INVESTIGATING ENRON
February 8, 2002

Congressional investigators find substantial evidence of illegal activity as key witnesses testify about Enron's collapse. Background report

 

Online Specials: Enron: After the Collapse Energy Deregulation Feb. 7, 2002: Former Enron CEO Jeffrey Skilling's statement clashes with testimonies of two other Enron executives. Feb. 6, 2002: Sec. of the Treasury Paul O'Neill talks about the economy and the Enron collapse. Feb. 3, 2002: Assessing the Powers report and its impact on the Enron investigation. Feb. 1, 2002: Experts discuss pension reforms and ways to safeguard 401(k) plans. Jan. 23, 2002: Members from the House Energy and Commerce Committee discuss the Enron investigation. Jan. 22, 2002: Paul Solman demystifies Enron's accounting alchemy. Jan. 18, 2002: Questions and answers about employee retirement accounts following the financial collapse of Enron. Jan. 17, 2002: Three experts assess the potential impact of the SEC changes. Jan. 10, 2002: Experts discuss the Justice Department's investigation of Enron. Dec. 12, 2001: A look at how former Enron employees are coping with Enron's collapse. Nov. 29, 2001: Energy market experts talk about the sudden downfall of Enron Corp   News For Students Not Business As Usual: Enron becomes the largest company ever to go bankrupt.     Enron Corporation The White House The U.S. Labor Department The Securities and Exchange Commission The Treasury Department The Federal Energy Regulatory Commission The US House of Representatives The US Senate	MARGARET WARNER: For a closer look back at a week that was Enron on Capitol Hill, we turn to John Coffee, a law professor at Columbia University, he teaches security regulation; Nancy Luque, she's a former federal prosecutor, specializing in white collar crime; and John Schwartz, a reporter for the "New York Times" who's been covering the story from Houston. Welcome to you all. Professor Coffee, beginning with you, let's pick up on what Senator Dorgan said. What did we learn this week about who is or was responsible?
	Just scratching the surface
	JOHN COFFEE: Well, we've started the week with the Powers Report. And the Powers Report sketches a scenario in which the primary villain is Andrew Fastow. He's presented as a predatory person who, with his associates, has virtually looted the company and enriched himself. But that explanation requires that the board explain why they let Mr. Fastow operate on both sides of the deal, wearing two hats with an egregious conflict of interest. Their explanation was that they were depending on a monitoring structure in which Mr. Skilling was at the top of the chain and he was going to oversee everything. Mr. Skilling appears before Congress and denies that. He says he has no recollection. His strategy appears to be to maintain a posture of plausible deniability. By the end of the week, that posture was significantly undercut by the McMahon testimony. Mr. McMahon was the treasurer and he describes how he sat down with Mr. Skilling, told him this was a dysfunctional organization, that you couldn't have Fastow in that position where he was monitoring all the employees on both sides of the transaction, and Mr. Skilling appears to have agreed with Mr. McMahon and that leaves the ball in Mr. Skilling's court. He's had the advice from Mr. McMahon, he signed at least one memo in which he acknowledges to the board that he knew about these partnerships. And there are some other indications that he heard about this from Mr. Fastow. So he's got this defensive posture, he's hunkering down in the bunker saying he didn't know anything like Sergeant Shultz. MARGARET WARNER: In "Hogan's Heroes." JOHN COFFEE: Yes. But there appear to be others who are ascribing knowledge to him. MARGARET WARNER: Nancy Luque, what you would add to that? How much closer did we get to figuring out what really happened? NANCY LUQUE: I think it was a very good summary of what we learned so far. I guess the Powers Report sort of is scratching the surface. And I'm not sure Congress took that any further because instead of asking good questions and there being much follow-up to the questions that get asked, instead we have a lot of banging on the table and talking about how bad the people are who are there. And so I'm not - I think that was a good summary of what we know at this point and I think we need to know a lot more about who benefited financially from these transactions to try and figure out who the bad guys are. MARGARET WARNER: What did we learn about the corporate culture at Enron that allowed all this to flourish? NANCY LUQUE: Well, again, from what appears to be out there now, it almost seems like the CIA with a compartmentalized culture, people saying you have a need-to-know basis and this is what you are going to know, and other people saying I don't want to know that. I just want to know the line of authority that I have -- with a few people trickling over between boxes to no effect. And so it seems as though, again at this point, it seems as though that's the kind of culture it was.
	Inside the Enron culture
	MARGARET WARNER: Professor Coffee, what would you add to that, about the corporate culture that emerged, when we heard all these different people from Enron testifying yesterday? JOHN COFFEE: Well, I was fascinated by Mr. Mintz's testimony. MARGARET WARNER: He's the lawyer, right? JOHN COFFEE: He's the senior counsel of the company. He repeatedly tried to go to Mr. Skilling, and he was told by the company's chief accounting officer and the company's chief risk officer to leave it alone. Don't bother Skilling; he doesn't want to hear it. There could be retaliation. Now that's the kind of world in which you begin to learn the culture says don't give adverse information to those at the top; they don't want to hear it. They want to maintain this kind of ostrich-like posture. And for a long time, they appeared to have succeeded. MARGARET WARNER: John Schwartz, you wrote a big profile of Jeff Skilling in yesterday's "New York Times." How did the Jeff Skilling you reported about jibe with the Jeff Skilling we saw on Capitol Hill? JOHN SCHWARTZ: Well, the Jeff Skilling who testified on Capitol Hill is a terrific talker. He gives great presentations. But it's impossible to tell what's going on behind his eyes. And that's what we saw yesterday. Interestingly enough, the culture that we're talking about is one that Mr. Skilling implemented at the company in -- over his time there. This sense that you shouldn't rock the boat, you shouldn't ask questions was played out in a process of employee review that was referred to within the company as "rank and yank." People would, superiors would get into a group, talk about the employees and decide who was the top rated employee in the group, who were the lowest rated employees in the group and the lowest rated often times would get kicked out of the company. MARGARET WARNER: That was the yank part. JOHN SCHWARTZ: That's right. First you rank and then you yank. And in the company itself, this created an atmosphere in which people simply became increasingly afraid to speak out. MARGARET WARNER: Yet you also sketched out in Skilling's rise in his ten or eleven years there, he really changed the whole business model for the company and created in some other ways a culture that encouraged risk taking, didn't he? JOHN SCHWARTZ: Absolutely. When the company that Jeffrey Skilling came to was a major natural gas oil pipeline company; they moved energy around the country. The company that he left was one of the world's largest trading companies with markets in all manner of commodities, things that you couldn't imagine: Selling rights to water, commoditizing things like broadband services, energy, paper, chemicals. And this was a completely different company, and the atmosphere that he tried to build, and in many ways, a very powerful business model, was to go out there, try it. Be creative, take a chance and see if something good doesn't happen from it. And very often the things that happened were good.
	What did Skilling know?
	MARGARET WARNER: Nancy Luque, one of the big points of contention, as Professor Coffee was laying out and as we saw yesterday is, obviously, how much did Jeff Skilling know and when did he know it, particularly about what Andrew Fastow, the man who ran a lot of these partnerships was doing. Now how will prosecutors get to the bottom of this? They're obviously going to have a lot more tools than the people on the Hill do. NANCY LUQUE: I think one of the things that -- I want to follow up on what he said - MARGARET WARNER: Certainly. NANCY LUQUE: Skilling is a risk taker. What he did yesterday was, I'm sure, over the advice of his counsel, he decided he was going to go ahead and roll the dice, facing a lynch mob essentially in getting his story out. I think what - unfortunately I think what may happen is prosecutors may focus on him now whether he told the truth or not, whether or not he can back up or the documents back up what he is saying, whether there are people other than McMahon who are going to come forward and say, no, that isn't the truth. So I'm not sure that did him much good in terms of the prosecutors. They're going to try to figure out exactly what you said. What did people know, when did they know it and most importantly because they always follow the money, who benefited from whatever conduct occurred? Did Fastow benefit the most? Did Skilling benefit the most? Did others associated with Fastow benefit the most? Or is all of this simply something that could have been done under ordinary circumstances and/or is there potential civil liability, perhaps but no criminal liability? And that's a hard call to make, whether or not somebody went over the line into that conduct, which is criminal as opposed to doing something that was inappropriate and probably not in the interest of the shareholders. MARGARET WARNER: John Schwartz, back to you. You also wrote a profile about Andrew Fastow. And what did your reporting show about the relationship between him and Jeff Skilling? In other words, was he someone who could be a kind of a rogue operator, or did he, as some people said yesterday in the testimony just cited by Professor Coffee, he kind of needed the protection of Jeff Skilling? JOHN SCHWARTZ: Well, in fact, Jeff Skilling kept around him a circle of lieutenants and those people had his every confidence. But they were very tight. And Fastow was one of the tightest. They were, as one person said, Andrew Fastow is not really a mastermind. He's the sort of guy who you say to jump, and he says how high and where. On the other hand, other folks have told me that Jeffrey Skilling was great at telling people where to go but didn't pay a lot of attention to execution. So there is room in there for the sort of person who has his confidence and goes ahead and goes farther than he should while Mr. Skilling stays conveniently unaware.
	The task for prosecutors
	MARGARET WARNER: And, Professor, what would you add to that in terms of the task before prosecutors now and how they're going to get to the bottom of this? JOHN COFFEE: Well, prosecutors usually behave in these kind of white collar investigations by moving from the bottom up; by finding the first domino to fall and then seeing if you can topple them in order, moving toward the most senior figure. There were a number of underlings below Mr. Fastow who seemed to have received undisclosed benefits. And they can be the target of old fashioned, traditional wire and mail fraud prosecutions. In turn, the prosecution may offer them considerable leniency and plea-bargaining if they will testify against the people who look like they're the primary targets: Mr. Fastow, who is very much in the cross hairs, and Mr. Skilling if you can attribute enough knowledge. There are a lot of enigmas about Mr. Skilling. He kept refusing to sign memos to the board about these partnerships even though he knew about them. And in the end the fact that you refused to sign something may give the jury more evidence than the fact that you simply signed a pedestrian form. It's going to require a lot of evidence, but ultimately prosecutors can prove that someone knew something and thought it was sufficiently suspicious that they wouldn't sign their name to the approval memo. MARGARET WARNER: And then you also have the, what I call the enablers, the outsiders like, for instance Arthur Andersen. How do they figure into-- could they be very useful to prosecutors? JOHN COFFEE: Certainly. And Arthur Andersen is in deep trouble because of document destruction. They may decide that the only way for them to go forward is to totally cooperate, admit the errors with regard to document destruction and try to show that they didn't deceive the board; that rather they told everything in full detail to Skilling and Fastow. We don't know what Arthur Andersen told Skilling, what communications there were between them but that's exactly what prosecutors should focus on and Arthur Andersen has every incentive to say we spilled everything before Mr. Skilling and he wouldn't listen. MARGARET WARNER: All right Professor, Nancy Luque and John Schwartz, thank you all three.