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House Energy & Commerce Committee Haaering on Enron
Aired February 7, 2002 - 10:09 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
BILL HEMMER, CNN ANCHOR: We'll not leave this for long, but right now, I want to get you to the House side, where that committee of that House right now gaveling to order, and we begin now the Enron hearings live on Capitol Hill.
REP. JAMES GREENWOOD (R-PA), CHAIRMAN: by the Constitution to every citizen in the Bill of Rights.
The duty of the subcommittee is to investigate the facts of the matter surrounding the collapse of Enron to determine what went so horribly wrong that the nation's seventh largest corporation had to seek protection from its creditors by filing for bankruptcy. And once we have established those facts, we have an obligation to determine how our financial laws and regulations can be improved so that in the future, publicly traded companies faithfully and completely report their financial actions and their true financial health. This is the only way to ensure that our investor confidence is restored and that future investors will not suffer the fate of the many thousands who watched with horror as the work of a lifetime was swallowed up and their life savings disappeared.
The facts uncovered to date seem clear enough. Two days ago we heard extensive and informative testimony from William Powers, dean of the University of Texas School of Law and chairman of the Special Investigative Committee of Enron's Board of Directors, who joined the board this past October solely to investigate the transactions between Enron and various partnerships.
Our own investigations into these transactions, along with Dean Powers' illuminating report, carefully detail the complex workings of these related party entities, as they were called. As the workings of these entities and associated schemes, such as Chewco, LJM1, LJM2, the Raptor transactions and Jedi, become clearer; they also become more disturbing. In Dean Powers' words, what we have found is nothing short of appalling.
Mr. Fastow, aided by a number of those witnesses subpoenaed here today, shared in huge fees totally tens of millions of dollars to arrange and participate in bizarre transactions that were, at the least, imprudent, and at worst, contrary to the very interests of the company, shareholders and investors they were duty-bound to serve, apparently plundering millions at the expense of the company and its shareholders. In furthering these transactions, we have also learned they failed to follow the most basic rules of accounting. They also failed to adhere to any of the business tenets designed to avoid conflicts of interest. In putting numerous deals together, Mr. Fastow and his subordinates managed apparently to represent both sides to a transaction. The Powers' report and the dean's personal testimony on Tuesday could not have been any clearer or more firm in conclusion that these transactions were not designed to improve Enron's economic health; on the contrary, these deals magnified Enron's risks, hastening the day of collapse.
Sadly, it is increasingly clear that this collapse was not brought about by the isolated acts of rogue employees. A disaster of this magnitude requires the complicity of far more than a few bad apples. From senior managers to corporate directors to outside counsel and accountants, almost no one who had the power to sound the alarm, correct the situation or prevent this debacle did so.
As I stated earlier, four of the individuals, who were at the center of these schemes, will not testify today. Andrew Fastow, who was Enron's former chief financial officer; Michael Kopper was the former managing director of Enron Global Finance. While both of these individuals have provided some documents to committee investigators, they have refused to be interviewed or provide all of the documents in their possession. They also have refused to come before us this morning voluntarily. They have come here under subpoena.
Rick Causey was Enron's chief accounting officer and Rick Buy was Enron's chief risk officer. We received word yesterday that neither of these individuals will testify today. Fortunately, committee investigators have had the opportunity to interview both Mr. Causey and Mr. Buy about these matters over the last month. But reluctant witnesses will not keep us from getting at the truth.
Again, the facts our investigation and Dean Powers' report appear to confirm that Mr. Fastow essentially masterminded the transformation of this company into the derivative's trading giant it was. He devised the transactions that were ostensibly aimed at moving volatile holdings off Enron's books; deals we understand now to have been fraudulent.
Mr. Kopper served as his chief lieutenant. He became the general partner of Chewco, whose mysterious dealings accounted for the single largest portion of Enron's financial restatements last November. Mr. Kopper also served as a general manager of Mr. Fastow's two LJM partnerships. Even without the testimony of Fastow, Kopper, Causey and Buy, we will still be able to get some important answers today.
To this end, other witnesses today will include Enron officials who had dealings with Fastow and Kopper, and who attempted to alert others in Enron's senior management about the danger these deals represented to the company.
We will also hear from Tom Bauer, the Andersen audit partner who worked on the Chewco transactions, who is expected to describe what Enron did and did not disclose about this highly troubling transaction.
Our last panel is comprised of senior Enron officers and directors who approved these partnerships and transactions and were responsible for ensuring the fairness and appropriateness of the transactions in question . Their role in this, for good or ill, also needs to be established. And we want to give them the opportunity to speak for themselves.
We'll hear much talk today of such things as derivatives, the practice of hedging and why certain transactions go on the books and others remain undisclosed. We will also learn, more than any congressional committee to date, on the murkiest of dealings Enron operatives engaged in.
We have before Congress for the first time a collection of the senior Enron players who knew why decisions were made, why the company chose to pursue this ill-fated course, what the company knew about the risks involved, and why they choose to act or not act the way they did.
What we learn today I am confident will help this continue to construct a full and accurate picture for the public of what happened to cause this financial, personal and corporate tragedy.
One final note. Like many Americans, I have tried to keep some perspective on this whole tawdry affair, to provide some perspective as well. The truth is, that this story of financial collapse and betrayal is of epic proportions. It is almost biblical in scope, so perhaps we need to look beyond all the gritty details of avarice and appetite to a larger lesson that all of us can share.
In the 11th chapter of the book of Proverbs, the authors offer these prophetic words: "He that troubleth his own house will inherit the wind, and the fool will be a servant to the wise in heart." Perhaps that is the true lesson of Enron's failure.
I now recognize the ranking member of this subcommittee, Mr. Deutsch, the gentleman from Florida, for an opening statement.
REP. PETER DEUTSCH (D) FLORIDA: Thank you, Mr. Chairman.
You know, our work here, I think, all of us at this point have a sense it's much important than really the specifics of this transaction, because we have benefited -- everyone in this room, everyone in this country, everyone in the world -- from a system of transparency and capital markets that has really gained incalculable result. And I think what we've learned, and we know more than we did a week ago, two weeks ago, is that Enron -- the system failed, Enron failed, but the system also failed, because stockholders, the public, did not know what was going on in the company. And the statements did not fairly represent what the company was doing. And it is absolutely certain that that was done with intent.
We've had a number of staff, maybe up to 20 staff people trying to unravel Enron. And obviously, SEC is working on this, as well as the Justice Department. And we had a members meeting with staff yesterday evening, where we were brief. And one of the things that I asked the staff there, that apparently there are about 4,000 partnerships -- I'm sure many of the people here could know the exact number -- but there are 4,000 partnerships that Enron did. And I asked the staff to try to explain one of them to us of the 4,000, that maybe we can understand one and just understand what was there. So I'm going to try.
And I asked them for a relatively easy one, maybe the easiest one. All right? This is what they have described as maybe the easiest one. It's the LJM Rhythms transaction structure. It started out as a normal transaction. Enron made an investment in an IPO with Rhythms Net. An initial of investment of $10 million. That investment then grew to value of about $400 million.
Enron had a lockout provision in the IPO that they could not sell the stock, so Enron had a reason to try to lock in the stock price. That's a legitimate business transaction. So they were attempting to buy a putsch at the strike price but is opposed to going to Goldman Sachs. What Enron did and, Mr. Fastow, what you did, is you set up LJM limited partnership to sell the putsch to Enron. And what happened was Enron capitalized LJM partnership with a value of about $200 million of Enron stock.
As soon as that occurred, Mr. Fastow, who won't testify today, took a $30 million management fee as a general partner of LJM's partnership. At the same time, he was the chief financial officer, as part of the management of Enron, right? Now, what happened was -- actually, that partnership then set up a subsidiary which sold the putsch to Enron, but what happened to the stock value is it kept going down and as it was going down, Enron kept putting stock into the general partnership.
Why we believe this is illegal is that as opposed to buying a derivative from Goldman Sachs where it would be an arm's length transaction and the risk would be borne by Goldman Sachs and they would have a true fee between them, there was no risk for the partnership because it was guaranteed by Enron stock. And so, the $400 million in gains that was attempted to be locked in, that stayed on the books of Enron. So anyone who wanted to try to understand what was going on in Enron would look at the books and see a $400 million gain, but effectively there was no gain.
I mean, this is a scam. This is one of 4,000 scams. It's one of the simpler scams. But, again, our understanding is it wasn't just smart, it wasn't just around the edges; it was, in fact, fraud. It was a criminal violation. And I think what we are learning as we learn more and more -- and hopefully, Enron is the exception in America -- that the case of Enron -- and I hope someone is going to try to defend this today because, you know, I think -- I want to understand.
Maybe there's another story that we haven't heard from our staff. Maybe there's another explanation which we don't understand. But what, you know -- hopefully, Enron is, in fact, the exception in corporate America. That this is -- the corporation that is doing this is not living on the edge, looking for the gray area, but engaging in illegal activity, is engaged in fraudulent transaction, and one analogy that I have mentioned at at least one other hearing that I'll mention again today, I keep reminding myself of the scene in the Godfather movie where Tom Hogan, who's the attorney for the Godfather, has a meeting with the Godfather and the Godfather tells him, "Just remember, you can always steal more with a briefcase than with a gun."
And I think what we have here is a case where literally about $4 billion was stolen from people, and it was stolen, unfortunately, from people -- from real people, thousands of who are suffering. And, again, you know, I've read biographies of half the people, you know, on the panel who are going to testify or not testify today, and I'm sure, you know -- you're going to have to live with yourselves regardless of the consequences of what happens with all these investigations.
But I will tell you, on a personal basis, as I look at this, is that I hope you in the dark night of your own souls think about some of the people who, in fact, throughout the country, but particularly in the area of Texas, who literally lost their entire life savings and whose lives are effectively, in many ways, destroyed because of your actions.
Thank you, Mr. Chairman.
SEN. PAUL SARBANES (D), MARYLAND: The chair thanks the gentleman and recognizes the chairman of the full committee, the gentleman from Louisiana, Mr. Tauzin.
REPRESENTATIVE BILLY TAUZIN (R-LA) DINGELL: Thank you, Mr. Chairman. Thank you, Chairman Greenwood.
Once again, let me express my gratitude to you, Jim, and to you, Peter, for the extraordinary way in which the subcommittee has conducted its business and has gone about this investigation.
And I would be remiss if I did not once again thank my good friend, Mr. Dingell, the ranking member of our committee, for the, again, extraordinary cooperation we're getting on both sides of the aisle in this investigation. Other committees may be proceeding in a partisan political manner looking at this matter. I hope Americans recognize the extraordinary way the Democrat and Republican investigative teams and this committee and our members are working together to try to get to the truth here. And I thank you again, Mr. Dingell, for that cooperation and that effort.
REP. JOHN D. DINGELL (D), MICHIGAN: Thank you, Mr. Chairman.
TAUZIN: We're getting close to the bottom of this collapse and this mess.
And I believe the solid progress this week will help us tremendously as we determine not only what happened, but what we, in turn, can do to assure that something like this doesn't happen again.
We look forward this morning, of course, to the second portion of our hearing into the fraudulent transactions that brought this corporation down.
This past Tuesday we heard a devastating report from the inside of the corporation, from the chairman of Enron's own investigative committee. And this report outlined the extraordinary story of self- dealing, of deception, of bogus statements, of irresponsible management and, indeed, I believe outright fraud.
And I say "outline," because Dean Powers, in his report, did not have the ability, as the committee does, to compel the production of documents or testimony, and it was limited in scope. But it certainly reinforced the very troubling information we've been unearthing in this investigation.
I think it's epitomized by one little line in the first memo that one of our witnesses, Jordan Mintz wrote on January 4. And I quote: "Nicole (ph) has advised that if there is a general theme or guideline to following the preparation process of all these deals, it is to be as innocuous as possible, in terms of description, detail, et cetera."
Despite all the complicated dealings and cross-dealings and self- dealing we are learning about, I still believe what we have before us is a simple story. It's a simple story of old-fashioned theft and explicable acts -- inexplicable acts that allowed the perps to get away and to destroy the company.
We know that the senior Enron employees who control these transactions, Chewco, LJM1 and LJM2, the Raptors and so many others, participated in self-enrichment schemes at the expense of the company and the shareholders and its own employees.
And yet these schemes could have been stopped with proper oversight by certain senior executives, a few of whom are with us today. Absent their taking action, matters could have been put right by Enron directors, who were ultimately responsible for the health of the company and the interest of the shareholders, but that didn't happen.
They allowed the CFO to work both sides of the negotiating table. They enabled him to participate in his own risky high-return transactions, but effectively insulated him from the risk. And this assured his ability to take away tens of millions of dollars and ensure that Enron would be on even more shaky ground, as ensured more risks and every riskier proposals.
They allowed sweetheart deals, literally, as we recently discovered, to take place among senior employees. And they allowed a fraud to be perpetrated on the shareholders. And they told shareholders the company was making money that it was actually losing, so the stock price would remain high, so senior officers could sell off their shares and make millions, while the vast majority of the workers would be left holding empty pocketbooks.
Be sure the accountants and legal advisers assisted wittingly or unwitting in the sham transactions. And we'll have the opportunity to see how we might resolve some of those perverse incentives that allowed that to happen. This morning, however, we have the opportunity to question several of the principals who could have prevented this collapse. They have a lot to answer for.
We also have a couple of senior officers who attempted to alert those charged with policing those deals to no avail. That's a good story. We'll hear from some good officers in the company who smelled the cancer growing inside and tried to do something about it.
We'll be able to explore today why they failed. For example, we'll have before us Jordan Mintz, the current general counsel for Enron Global Development. He attempted to get then-Enron President and CEO Jeff Skilling to sign deal approval sheets, as was required, but he couldn't get Mr. Skilling to sign them.
We're going to ask Mr. Skilling today about that. I mean, we'll find out why those sheets were not signed; why they were signed by everybody else but him.
We'll have Enron board members. We can ask them about the oversight of these transactions.
And finally, we have former CFO Andrew Fastow, and former managing Director of Enron Global Finance Michael Kopper, who anyway you look at it stood at the very center of these schemes. Now, they may take the Fifth Amendment today, and they have the right to do so, and we certainly respect that.
But as the chairman said, we have other means of getting to the bottom of this thing. Our investigators are doing that. We're doing it in a deliberative, bipartisan way. And we're going to make it available to the American public, as we try to not only unravel what went wrong here. Try to make sure again that it doesn't happen again to any other American company, to its employees or to those who believe in the system by which investors can trust information upon which they make the judgments when buying and selling stock in this country.
We got a big job to do. Today's a big step. And Mr. Chairman, again I want to thank you for the diligent, extraordinary work you and your minority member are doing for the full committee.
And again, I want to thank Mr. Dingell for his extraordinary cooperation.
GREENWOOD: I thank the chairman.
DINGELL: Mr. Chairman, I thank you.
And I want to reiterate the words of our chairman, Mr. Tauzin, that this is a bipartisan investigation; and in it we will work together to get to the bottom of this sorry mess. And I want to commend Mr. Tauzin, the chairman of the committee, and also the chairman of the subcommittee for their labors in this, and the staff, which has worked together splendidly to bring us to where we are today.
We had hoped today that for the first time in this long investigation of Enron and the sorry matters associated with it that we would hear directly from the people who created the partnerships that brought Enron crashing down while they made millions of dollars for themselves.
We had hoped to hear why all this had happened. We had hoped to hear what these people thought about the loss of jobs of thousands of employees, and the wiping out of the savings and the retirement of thousands of more employees, retirees and investors.
Pension funds and general investors in the market all have suffered because of deceit, misbehavior, grasping self-dealing, wrongdoing of the most scoundrelly and improper fashion.
But I note with some distress that most of the key players are staying silent, for what appears to be good reason. We know from the Powers report that key executives misbehaved, and that others claim to have been clueless about the wrongdoing which was going on. This leaves them with the unfortunate choice as to whether they were incompetent, or corrupt, or perhaps both.
Clearly, there's room that we can come to all the above judgments. And it's pretty hard to find anybody in this nasty mess to be a person of innocence and character.
For years, they and Enron have played fast and loose with their numbers, with their ethics, with their public representations, and with their fiduciary duty to the shareholders. As long as the earnings and the stock went up, everyone was happy, and no one needed to know exactly how these numbers were created.
Enron's culture, moreover, discouraged anyone from raising objections, for plays, bonuses, and their very jobs depended on being team players. The infamous rank and yank system that got rid of the bottom 10 percent of all employees every year could be, and was, manipulated to get rid of anyone who caused trouble.
Enron's executive suite seemed to be the personal sandbox of a group of golden boys who had been clever enough to structure financial vehicles that would take debt and losing assets off the books and turn them miraculously into income.
It is interesting to note that lawyers, accountants, officers of the company and others all profited from this.
Mr. Fastow, who almost got yanked because of his inability to achieve real earnings in one of Enron's energy divisions, became a star... by creating false earnings when he could not create real earnings. Favoritism and chaos reigned in his global finance division, where people with insider information and paychecks from Enron, but their bonuses from LJM2 were negotiating contracts for Mr. Fastow's and Mr. Kopper's partnerships with other Enron employees.
If the Enron negotiators were too tough, they sometimes got personal calls from Mr. Fastow. Two people who were engaged to be married were negotiating against each other. Picture that if you please. One of them actually got a $60,000 payment from one of Mr. Kopper's partnerships for restructuring a deal.
Mr. Skilling, the company's president and chief executive officer, was warned about problems these partnerships were causing in the office. He did nothing, except to find another job for the complainant; nor did others in positions of authority distinguish themselves.
There were very few innocent parties in the boardrooms and the executive suites at Enron. The board of directors approved these related party transactions because they were fast and cheap. In other words, debt and assets could be moved around quickly, and Enron wouldn't have to pay investment bank fees.
Then senior management and the board gave transactions to the company's chief financial officer because he would know where to find investors. But as a former Securities and Exchange commissioner said recently: "A CFO, of all people, has to have an undivided loyalty to the company."
We will inquire, as this goes forward, as to where the loyalty here lay.
Such a structure is a recipe for disaster, and a disaster is clearly what followed. Enron, the seventh largest company in the nation, a darling of Wall Street, a publicly held company failed, taking with it the incomes, the savings, the hopes, the aspirations, the dreams of its employees and its retirees.
This committee and this Congress has a duty to find out what happened and to take all necessary action to correct the situation and prevent the repetition of such a sorry, stinking mess.
We may find the scandal is not only what was illegal. A greater scandal may very well be what was legal.
Mr. Chairman, I thank you.
TAUZIN: I thank the ranking member and the full committee.
The gentleman from Florida, Mr. Bilirakis.
REP. MICHAEL BILIRAKIS (R), FLORIDA: Thank you, Mr. Chairman.
We have a vote on the floor. I won't take long. I do not have prepared remarks. And the others before me and those after me will have gone into many of the details which...
DINGELL: Mr. Chairman, could I just note, if you please, one thing. There are a group of Enron employees here hoping for justice, looking to see what has transpired, and watching the debates and the considerations of this matter by the committee with considerable interest. And I thank you for that. They're back against the wall, over here.
TAUZIN: And I thank the ranking member.
The gentleman from Florida will continue.
BILIRAKIS: Well, thank you.
You know, as we sit in these hearings, Mr. Chairman, I just wonder if, particularly the executives of Enron and the executives of the auditors realize what they've done -- what they've done to, certainly, to people to stockholders to employees of Enron, to America, to those of us, really, who have always believed in the system, as Mr. Tauzin said, in the business community, in the concept that it takes employers to have employees.
You're really shattering the strength that you've always had among those of us who feel very strongly -- believe very strongly in the system. And I realize -- I can't imagine that you don't realize what you've done. And on the other hand, with the apparent type of mind-sets that many of you must possess to have done what you have, maybe you really don't realize what you've done.
You know, it took terrorists from other countries to tear this country, and really the world, asunder; and yet we have fellow Americans who have accomplished something that's almost as bad when we take into consideration what it's doing to the stock markets, what it's doing in confidence and faith of the American people in the system and in auditors particularly, and in the corporate community.
There's a lot of anger here. And I just hope that you all realize that, and you realize that you've brought about that anger.
Having said that, Mr. Chairman, I yield back. Thank you.
TAUZIN: I thank the gentleman.
The chair would like to advise the visitors and the participants here today that a vote is occurring on the floor of the House, and members have had to move over to the House floor to make that vote. But we'll continue the process of the opening statements so we can get to the witnesses as rapidly as possible.
The chair recognizes, at this point, the vice chairman of the full committee, the gentleman from North Carolina. The distinguished Mr. Burr.
REP. RICHARD BURR (R), NORTH CAROLINA: I thank the chair.
Mr. Chairman, Mr. Greenwood said earlier that this was a painful hearing. I agree totally with that. This is also a sick hearing. It's a sick hearing because of the individuals. It's a sick hearing because investors are sick of the lack of transparency that existed in the Enron books.
America is sick that greed drove decisions with no regard for the human lives that were affected by it. And today's pain is magnified even greater by the decision of some to say nothing.
I believe that there are individuals that will be asked to testify in front of this committee and have testified in front of this committee that believe by remaining silent that the anger will die or that we will go away or that America will forget.
For those who have chosen that route, let me assure you the anger will not die, we will not go away, and America will not forget what has happened.
Mr. Chairman, in its heyday Enron ran a television ad, and its commercial touted their innovative corporation. I now know what that meant. But the Enron ad went on to show the Enron logo at the end, and it said: "Why, why, why?" You know, today we're here with the same logo and the same question: "Why, why, why?"
Mr. Chairman, I want to commend you for not only the subcommittee, but the full committee's commitment to get the answers to the question, "Why, why, why."
I yield back.
GREENWOOD: The chair would gladly yield the gentleman as much time as he chooses, but in the absence of other members prepared to make opening statements now, we're going to suspend for at least five minutes until the next member is with us.
GREENWOOD: The meeting will come to order. Our guest will pleased be seated.
The chair recognizes the gentlelady from Colorado for five minutes for an opening statement.
REP. DIANA DEGETTE (D), COLORADO: Thank you, Mr. Chairman.
And I want to thank both you and the chairman of the full committee and Mr. Dingell also for these unprecedented last couple of weeks.
We've received a crash course in corporate management, special purpose entities and auditing and accounting practices. This debacle has been a sobering revelation of the dark side of arrogance, greed and apparent disdain for legitimate public safeguards.
I understand we have a number of Enron employees here today. And I will assure each and every one of you that we will get to the bottom of this. We will find what happened. And we will make sure it never happens again, to the best of our ability.
By the time we finish this investigation, Enron may be the most analyzed, dissected and discussed corporation in history. I don't think any of this like what we've seen.
I wonder about the mind-set, for example, that allows sketchy partnerships to be created rife with conflicts of interest which are undisclosed. I've tried to conceptualize decisions that allowed lower-level employees, like the folks here today, to lose their life savings, while senior executives walked away with millions of dollars without seemingly doing anything for that money.
I've come to realize that there are some people who think they are smarter than the system and are willing to risk what is not theirs for personal gain. And I'm shocked by the apparent ambivalence, at best, by a board of directors who somehow seems to feel that when employees and officers are self-dealing that these same people, the fox is guarding the hen house, should somehow come to the board and independently give this information to the board, rather than the board ferreting out, which I think is their fiduciary duty.
Mr. Chairman, I have a long opening statement here, but I think I'd rather get to what the witnesses have to say. And so, I ask unanimous consent to submit the whole opening statement for the record. And I'll yield back the balance of my time.
GREENWOOD: Without objection, the statement of the gentlelady in its entirety will be incorporated into the record.
The chairman recognizes, for purposes of an opening statement, the gentleman from Florida, Mr. Stearns.
REP. CLIFF STEARNS (R), FLORIDA: Thank you, Mr. Chairman.
And let me, again, compliment you and the staff for a very thorough job here investigating something, as we look into, more deeply gets worse and worse.
When you look at the presentation that Mr. Deutsch provided, it's probably a little complicated to most Americans. But I would give the analogy -- it's basically the analogy of the special purpose entities -- Enron was putting money in their right pocket of approximately, let's say, $10, and then pulling out a fictitious amount of $400 out of the left pocket and calling that income.
Obviously, this is a case of failure to disclose. It'll be up to the Justice Department to prosecute this and to ferret out all the details.
What we can do today, though, is to bring attention to this type of operation.
When the Securities Act of 1933 was passed, the whole intent was that these individuals would provide disclosure. My colleagues: In capitalism, in a free market, unless there is a sense of compunction, a sense of consciousness, we can legislate until hell freezes over, and we won't be successful. It's dependent upon men and women to put forth some honesty, and obviously it was not here.
I was alarmed to read in the Wall Street Journal that the top executives of Enron shielded their pension benefits. It wiped out the retirement saving of its workers. But they had the gall, the unmitigated gall, to have financial dealings where, for example, Enron Chairman Kenneth Lay used a private partnership to protect millions of dollars worth of executive pension benefits.
So the more we look into this, the more appalling it gets.
I imagine we're going to encounter today from Mr. Skilling what's called plausible deniability regarding his role or knowledge of these transactions. However, I believe you'll find this panel extremely skeptical, as our investigation has uncovered numerous warnings, some directly reporting -- they were reported to Mr. Skilling as to the problems with the various transactions.
We have the Watkins memo to Ken Lay in August, which also mentioned former executive Cliff Baxter's conversation to Skilling regarding these transactions.
We also have before us today Mr. McMahon, former treasurer, now president and COO of Enron, who also repeatedly raised concerns. And Jordan Mintz, former general counsel of Enron global finance and current general counsel of Enron global development, who also raised concerns.
There were plenty of flags. People were just denying the facts.
Arthur Andersen, in its role, appeared to have acquiesced in these dealings, despite concerns raised internally in a February 2001 memo.
And again, I'd like to quote, as the chairman has -- both the chairman of the full committee and the chairman of the oversight committee -- from the Powers report, that these transactions consisted of, quote: "a flawed idea, self-enrichment by employees, inadequately designed controls, poor implementation, inattentive oversight," end quote.
We are indeed uncovering more and more information. Unfortunately many of the folks today will use the Fifth Amendment, which they're entitled to do. But that leaves the general impression that something occurred here which was wrong, and they're afraid to incriminate themselves.
I would close, Mr. Chairman, by saying that something is going on here in space and time, and that we, as members of Congress, have a fiduciary responsibility to ferret out the details and facts for the American people, and it's an awesome responsibility.
And I yield back the balance...
GREENWOOD: The chair thanks the gentleman, and recognizes for an opening statement the gentleman from Louisiana, Mr. John.
REP. CHRIS JOHN (D), LOUISIANA: Thank you, Mr. Chairman.
On Tuesday this committee had a real opportunity to review and discuss the Powers report. It provided the subcommittee with at least a little glimpse of the questionable and, more likely, criminal activities that contributed to Enron's financial collapse.
Yesterday the full committee had an opportunity to hear from experts in the auditing and accounting field about what can we learn from the lessons at Enron.
Today, however, is the main event. While it appears that most of us will learn from the first three panels at most their ability to recite the Fifth Amendment, I'm hoping that the remaining witnesses can shed a little more light on the numerous partnerships and transactions and businesses with Enron.
It is important to remember, from a committee standpoint, that we, the members, do not sit as prosecutors, judges, jury members in determining the guilt or innocence of our panelists. I have confidence in the ability of the U.S. Department of Justice to pursue justice of what clearly, to me, appears to be securities fraud, insider trading and obstruction of justice.
The illegal and unethical conduct of Enron officers and managers is an important component in our congressional investigation. But it is the legal loopholes and business practices of companies exemplified by Enron's use of, quote, "aggressive accounting," that I feel is our primary charge of this subcommittee.
We cannot protect against every bad actor in corporate America who decides to willfully break the law, although we can make sure that the tools are available to regulators so that we can catch them.
We can, however, make sure that shareholders and investors are not misled by inadequate disclosure, conflicts of interest or, may I quote from the Powers report, "walking conflicts of interest," and a lack of independence in the performance of auditing functions.
Mr. Chairman, I believe today we have the architects of Enron's house of cards. And I'm eager to hear from Mr. Skilling and others their views and their roles in the eventual collapse.
The Powers report concluded that many of the partnerships created by the first three witnesses were, from the very beginning, fraudulently created because they transferred no risk and were designed for the very sole purpose of shifting debts and liabilities off balance sheets.
HEMMER: As we continue to work way through this hearing, we want to break some things down for us right now. Richard Breeden is with us live in New York City. We talked with Mr. Breeden earlier in this week, a former chairman of the FCC.
Sir, good to see you this morning again.
RICHARD BREEDEN, FMR. SEC CHAIRMAN: Good morning, Bill. HEMMER: You've been able to listen while we listen as well. Many times for our viewers, and even for us, this can be very complicated stuff. You did hear Representationtive Greenwood about 20 minutes ago say that he does anticipate to get some sort of answers today despite the anticipated Fifth Amendments that we anticipate will hear sometime probably before noon Eastern Time. What kind of answers can we anticipate out of a hearing like this, sir?
BREEDEN: Well, it's interesting, Mr. Dingell, who was just speaking, before we cut away is setting up an interesting dichotomy here for the witnesses who will testify. Are they going to claim that were innocent in the sense of not aware of what's going on in their company even though they were top-level officers, or where they aware and participants? And -- as he put it, were they innocent -- were they incompetent or were they corrupt. Was that a difficult challenge for any witness to step into as they counterpose those two possibilities against the demands of people to see ethics and integrity, and see somebody standing up for fiduciary duties.
So all these witnesses are going to have a very tough time.
HEMMER: Back in a second here. But if the fifth is played by many, what will get done today?
BREEDEN: Well, I think that's -- we will really have to see how much these witnesss have to say and how much testimony the committee is able to elicit. But you know, this is one of the most -- in the last -- it's been 30 years since the Watergate hearings, which when most Americans got a glimpse of the inner workings of the White House, and, Bill, I don't at the time when most Americans have had a glimpse like this into the workings of a major American company, and unfortunately, one that failed.
HEMMER: That is very true. And quickly here, you heard talk about the stock market and confidence for American investors to continue to put money in public companies. Is that at stake ultimately here as well, not just dealing with Enron, but the rest of financial world, sir?
BREEDEN: Well, I think that's one of the most important things that is at stake here. And you're certainly seeing in the market an Enron effect, Enron-itis pressure on the stocks and a number of companies, and a lot of just basic concern and fear about the quality of company's financial statements.
And I think it's very important for the market, and the investment community, and citizens broadly to understand that what happened at Enron is not typical of most American companies, or at least we're going to find out if that's the case. But I -- you know, it's a very special case and a bad one, but let's not all assume that this is typical of every company out there.
HEMMER: I mentioned the complications involved here. Certainly we will try and track and follow on that. A lot of us are going to get a heck of an education when it comes to economics and investment. You heard Billy Tauzin, though, say a short time ago -- and I will quote him though -- he said it's not necessarily a complicated matter. In his words -- quote -- "It's a simple story of old-fashioned theft. Simply stated, is that what it deals with?
BREEDEN: Well, that's certainly part of what's going on here. Part of it is ultimately, it's clear from the Powers Report, if that report is accurate, that there are corporate insider who enriched themselves substantially at the expense of the Enron shareholders. There's more to story, though. It's not purely a question of that looting, but also questions of what happened to all the other people who should have been watchdogs to help prevent this? Why didn't they act? That's going to be a major question, a major underlying theme in every witness, is where were you and why didn't you do something.
HEMMER: Richard, thanks. We will let you go free here to listen again, and we will rejoin that hearing on Capitol Hill regarding Enron and also Tommy Franks is there as well, in another hearing on the Senate side. We'll track them both throughout the day.
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