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| INVESTIGATING ENRON | |
 February 4, 2002 
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| KWAME HOLMAN: These
members of the Senate Commerce Committee had expected to spend the morning
questioning former Enron CEO Kenneth Lay. Instead, they had to cancel
their hearing because Lay suddenly announced yesterday he would not appear
before them. North Dakota Democrat, Byron Dorgan, was to chair the hearing.
SEN. BYRON DORGAN: I regret that he's not coming to the committee at this point. We had been told for over a month that he was going to be available, was anxious to testify. We were told that on last Friday and last Saturday. KWAME HOLMAN: Dorgan speculated it was the release of a critical internal report that caused Lay to decide not to testify. SEN. BYRON DORGAN (D-ND): And then the Powers report came out, which was the report commissioned by the board of directors of the Enron Corporation, and I think that represents the door through which Mr. Lay escaped. I believe that the report that was issued by the board of is a pretty devastating indictment of a number of things that went on inside the corporation. KWAME HOLMAN: Lay's attorney blamed members' strong statements about Lay over the weekend for his refusal to come forward. Today, members were undeterred. SEN. PETER FITZGERALD (R-ILL): Mr. Lay may contend, and I would stipulate it's theoretically possible, that Mr. Lay as CEO did not know what was going on beneath him. But the documents give the impression that there were so many transactions taking place over so long a period of time that, to believe that, you would have to conclude that Mr. Lay was the most out-to-lunch CEO of any corporation in America. KWAME HOLMAN: Committee members will meet tomorrow to decide whether to subpoena Kenneth Lay, which may guarantee his appearance, but cannot force his testimony. Later this afternoon, the second Enron investigative committee scheduled to hear from Kenneth Lay today went ahead without him, but this House Financial Services subcommittee had other witnesses scheduled, including the author of the Enron internal investigation. The report by William Powers, dean of the University of Texas Law School, is an analysis of the myriad transactions between Enron and its investment partnerships that led to the company's plunge into bankruptcy. The report concluded high-ranking employees involved in Enron partnerships "were enriched by tens of millions of dollars they should never have received"; management allowed Enron to conceal from the market very large losses -- at least a billion dollars -- by using misleading accounting procedures; and controls were lax and oversight was inadequate by both managers and the Enron board of directors. Early this evening, the Committee swore in and began hearing testimony from report author William Powers.
GWEN IFILL: Here to dissect the Powers report and more, we're joined by John Coffee, professor of securities law at Columbia University; John Fahy, a certified public accountant and former federal prosecutor in New Jersey; and Charles Elson, director of the Center for Corporate Governance at the University of Delaware. Gentlemen, welcome. Professor Coffee, the effort this report, the Powers report, is clearly an effort to lay out a road map at least to investigators. The question I guess is, after looking at this report, do you think it's also a road map to crimes? JOHN COFFEE: I think we see two different road maps here. We see even from the perspective of the board of directors everything about the governance of Enron had become pathological. Nothing was working as it was supposed to work. And along the way-- and this is very normal-- we find that when the mechanisms of corporate governance break down, some officers, particularly at the lower and middle level, wind up with their hands deeply in the till. And there is a very specific picture here of a number of officers who seemed to have engaged in predatory self- dealing, receiving millions of dollars without ever disclosing to the board that they were contracting with the board of directors of Enron. GWEN IFILL: Mr. Elson, do you think that there is a case here of intent, and is it important whether there was intent involved? CHARLES ELSON: Well, the report certainly concludes that there was intent on the part of the officers of the company. Vis-à-vis the board itself, obviously this report was written by the board itself or members of the board itself. It suggests really sloppiness on the part of the board. No surprise there. But vis-à-vis the officers, the report seems to suggest that they knew exactly what they were doing and were acting to defraud-- pretty heavy charges. Again, you have to remember this report was authored by the board. It also shifts the blame to some other parties, too, including the third party advisors, Andersen and to Vinson and Elkins, which is obviously troubling for those folks. But remember, this was done by the board. It's not necessarily dispositive. It is going to be a long time before all the facts come out and we know who knew what when and where. At that point, we can reach pretty strong conclusions as to who were the intentional actors and who were not. GWEN IFILL: You don't think it's significant... I want to get to your point about the board's involvement. You don't think it's significant that Mr. Powers and the other members of this committee were appointed to this and appointed to the board at the end of October, after all this happened? CHARLES ELSON: There are three directors involved in this. The first director, Mr. Winnaker, has been on the board for a long time, and I think shared the Finance Committee that approved some of the conflict transactions that were in question. Mr. Powers came on the board in October to I think do this investigation, though some questions have been raised about his relationship to the company before coming on the board, though he's obviously an individual of great integrity and wisdom. Mr. Traub, who is the third author, truly came on after everything was done. He was appointed to the board the evening before the board went into bankruptcy, the company went into bankruptcy. But if you read through the report, it's sort of interesting, because there are all sorts of people making cameo appearances and cameo disappearances as conflicts come up. One part of the report, vis-à-vis the law firm, had said, well, one of the directors will not comment, Mr. Powers, because of a relationship with Vinson and Elkins. GWEN IFILL: A lot of interconnectedness. CHARLES ELSON: Yeah, which, you know, again doesn't really affect the report dramatically, but does affect it, I think, as a dispositive document on what happened and when. GWEN IFILL: Let me get to Mr. Fahy, because I'm curious from a prosecutor's point of view whether the unusual... How unusual were these partnerships that we saw set up, and therefore how prosecutable? JOHN FAHY: The answer is that these partnerships are allowable under securities law, as long as there's a 3 percent owner outside of Enron, and as long as that owner has 3 percent of the liability that would be... That would come due and owing. The significance of the report, though, is that it indicates that they manipulated the ownership in those partnerships so those partnerships were almost shell corporations. The other thing with the report, from a prosecutor's perspective, is the report says they manipulated their income statement. They increased their profits, and the report goes on further to state that many of the transactions with these partnerships had no economic value at all, and they were done merely to keep the shell game alive. GWEN IFILL: So when you talk about shell games, you're saying they created these partnerships, they created these entities that didn't exactly exist because Enron was behind both sides of the deal. JOHN FAHY: Yes, it was. And to make it worse-- and I don't think we understood this before this report came out -- but there was a feeling that perhaps these partnerships were there to keep the company afloat, and even though that would be criminal, there wasn't a very good motive. According to the report, senior people at Enron made huge amounts of profits from these partnerships, and that... So now you have fraud, a reason for the fraud, on the one hand, and you have people who are perpetrating the fraud making millions of dollars. So for a prosecutor, that's something that they love to see, and it gives them a lot of sex appeal for a case, if they decide to bring one. GWEN IFILL: Because of the personal benefit that these people got. JOHN FAHY: Yes. GWEN IFILL: Professor Coffee, I am curious about whether you think, based on what you're reading of the report, if there were enough red flags, if there were enough warning signals that this board, which authorized its report, should have seen some of this coming? JOHN COFFEE: Of course they should have seen it coming. I think that the report itself says that the board was grossly negligent. What the report is emphasizing-- and what is the critical difference-- is that negligence doesn't create liability for fraud. You have to move from being stupid to being willfully intending to defraud before you have criminal liability. And this report, while it finds fraudulent intent on the part of some officers and possibly on the part of the outside accountants, is fairly strong in its statements that the board was deceived and the board didn't have that intent. And of course it's not entirely surprising that, given the author of this report, that they reached that conclusion. GWEN IFILL: And they also seem to say that Kenneth Lay, the CEO, who did not testify today, may not have had intent, but that he may have been not a very good steward of his company. JOHN COFFEE: I think there's no question but that this report does actually protect him, to the extent that it somewhat diminishes the prospect of a criminal prosecution for him. They don't find the evidence, and there isn't going to be the simple road map for the prosecutors with respect to an indictment of either Lay or Skilling. But it's very different once you go below their level. GWEN IFILL: Mr. Elson, what should the board have done if they indeed had seen these warning signals, if they were responsible for recognizing and pulling the coat of the folks who were coming up with these deals? CHARLES ELSON: The first thing, the real tip-off here was the fact that they were asked to waive the company's code of ethics with respect to a couple of the transactions involving the chief financial officer. That's a really troubling thing. That's extraordinary, if you think about it. The CFO is the chief financial control officer. Asking to waive the company's code to allow the chief financial officer to be on two sides of the transaction from a corporate governance standpoint is extraordinary. Once that was proposed, the board should have been all over that. GWEN IFILL: The CFO in this case is Andrew Fastow. Do we have any indication from that report whether he had an okay from the upper higher-ups in this, whether they signed off on these deals? CHARLES ELSON: You know, the fact that it went before the board, it had to go through the CEO to get to the board certainly. So obviously someone in management didn't think this was problematic. Again, it went to the full board. And the board, rather than stopping and saying, why is this going on? Why are we waiving this? What is the intent of these transactions? Perhaps we need a third party to come in and examine this. Are the auditors really comfortable with this? Is our outside law firm really comfortable with this? At that point bells and whistles should have gone off, and the board should have really stepped back. They didn't. That's what the board claims. Why they didn't we'll have to find out as time progresses. It's extraordinary. GWEN IFILL: Mr. Fahy, how significant was it, what we saw in the report? Was it pointing fingers, or was there something significant about the degree to which this report went after Andersen Consulting and went after Vinson and Elkins, the law firm which had done the earlier study that said all of this was not irregular? JOHN FAHY: I think it's significant that they went after them, because some of the blame has to lie with the outside authorities, and also with the law firm to some degree, the auditors. Management in a company wants opinions in a particular area, but it's up to the professionals, to the CPA's and to the lawyers, to make sure they're on firm ground when giving advice to large corporations. GWEN IFILL: When the report says that Kenneth Lay was responsible for what happened there and he was the captain of the ship, does that make him criminally liable? JOHN FAHY: From this report, it does not lay out any criminal liability by Lay. However, I suspect that perhaps one of the reasons he didn't want to testify today is, if he's asked other questions as to what his involvement was with Fastow, as to what he knew about these partnerships, as to what he knew what was going on since 1997-- all of those specific questions-- no matter how he answers it, if he says he didn't know about it, there may be documents that indicate that he's not telling the truth. If he says he did know about it, that may bring him criminal liability. There's an awful lot of unanswered questions. This report really doesn't address Kenneth Lay and his involvement. GWEN IFILL: Professor Coffee, because there are so many unanswered questions and we did not see Kenneth Lay testify before Congress today, how do we begin to get to the bottom of so many of these questions? JOHN COFFEE: Well, you're right. We haven't heard the last word. I'm sure we're going to hear Arthur Andersen reply to Enron and say it was more their fault than the auditors' fault. In that mudslinging contest, both sides could be right. But what we do see from this report is a very professional job of objectively describing facts, facts that show a complete breakdown in terms of the governance structure, facts that show pretty strong evidence of failure by the auditors, and finally facts that for the first time suggest to us that some people really did have their hand in the till, and were frankly looting the company by looting these off-balance-sheet funds that were out of sight and out of mind. GWEN IFILL: Crystal ball. Do you have any reason to believe that any of the people who we talked to-- Jeffrey Skilling, the former CEO; Kenneth Lay, the former CEO; or Andrew Fastow have any vested interest in this point testifying before Congress? JOHN COFFEE: I would think that any criminal defense lawyer talking to any one of those three would give them very strong warnings that they are making their case much, much weaker if they make any statements under oath to Congress without immunity. And I don't think this Congress is willing to give them that immunity. So I think once you see the specter of criminal prosecutions loom out there, any criminal defense lawyer is going to strongly advise you to sit tight and come up with some reason why you can't testify, and if need be, take the fifth, as embarrassing as that is. GWEN IFILL: Mr. Elson, does this bear any recommend ambulance at all in your recollection to the shadow games of the savings and loan scandal? Is this comparable in any way to that? CHARLES ELSON: There's some similarities, but on the other hand, this appears, at least taking the report as true, it's just plain old garden kind of variety of financial fraud, again assuming that the report was accurate. Unfortunately, fraud on the market is as old as humankind. This will unfortunately not be the last. We hope it will be, but it probably won't. The key is reform to make it a lot tougher to have something like this happen-- reform, in my view, in the governance of the board itself and the way the board was structured. GWEN IFILL: Okay, gentlemen, thank you all very much.
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