key to the future success of our wholesale enerzy
trading business and to regain the support and confidence of its trading counterparts.”

Comment by Ken Lay 02254

“From an operational standpoint, «ur energy businesses-ineluding our pipelines and utilities-are
conducting normal operations anc. will continue to do so, * said Kenneth L. Lay, chairman and CEO of
Enron. “While uncertainty during the past few weeks has severely impacted the market's confidence in
Enron and its trading operations, “ve are taking the steps announced today to help preserve capital,
stabilize our businesses, restore the confidence of our trading counterparties, and enhance our ability to
pay our creditors.” Enron's princi}! legal advisor with regard to the proposed merger with Dynegy,
Enron's Chapter 11 filings. the Dy aegy lawsutt, and related matters is Weil, Gotshal & Manges LLP
Enron's principal financial adviso- with regard to its financial restructuring is The Blackstone Group

Di-CO-200! {202-900436 djml&rempisie=;.

01300000000863


common stock, which previously had been issued as part of a series of transactions
involving special-purpose entities associated with LIM2. In subsequent disclosures, Enron
has characterized the reduction in shareholders’ equity as the correction of accounting

errors.
On October 24, 2001, Enron replaced the CFO. He subsequently was terminated,

On November 8, 2001, Enron filed a Form 8-K with the Commission. In the
Form 8-K, Enron announced, among other matters, the following:

. Its intention to voluntarily restate its financial statements for the years ended
December 31, 1997 through 2000 and the quarters ended March 31 and June 30,
2001 reducing previously reported net income for the last four and one-half years
by $569 million, or 16% of reported net income for those four and one-half years.
In connection with that announcement, Enron alerted investors not to rely upon
the previously issued financial statements for these periods, including the audit
reports of Arthur Andersen LLP covering the year-cnd financial statements for
1997 to 2000.

* Its intention to file a restatement recording: (1) a previously announced $1.2
billion reduction to shareholders’ equity reported by Enron; (2) various income
statement and balance sheet adjustments as the result of a determination by Enron
and its auditors that three unconsolidated entities should have been consolidated
in the financial statements pursuant to generally accepted accounting principles
("GAAP"), and (3) prior-year proposed audit adjustments and reclassifications
(that were previously not recorded because they were determined to be immaterial
in the year originally proposed and therefore never recorded).

© A Special Committee of the Board of Directors had been formed to investigate the
matters disclosed in the Form 8-K and the Committee’s investigation might result
in additional or different information.

The restated financial statements that Enron indicated it would file have not yet
been filed with the Commission.

02345

01300000000954


As of Dec. 17, with Enron a penny stock, fetching 57 cents a share, 7 of 17 Wall Street analysts rated the stock a “hold”
and 5 offered e "self" recommendation,

Five other analysts advised their clients that the company at the center of the biggest bankruptcy filing in U.S. history was
still a “buy.”

rac ing: ect lent oi ory ood
Cetina, Jil Delivered: 12/18/01 12:13 PM Deleted: 1/3/02 10:55 AM

; 03003

01300000001612


Carleton, Norman

Schultheiss, Heidilynne

Tuesday, January 02, 2001 2:23 PM

Squitier|, Ray; Sachs, Lee; Paulus, Michae!; Greene, Michelle; Gross, Jared
Carleton, Norman; Nickoloff, Peter; Soares, Chris; Cetina, Jil

SF Chronicle Article on Cal Energy Situation

This was sent to me by a former DoE employee who now worka for an private-sector enercy
company in Houston. It's a good, comprehensive background piece. Unfortunately I don't
have it in electronic form, and the hardcopy (margin) format is a bit strange.

December 31, 2000 (SF Chronicle}

Genesis Of State's Energy Fiasco/String of bad decisions on deregulation
could end up costing consumers $40 billion

Chriatian Berthelsen

Next month, about 10 million Californians may begin paying as much as
30 percent more for electricity, in a maddening coda to one of the most
costly public policy mistakes ever made.

When the state's leaders started moving the energy system toward
de lation six years ago, they envisioned a brand new day in which
utility companies' long-standing monopoly would be broken and rates would
decline by as much as 25 percent.

Instead, when it is over, it may cost customers of the state's
investor-owned utilities $40 billion, perhaps more. In the coming year, it could
harm the world's sixth-largest economy and send a ripple effect throughout
the globe for those dependent on California's continued prosperity.

This is the story of what went wrong with deregulation, and how
planning lapses, serious policy blunders -- and warnings that came too late -- set
California's two main utilities, Pacific Gas & Electric Co. and Southern
California Edison, toward a train wreck.

Power plant construction lagged while demand expanded. Leaders
misjudged how much competition there would be to supply California with juice. And
flawed deregulation laws left utilities and their customers at the mercy
of power companies, extracting the highest price for electricity.

"There was a blind adherence to free-market ideology that couldn't
possibly work," said Eugene Coyle, a former utility securities analyst,
economist and early opponent ef deregulation. "There were poorly
thought-out specifics."

In the early 1990s, businesses were fleeing the state amid the worst
economic times since the Great Depression, Ener rates were 50 percent
higher than they were on average across the nation, because of commitments
to more expensive, environmentally friendly power and cost overruns for
nuclear power plant construction.

Large customers such as steel makers, mining concerne and cement
makers, for which electricity costs make up 25 percent of their overhead, saw that
independent power producers were offering power much more cheaply. They
began to insist on change.

The United States had deregulated long-distance telephone service,
airlines and a host of other industries, often with resulting competition
that was a boon to consumers. Why not do the same for electricity?

So California embarked on a pioneering experiment. In 1993 and 1994,
the California Public Utilities Commission began to draft auch a policy. It
allowed large users to buy power directly from independent producers and
froze customer rates at artificially high levels so utilities could
recover their investments in costly plants.

The utilities sought to have the terms codified in law, and in early
1996, a number of bills were introduced in the Legislature to do so.
> Some observers say that what happened next contributed to the overall
plan's flaws. Months passed while the discussion meandered and faltered,
and at one point it even appeared that no law would be passed.

That's when state Sen. Steve Peace took the reins and tried to make
something happen.

The San Diego legislator already had won the respect of his colleagues
for his work on another complex piece of legislation, reform of the workers’

; 02474

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02398

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01300000001009


CORRECT. C

Wednesday, December 26, 2001; Page A02

A Dee, 25 article incorrectly reported the action taken by the Senate Banking Committee, chaired
by Phil Gramm (R-Tex.), on a bill that exempted much of Enron Corp.'s trading activities from
federal regulation. The legislation was approved by the Senate Agriculture Committee.

© 2001 The Washington Post Company

02163

01300000000772


Testimony of Richard L. Trumka

House Financial Services Committee

December 12, 2001

Page 12

The AFL-CIO and worker pension funds took several steps during the collapse of Enron
to try and reform corporate governance and disclosure, and then as the situation worsened
to protect workers’ investments in the courts, Initially, the AFL-CIO and the
Amalgamated Bank, a large index manager of union pension fund assets, reached out to
outside directors, We wrote to Enron's Board asking that a special committee of the
Board that had been set up and chaired by Thomas Power, Dean of the University of
Texas Law School, broaden its agenda from merely investigating specific past
transactions to reforming both the company’s executive compensation and its audit

policies.23

When the Dynegy transaction was announced, we again wrote to the Enron Board,
pointing out that the markets cdiitinued to be in turmoil due to incomplete disclosure and
that investors more than anything needed enhanced disclosure both to stabilize prices and
to enable investors to evaluate the Dynegy transaction. We suggested the company
immediately recruit people with credibility in the capital markets to its Board. We
offered to mect with the Board and discuss possible candidates, but never received a
substantive reply. Given what we all know now about the lack of independence of the

Board, this is no surprise.24 Copies of our letters are attached.
As the situation deteriorated the AFL-CIO, together with other large institutions,

contemplated a state court action to obtain Enron's books and records to be able to
evaluate the Dynegy deal. But before we could begin that process the deal collapsed. In

02377

01300000000986


Hannon, president of Enron Broadband Services, which completed an 18,000-mile fiber optic network in 2000
and built 25 “pooling points" to tic in with other provider networks.

A Helping Hand

Enron has plowed ahead so aggressively online that some trading partners that haven't invested in back-office
automation simply can't keep up, Piper admits. Enron is responding with CommodityLogic, software modules
designed to help trading partners streamline the fulfillment process and reduce data re-entry errors.

Enron will create and maintain a centralized database of information pertaining to trades. Partners access that

information with CommodityLogic software modules designed for such tasks as quality assurance, scheduling
and invoicing. The three modules in tests are InvoiceLogic; ConfirmLogic, an order confirmation system; and
NomLogic, which handles delivery scheduling for natural gas trades,

“Scheduling that natural gas would typically involve three to 10 phone calls and two to three faxes, and for a
deal done over the course of a 30-day month, you might have had to repeat that every business day,” says Tom
Gros, the Net Works vice president in charge of CommodityLogic. "With NomLogic, that process now takes
seconds. I enter it on the screen and automatically, if it's a month-long deal, the previous day's data appears for
me so I don't have the chance to create an error."

The business model for developing CommodityLogic is the same one Enron used for EnronCredit.com and its
other online initiatives: Net Works develops an application to save time or improve efficiency internally and
then repackages the app for extemal usc. The software for EnronCredit.com's Cost of Credit service, for
instance, was originally developed to help Enron's own traders manage credit risk.

Much of Cost of Credit information is free with registration to EnronCredit.com, but Enron charges a fee to
download information or get e-mail alerts of significant changes to the credit risk of companies in a prespecified
portfolio, But the main way Enron makes money from the site is by selling "bankruptcy swaps" to enterprises
that want a hedge against the possibility that a partner will go out of business.

Whereas EnronCredit.com grew out of software Net Works developed for Enron's commodity trading business,
Enron’s latest ASP offering, DealBench, came out of software designed to make it easicr and faster for Enron to
negotiate large structured deals for complex assets, such as power plants.

Enron's procurement department has used the auction functions in DealBench to buy more than $1 billion of

goods, everything from broadband networking gear to carpeting for the new 40-story skyscraper Enron is
building across the street from its 50-story headquarters in downtown Houston,

DealBench’s collaboration tools manage the complex communications that are part of any large structured deal.
Features include secure two-way messaging and the ability to deliver multimedia presentations and give
participants varying levels of access to sensitive information.

Last month, Enron added Data Room, a document management system that lets companies sct up "virtual data
rooms" to streamline the bidding process for complex physical assets, such as refineries and manufacturing
plants. Normally, companies selling these types of assets have to staff a physical room hosting lawyers and
engineers from every potential bidder, each of whom require several days to pore over hundreds of thousands of
pages of technical documents. Enron has used Deal Room to syndicate some $3 billion of its own credit to more
than 81 financial institutions and sell more than $240 million in assets.

With all DealBench services, companies can host any number of potential bidders simultaneously, giving each
participant the exact level of access necessary. Bidders download a piece of client software that decodes
encrypted documents on the site, so even if sensitive documents are sent to unauthorized users, they can't be

opened, says Jeffrey Bartlett, a principal at DealBench.
Rather than take a percentage of the overall deal, Enron sells DealBench licenses to the deal managers and hosts

02275

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Derivatives Study Center Page 2 of 14

By M. Corey Goldman

NEW YORK, Sept. 11 — The U.S. economy is pot well. And Washington lawenakers are desperately searching for whatever remedy they can find to
cure it

Already they've spooned out some $36 billion worth of rebate checks to weary consumers, part of a $1.35 trillion 10-year tax-cut package meant

to stimulate growth. And Republicans and Democrats alike have been bantering of late about another tax cut they hape will revive the sluggish
economy: A reduction in the capital gains taxation rate to 15 percent from 20 percent.

Dubbed the “rich man’s” tax because it tends to affect only those with very high incomes and assets, the capital gains tax was initially
implamentad to bring revenue into the government's coffers from those who made money on well-heeled investments. The rate was as high as 28
percant before the former Clinton administration lowered it to 20 percent with the 1997 Taxpayer Relief Act

With the economy looking sicklier by the day, lawmakers in Washington are now exploring a further reduction in the capital gains tax as a way to
stimulate economic growth — a move they hope will restore consumer confidence and get the economy back on its feet. The problem is, not
everyone agrees thal @ reduction or outright elimination of a well-heeled tax wil really do all fat much to help the struggling economy.

“It's an honest debate and one that certainly has &s mers, but there is a big question mark as to whether a reduction in the capital gains rate
would have any effect at all,” said Stanford University economics professor Warren Bailey. “Any talk of a tax cut is going to seem positive, but
there really is no way to tell what the impact might be,”

Minimal Market Gains

‘Currently, anyone who makes a capital gain — whether by selling stock at a profit or selling real estate in excess of $500,000 — is required to
pay a 20 percent tax. For smait gains in an IRA portfolio, that's not too bad; for larger gains, such as buying 8 $f million country home and selling
it for $4.5 million, the implications of the tax become much more palpable.

According to research compiled by the Congressional Research Service's government and finance division, only 1.8 percent of the taxpaying
population aams more than $200,000 and pays approximately 79 percent of capital gains taxes. The tax itself accounts for roughly 4.5 percent of
total federal income, payroll and excise taxes; it accounts for 14 percent of total taxes for the highest-income taxpayers,

In thaory, a reduction In the rate would add to the government's ravenues like this: Anyone currently sitting on the fence as to whether or not to
sell their investments might be encouraged to do so F the tax rate were less. That would then increase tax revenue and help Congress deal with
the shrinking budget surplus, which has been declining ine weaker economy and Bush's already current tax cut, and avoid dipping into Social
‘Security.

In practice, many economists and market-watchers don’ believe a five-point reduction in the capital gains tax will have any effect whatsoever,
The only effect it might have, experts say, is to keep long-term interest rates high 3s longer-tarm revenues the government would have been
receiving dwindle away.

Atter aif, at the end of the day, the government will be taking in 5 percent less,

Lim vaat sion of canis anee go © ver rch pecole. and rght now there aren any capital gains anyway.” sakt Randall Dodd, a director wih
the Economic Strategy Institute in Washington. “if you want to stimulate the economy, that ts not a very effective way to do it,”

Tried and True
And that email percantage of American wealth has a very tried-anc-tus way of doing business.

“if you think a reduction in the capital gains rate ts going to stimulate the economy, you Nave to think that those high-income people are going to
something other than what they've been doing with their money,” said Iris Lav, a senior analyst with the Center on Budget and Policy Priorities in
‘Washington. “That tax is for very weallhy people, and those people are not likely to change their spending patterns.”

To be sure, some analysts have suggested that, If another tax cut is something Weshington decides ft absolutely must do, then it should be a
different kind of tax cut, such as a reduction in the 15.3 percent payroll tax that comes out of most working Americans’ paychecks.

Ralling back a portion of the payroll tax that goes to Social Security and Medicare would give a tax cut to more than 30 million workers most
‘earning tess than $44,000 s year who were left out of this year's $40 billion in tax rebate checks because they didn't have enough taxable income

to quality.

All the same, others believe the goverment should simply cut income tax rates across the board, providing broad-based tax relief for lower- and
middle-income individuals and families that might bring less cash into the Treasury, bul would create more economic aclivily as Geposable
incomes rise.

"During a downturn economy a government probably should cut taxes, and a government should probably run a deficit — that's what a

1/15/02 02 597

01300000001206


Testimony of Richard L. Trumka

House Financial Services Committee

December 12, 2001

Page?

Though Enron began as a utility and pipeline company, and its hard assets remain just
that, Enron had become a new kind of financial intermediary. Enron brokered a huge
number of contracts allocating price risk and other kinds of risk in an increasingly
bewildering array of commodities from natural gas and electricity to Internet services to
the weather. In that kind of business, a company’s most valuable asset is trust-- trust that
you are telling all your constituencies the truth, trust that you are a market maker and not
merely a gambler. And what seems to have fundamentally happened to Enron is that the
company’s management abused that trust and ultimately destroyed it. Almost overnight
Enron turned from a market colossus with an enterprise value of well over $70 billion to

a mere collection of pipes and computer terminals worth considerably less than its debts.

The story of Enron's unraveling begins with self-dealing-- with transferring business out
of the company into the hands of related entities that were in large part owned by Enron
executives, These transactions were approved by the Board of Directors, the auditors and
the lawyers. According to the chairman of the Compensation Committee, Charles Le
Maistre, the partnership arrangements served in part to retain executives, saying "We try
to make sure that all executives at Enron are sufficiently well-paid to meet what the
market would offer.”'* But there was no mention of these transactions anywhere in
Enron's extensive disclosure of its already extremely generous executive compensation
Practices. And the company funds that were put into these partnerships were accounted

for as investments, not as payments to executives. These partnerships then went on to

02409

01300000001018


Jonathan G. Katz
December 12, 2001
Page 3

the Commission solicited comment on three alternative approaches; banning the
provision of such services altogether, imposing limits on the provision of those non-audit
services deemed most likely to impair independence, and requiring only additional
disclosure.

Although a number of commenters and those testifying at the Commission’s
public hearings favored @ ban on non-audit services, there was also significant opposition,
mainly from the accounting profession, to any substantive reform. As a result, the final
regulations reflected a compromise in which auditors could provide those non-audit
services that posed a danger to independence, but only under certain circumstances. (The
proposed limitation on providing expert testimony were dropped in its entirety.) A
compromise was also reached regarding the additional disclosure required of registrants
regarding the non-audit services provided by their auditors and the involvement of their
audit committees with respect to auditor independence issucs.

In light of subsequent developments, however, we ask the Commission to revisit
some of the issues raised in the 2000 rulemaking, and to consider some new reforms, in
order to strengthen its auditor independence safeguards, As discussed more fully below,
both substantive reform and additional disclosure are necessary to preserve confidence in
our capital markets.

The Rules on the Provision of Non-Audit Services Should be Strengthened

We believe that the Commission's final rules give too much flexibility to audit
firms to provide non-audit services that could compromise the firms’ objectivity and
create economic incentives that may undermine the effectiveness of audits. A December
5, 2001 Washington Post article highlighted the pressures on individual auditors to
“cross-sell” non-audit services to audit clients, recounting a case in which a Coopers &
Lybrand accountant’s performance review varied according to the amount of such
services he was able to sell. That case involved Phar-Mor, which later filed for
bankruptcy protection following revelations of accounting fraud; a jury found that
Coopers, Phar-Mor’s auditor; had committed fraud.

We believe that in some cases the sheer amount of the consulting services may
create perverse incentives. During testimony in connection with the 2000 rulemaking,
much was heard about the “loss leader” phenomenon, in which firms submitted
artificially low bids, not consistent with providing high quality audit services, as @ way to
establish a relationship with a client and sell audit services. The audit then makes up an
even smaller proportion of the total revenue stream from the client, And here, the danger
not only lies in the auditor's impaired judgment. Anecdotal evidence suggests that
executives of some companies encourage audit firms to undertake non-audit consulting as
a way of obtaining leverage for the company over the audit process.

” See id.

02384

01300000000993


We need to learn why the accounting rules permit companies to keep important
information off their balance sheets.

Above all, we need to reduce the likelihood that this will happen again.

The effects have been devastating - as one might expect when a $75 billion company
files for bankruptcy. Hit hardest by the meltdown, of course, were Enron's
employees. Thousands have already lost their jobs, and more will undoubtedly
follow. And the 11,000 employees who participated in the company's 401(k) plan
have seen their retirement savings practically eliminated.

In addition, beyond the impact on Enron employees themselves, Enron's collapse
has drained the investment savings of investors across the country who put their
retirement and other investments into mutual funds, pension funds, and other
vehicles that invested in Enron. Thankfully, at this point there does not seem to be
a systemic threat to the financial markets as a result of Enron's collapse, but the
damage the collapse has done to the financial position of thousands of Americans
will be very difficult to quantify.

Some may use Enron's bankruptcy as a vehicle to make big-government arguments
against electricity markets. But it wasn't the electricity consumer who was hurt by
Enron's fall, it was the workers and investors.

Furthermore, Congress must pass the netting provisions of the bankruptcy reform
legislation. Enron and its subsidiaries were party to tens if not hundreds of
thousands of different financial contracts. The identification of these contracts and
verification that they are eligible for netting will require vast expenditures of time
and money and divert the attention of Enron and the court from the task of
reorganizing. Meanwhile, creditors will remain uncertain as to the enforceability of
their contracts and the ultimate status of their claims against Enron. Let's
eliminate the uncertainty, the waste of valuable court time and estate funds, and
allow institutions to eliminate exposure more efficiently.

We are pleased to welcome the distinguished Chief Accountant of the Securities and
Exchange Commission, Bob Herdman, to the Committee to discuss the reporting
and financial disclosure system mandated by the Federal securities laws. | am
particularly pleased that Mr. Herdman is here today, as the central issues that the
Enron collapse raises are issues of investor protection and accounting rules, about
which there are few better experts than the Chief Accountant of the Commission on
which to opine.

I would like to remind the members of the Committee that Enron, as well as
Andersen, are the subjects of a formal investigation by the SEC, so Mr. Herdman

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