[Senate Hearing 107-773]
[From the U.S. Government Printing Office]

                                                        S. Hrg. 107-773
                           COLLAPSE OF ENRON



                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION


                           FEBRUARY 12, 2002


    Printed for the use of the Committee on Commerce, Science, and 


82-951                 WASHINGTON : 2005
For sale by the Superintendent of Documents, U.S. Government 
Printing  Office Internet: bookstore.gpo.gov  Phone: toll free 
(866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2250 Mail:
Stop SSOP, Washington, DC 20402-0001


                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

              ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii             JOHN McCAIN, Arizona
    Virginia                         CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana            KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon                    SAM BROWNBACK, Kansas
MAX CLELAND, Georgia                 GORDON SMITH, Oregon
BARBARA BOXER, California            PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina         JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri              GEORGE ALLEN, Virginia
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel
      Jeanne Bumpus, Republican Staff Director and General Counsel

                            C O N T E N T S

Hearing held on February 12, 2002................................     1
Statement of Senator Allen.......................................    23
Statement of Senator Boxer.......................................    15
    Article from the San Jose Mercury News, dated February 10, 
      entitled, Enron Collapse Strongly Felt in California; From 
      Pensions to Energy Prices, Effect on Government Is Broad...    16
Statement of Senator Breaux......................................     9
Statement of Senator Brownback...................................    20
Statement of Senator Burns.......................................     5
    Prepared statement...........................................     6
Statement of Senator Carnahan....................................    21
Statement of Senator Cleland.....................................    13
Statement of Senator Dorgan......................................     2
Statement of Senator Ensign......................................    22
Statement of Senator Fitzgerald..................................     3
Statement of Senator Hollings....................................     1
    Article from The New York Times, dated January 13, 2002, 
      entitled, Enron's Collapse; Complex Web of Relationships in 
      Boom and Bust..............................................    44
Statement of Senator Hutchison...................................    10
Statement of Senator Inouye......................................     5
    Prepared statement...........................................     5
Statement of Senator Kerry.......................................     7
Statement of Senator Lott........................................    25
Statement of Senator McCain......................................     1
Statement of Senator Nelson......................................    23
Statement of Senator Smith.......................................    14
Statement of Senator Snowe.......................................    12
Statement of Senator Stevens.....................................     8
Statement of Senator Wyden.......................................    11


Lay, Kenneth L., Former Chairman and CEO, Enron..................    25
Powers, Jr., William C., Member of the Enron Board of Directors 
  Chairman of the Special Investigation Committee................    26
    Prepared statement and executive summary.....................    29
    Letter dated February 6, 2002, from William C. Powers, Jr. to 
      Joseph F. Berardino........................................    69

                         THE COLLAPSE OF ENRON


                       TUESDAY, FEBRUARY 12, 2002

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:30 a.m. in room 
SR-253, Russell Senate Office Building, Hon. Ernest F. 
Hollings, Chairman of the Committee, presiding.


    The Chairman. The Committee will come to order. For the 
record, this Committee on Commerce conducted its first Enron 
hearing on December 18, and shortly after that hearing, Mr. 
Kenneth Lay, the Chairman, committed to testifying on Monday, 
February 4. However, on Sunday night, February 3, Mr. Lay's 
attorneys notified the Committee that Mr. Lay would not appear, 
and so we canceled that hearing, and the Committee voted 
unanimously on February 5 to authorize the Chairman of the 
Committee to issue a subpoena to compel the appearance of Mr. 
Lay before the Commerce Committee on February 12. The Committee 
was notified on Sunday night, February 10, that Mr. Lay would 
appear before the Committee but would assert his Fifth 
Amendment right against self-incrimination.
    We have a vote in about an hour's time. I know the Members 
are anxious to make their opening statements, but the request 
is to please make them as brief as possible, because if we went 
to all 23 Members it would be about an hour and 40 minutes, and 
I would like to get through the opening statements and swear 
the witness prior to that vote.
    I am going to yield from side to side here. My Ranking 
Member, Senator McCain.

                STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    Senator McCain. Thank you, Senator Hollings, and I will 
make a very brief statement.
    In a speech given by Mr. Kenneth Lay on April 6, 1999, at a 
conference sponsored by the Center for Business Ethics 
entitled, ``Corporate Governance: Ethics Across the Board,'' 
Mr. Lay described the qualities he demanded in a Board member. 
I quote: ``It is no accident that we put strength of character 
first. Like any successful company we must have directors who 
start with what is right, who do not have hidden agendas, and 
who strive to make judgments about what is best for the 
company, and not about what is best for themselves or some 
other constituency.''
    He went on to say that, ``Once such a board is in place, 
what does a CEO--and in particular, this CEO--expect from these 
principled, wise, and experienced directors? Again, our 
corporate governance guidelines are simple and straightforward. 
The responsibility of our board--a responsibility which I 
expect them to fulfill--is to ensure legal and ethical conduct 
by the company and by everyone in the company. . . .''
    As Enron's Chairman of the Board, and CEO since 1986, Mr. 
Lay was expected to live up to these principles and ensure that 
others in his company did the same. According to the Powers 
report however, senior management at Enron made a mockery of 
Mr. Lay's words and turned the principles he described on their 
    The Powers report indicates that for years Enron engaged in 
financial games, hiding massive debt from its shareholders and 
misrepresenting its economic conditions to the public and to 
many Enron employees. Yet, after years of business shenanigans, 
and pointed warnings that Enron was going to ``implode in a 
wave of accounting scandals,'' the New York Times has reported 
that during an online chat with Enron employees, as late as 
September 2001, Mr. Lay called Enron's stock, ``an incredible 
bargain,'' and said that, ``the third quarter is looking 
    Mr. Lay, I regret that you have chosen not to explain to 
this Committee, to the American public, and to your former 
employees how you, and others in senior management and on the 
Board of Enron apparently failed so completely to fulfill your 
    Thank you, Mr. Chairman.
    The Chairman. Thank you. Senator Dorgan.


    Senator Dorgan. Mr. Chairman, Mr. Lay's attorneys have told 
us that he will invoke his Fifth Amendment right against self-
incrimination, and he certainly has that right. I must say, I 
am disappointed by that decision. I think Mr. Lay has a story 
to tell. We and the American people would like to hear that 
story. The bankruptcy of this corporation is not a garden-
variety business failure. It is a bankruptcy framed by very 
serious questions about the behavior of officers, directors, 
and the accounting firm that audited the corporation's books.
    It appeared to me that we have seen a corporation here 
inside the records that I have seen consistently challenging 
and bending the rules, manipulating financial information to 
hide debts, and booking profits that did not exist.
    Some eight weeks ago, Ms. Janice Farmer sat in our witness 
chair. She was an Enron employee, and she told us that the 
bankruptcy demolished her life-savings. On behalf of Ms. Farmer 
and thousands of other Enron employees who lost their 
retirement accounts and investors who lost their savings, we 
have an obligation to ask how is it that 29 Enron executives 
and directors at the top were able to earn over $1 billion in 
stock sales from 1999 through mid-2001, while people at the 
bottom ended up losing everything.
    We know that the Enron Corporation created many secret 
partnerships and subsidiaries off the books. They were kept off 
the books, despite the fact they burdened the company with 
additional debt. According to the Board of Directors' report, 
some of the partnerships were reporting income they didn't earn 
and incurring debt for the Enron Corporation that was never 
    Although it appears we will not hear from Mr. Lay today, we 
will receive testimony from a second panelist, Mr. William 
Powers, the head of the special investigative committee that 
was established by the Enron Corporation's Board of Directors. 
Mr. Powers is Dean of the University of Texas Law School. He is 
here today to discuss with the Committee the findings from his 
examination of a few of the now more infamous transactions 
between Enron and third party entities that eventually led to 
this corporation's collapse, just one of which, Mr. Chairman, 
the report documented and documented a number, of course.
    Mr. Fastow, the CFO, invested $25,000 of his own money and 
60 days later took $4\1/2\ million from the corporation. This 
is a publicly traded corporation. That money belongs to the 
American stockholders. They had trust in the executives, trust 
in the corporation, trust in the accounting firm, and that 
trust was broken in this case. We need to put the pieces 
together to find out what has happened, and the hearing process 
that we will begin in this Subcommittee is an attempt to do 
that, Mr. Chairman.
    The Chairman. Thank you. Senator Fitzgerald.

                   U.S. SENATOR FROM ILLINOIS

    Senator Fitzgerald. Thank you, Mr. Chairman.
    Mr. Chairman, during the past several weeks I have spent a 
significant amount of time going over the rubble that is Enron. 
I was disappointed to learn that you, Mr. Lay, have no 
intention of testifying this morning, because I have lots of 
questions that I think are important to ask you. And you know 
what, Mr. Lay, I thought that after any role you might have 
played in bankrupting a $100-billion-a-year company, 
devastating the retirement savings of thousands of your 
employees, spreading fear through millions of Americans 
concerned about their investment, and calling into question the 
very integrity of our capital markets, I thought that you might 
think it was important to answer those questions, too, but 
apparently you do not. Apparently you do not think it is the 
least you can do.
    As part of the investigation underway by my subcommittee, 
the Consumer Affairs Subcommittee, I have looked at literally 
hundreds of documents, and I have heard or read the testimony 
of many others, of the many others who have already testified 
before this Committee or other congressional committees. There 
is a great deal of information out there. You cannot help but 
get angry once you begin to put together the pieces of the 
    You know what I have seen, Mr. Lay? I have seen 
ridiculously complex transactions that boil down to simple 
games. For example, over and over again, Enron would transfer 
questionable assets to partnerships, and the partnerships would 
pay Enron inflated amounts for the questionable assets, and 
where did the partnerships get the money they paid to Enron? 
The partnerships raised their money from lenders or investors 
who often were relying on some form of guarantee or credit 
support from Enron itself, sometimes in the form of Enron's own 
    Enron seems to have installed insiders as general partners 
of these partnerships, perhaps because honest outsiders would 
not have consented to pay Enron such inflated amounts for such 
questionable transactions. Even though Enron was really just 
indirectly borrowing money, it nevertheless often appears to 
have reported the transactions on its income statements in a 
way that encouraged the false perception that these essentially 
borrowed proceeds were recurring earnings, all the while, of 
course, keeping the ballooning debt off its own balance sheet 
and parked precariously on the partnerships' books.
    As earlier debts came due, Enron would indirectly borrow 
even more money, both to pay off maturing obligations and to 
book even more fictitious income. This game kept driving 
Enron's earnings per share and stock price higher and higher 
and making senior managers whose personal portfolios were 
packed full of Enron stock richer and richer. This game worked 
until some investors and some reporters began to ask questions. 
At that point, new investors and new lenders became more 
difficult to attract, and the pyramid began to collapse.
    So what have I concluded? Mr. Lay, I have concluded that 
you are perhaps the most accomplished confidence man since 
Charles Ponzi. I would say you were a carnival barker, except 
that would not be fair to carnival barkers. A carnie will at 
least tell you up front that he's running a shell game. You, 
Mr. Lay, were running what purported to be the seventh largest 
corporation in America. What is incredible to me is how long 
you kept it going, and how almost nobody called you on it.
    There were a couple that could not be fooled, though, 
weren't there? Why is it, Mr. Lay, that occasionally some 
people will take a stand? Sharon Watkins took a stand. Sharon 
Watkins, a good life, a nice house, a great kid. She had 
everything to lose when she essentially told you that your 
company was a sham. She had every reason to walk away, but she 
stood and spoke, and you, Mr. Lay, you have every reason to 
stand and speak, but you will walk away. You will raise your 
right hand, you will take the Fifth, and then you will walk out 
that door, and when you walk out that door, it will be a 
stunning coda to the collapse of Enron.
    Mr. Chairman, I would encourage my fellow Committee Members 
not to allow the absence of Mr. Lay's testimony to be an 
impediment in our continuing search for the explanations and 
ramifications of this significant event.
    Thank you.
    The Chairman. Senator Inouye.

                    U.S. SENATOR FROM HAWAII

    Senator Inouye. Thank you, Mr. Chairman.
    The circumstances surrounding the collapse of Enron may 
never be fully uncovered. However, we can clearly see that the 
implosion of this once-towering giant has left tens of 
thousands of investors with enormous financial losses, a large 
number of employees without jobs, and pension savings 
    In the first grips of this crisis, passions are running 
high, even in this Committee, and it is only natural that 
persons and organizations of all persuasions are pressing for 
an immediate adoption of hastily drafted legislation. As we 
grapple with this sad chapter in our nation's history, we need 
to restore public confidence in our financial reporting and 
market systems, and I am certain that the Chairman will use his 
leadership wisely to guide us toward a rational response.
    Mr. Chairman, I ask that my full statement be made a part 
of the record.
    [The prepared statement of Senator Inouye follows:]

             Prepared Statement of Hon. Daniel K. Inouye, 
                        U.S. Senator from Hawaii
Mr. Chairman and Members of the Committee:

    There can be no doubt the full circumstances surrounding the 
collapse of the Enron Corporation have yet to be uncovered, and may 
never be fully uncovered. However, at present, we can clearly see that 
the implosion of this once towering giant has left tens of thousands of 
investors with enormous financial losses, a large number of Enron 
employees without jobs, and their entire pension savings eliminated. We 
can also see that the plummeting value of Enron stock and its resulting 
ripple in the financial markets has had devastating effects on other 
pension systems as well. Even Hawaii is not immune to such effects. In 
the weeks and months to come, I fear we may learn of further impacts 
from the Enron collapse.
    The viability and confidence of our financial market systems are 
dependent upon accurate and reliable information. Like everyone, I am 
most disturbed by the allegations of reckless investment practices, 
false reporting and illegal accounting practices, use of off-the-book 
balance sheets to conceal debts and liabilities and inflation of 
corporate earnings. Even savvy investors failed to detect Enron's 
financial troubles. Obviously, the collapse speaks to the possible 
failures in oversight of our financial market systems.
    In the first grips of this crisis, passions are running high, and 
it is only natural that persons and organizations of all persuasions 
are pressing for the immediate adoption of hastily-drafted proposals. 
While there can be no doubt that corrective measures to restore public 
confidence in our financial markets will be necessary, I believe 
strongly that such measures must be the product of careful study and 
thoughtful analysis. I am confident that the Chairman will use his 
leadership wisely to guide us toward a rational response.
    As we grapple with this sad chapter in our nation's history, we 
need to restore the public confidence in our financial reporting and 
market systems.

    The Chairman. Senator Burns.

                   U.S. SENATOR FROM MONTANA

    Senator Burns. Thank you, Mr. Chairman. I want to thank my 
Committee Members as we try to unravel the Enron disaster. I 
have a complete statement that I will put in the record this 
morning. I do want to read a paragraph.
    Congress is tasked with the responsibility to the American 
people. We are not here to judge or convict, but we are here to 
assure the American people and the American investors in 
circumstances such as this the folks that are at the helm do 
the right thing, and that is to protect the right people, in 
other words, the transparency in the market. We need protection 
from people who have little control over a situation, and I 
consider this an extremely important task as our nation's 
economy and also our basic principles of our economic systems 
have been jeopardized by this collapse.
    We have an opportunity here today to listen from a man who 
was there at the building of this company, had a lot to do with 
its leadership, in fact everything to do with its leadership, 
and it was on his watch that the wreck occurred, so much 
knowledge that he would have to help us either determine what 
should be done and what should not be done, as there are many 
people that one could point their finger. There is enough blame 
to go around, from banks and partners who financed the debt, 
pushed them into a gray area of accounting procedures, to 
Arthur Andersen for not reporting the financial situation 
correctly, or Mr. Lay and the Board of Directors for allowing 
it, or stock analysts for overvaluing its worth.
    That does not change a thing. We can write out a laundry 
list of people to blame, and Enron's employees will not 
suddenly have a solid future, and private investors will not 
magically see their stock gain in value, and retirees will not 
see their 401(k) plans suddenly emerge.
    What we have to do is glean our way through the information 
here and fulfill our responsibility to the American people, to 
the employees and the investors, and to ensure that our system 
    I ask unanimous consent my entire statement be made a part 
of the record.
    The Chairman. It will be included.
    [The prepared statement of Senator Burns follows:]

               Prepared Statement of Hon. Conrad Burns, 
                       U.S. Senator from Montana
    Thank you Mr. Chairman for holding this hearing. We have all 
witnessed a business failure of the largest magnitude in our history. 
What we have been told, and what we have learned through the press and 
information we have gathered has prepared us for this important 
hearing. We have before us today, the one person that was-in-large-
part, the builder of Enron Corp. But, it was also on his same watch 
that the immense collapse occurred. Not many times in our history have 
we had a single witness who represents such a large proportion of 
institutional knowledge as we do today in Mr. Lay.
    We welcome Mr. Lay here today. I am hopeful that the information 
offered today can further enlighten this Committee and the American 
people of the events that led to this collapse. While I respect Mr. 
Lay's decision to invoke his Constitutional prerogative, I am 
disappointed in the fact that Mr. Lay intends to utilize his 
Constitutional right not to answer our questions.
    I am hopeful he can fill in the blanks and connect the dots. I am 
hopeful we can answer to the 4 W's. Not only What, but When it was 
apparent that there were these internal problems, Why management acted 
the way they did, and Who were the principals. I believe we should be 
here to listen and be prepared to act based on the information 
collected and on the facts as they are known.
    Congress is tasked with a responsibility to the American people. We 
are not here to judge or convict but we are here to ensure the American 
people that when a circumstance such as this, the folks that are at the 
helm do the right thing and that is protect those who have little to 
control the situation or have the ability to protect themselves. I 
consider this an extremely important task as our nation's economy and 
the basic principles of capitalism have been jeopardized by the Enron 
    Not disregarding any illegal action or crime, I encourage Mr. Lay 
and other current and former Enron associates to assist us in our 
effort to re-instill public confidence in their investments. This is 
not about Enron executives, this is about the nation's economy.
    I don't think it is out of line to ask the important question of 
what now? What are Enron's plans for break-up and their actions and 
plans for former and present employees who lost so much.
    We have a business crises on our hands that has overriding 
implications on the corporate world and its relationship to the 
investing world and to the loyal employees whose talents were, in large 
part, used to build such an enterprise.
    From what we have heard from employees and investors over the past 
few weeks, many conclusions can be drawn. One overwhelming conclusion 
is that the leadership of a huge company failed to protect their own 
employees and on the surface, only thought about themselves. This, my 
fellow Committee Members is not the sign of good leadership. If there 
is an overwhelming dedication from the ranks of the employees with a 
high degree of loyalty, then there should be no less degree of 
dedication and loyalty expected from their leadership.
    As I believe we will hear from Mr. Powers later today, there is no 
shortage of people to blame. Whether we blame the banks and partners 
who financed Enron's debt and pushed them to use gray-area accounting 
procedures, or Arthur Andersen for not reporting the financial 
situation correctly, or Mr. Lay and the board of directors for allowing 
it, or stock analysts for overvaluing Enron's worth, that doesn't 
change anything. We can write out a laundry list of people to blame and 
Enron's employees won't suddenly have a solid future. Private investors 
won't magically see their stock gain value. Retirees' 401(k) plans 
won't suddenly re-appear.
    One thing we can do is untangle the events that led to this point. 
Then we must find out which rules were bent or broken along the way, 
and the rules that should have been in place but did not exist. Once 
these important questions have been answered, we can address policy 
concerns at the SEC, FASB and other agencies with jurisdiction or 
ultimately Congress. In short, Congress WILL take action to make sure 
this collapse and the ramification can be prevented when such a 
circumstance happens again.
    Neither Congress nor the federal government will ever be able to 
keep companies from going bankrupt. Pending national security issues, 
that is not the role of Congress. However, one thing the federal 
government should guarantee is that investors know the truth. Our 
entire financial system relies on the transparency of a publicly traded 
company's value. With Enron, it is becoming clear that was not the 
    Finally, I believe that it is important to remember we cannot 
legislate morality, that is something we expect of all Americans 
regardless of whether they are powerful corporate executives or blue 
collar workers working to put food on their family's table. From the 
perspective of American morality there should be no difference. To 
think otherwise is a crime of humanity.

    The Chairman. Senator Kerry.

               STATEMENT OF HON. JOHN F. KERRY, 

    Senator Kerry. Mr. Chairman, thank you very much.
    There are so many aspects of the Enron situation that it is 
hard to narrow it down, but I am going to try and focus on a 
couple of things very quickly, but let me just say that 
obviously, Mr. Lay, the anger here is palpable. Companies do 
come and go, as I think the Vice President said at some point, 
and people understand that when they invest, they take risks. 
But, this clearly is so far beyond any normal market 
undertaking, or opportunity for any investor, and the 
implications for people who trusted in the system, trusted the 
nature of disclosure, the nature of audits and so forth.
    As Senator Burns stated, the implications for them are 
deep, and obviously lives have been ruined, many lives at the 
top and at the bottom. That is a tragedy in and of itself, but 
it raises critical questions for all of us. The stewardship of 
a major public corporation, as Senator McCain said, the words 
he quoted of you, is a major trust. It is a public trust in its 
own way, and we in this country spend a lot of time trying to 
convince other nations of the virtue of transparency, 
accountability. We try to sell that through the framework of 
our trade regime of WTO. We try to spread capitalism around the 
world for its virtues, and here is an example of abuse that 
runs deep, not just within Enron itself, but further than that.
    I think it is safe to say that no Member of this Committee 
believes that Arthur Andersen invented this method of 
accounting. These accounting errors send shivers through the 
stock market and elsewhere in this country, as people 
contemplate what may be behind it.
    I just want to direct my colleagues to one particular 
component of this that I have been harping on for a number of 
years, because as we fight a war on terrorism, and as we talk 
about holding other systems accountable so we can follow the 
flow of money, all of us in this Congress allowed to stand for 
too long a system that undermines our capacity to do that, and 
that is offshore subsidiaries and tax havens.
    There is a fine line between tax avoidance and tax evasion. 
As we all know, shelters have been legal in certain structure 
when they do legitimate business, but countless companies--and 
Enron took this to the heights unparalleled--go way beyond any 
concept of legitimacy, and so you have Exxon-Mobil with 140 
offshore subsidiaries, Wal-Mart with 12, General Motors 316, 
Ford 73, General Electric 24, IBM 89, AT&T 36, and Verizon 21.
    I would respectfully suggest to my colleagues that all of 
those might bear some analysis, but Enron had 2,832--in Aruba, 
Barbados, Bermuda, Virgin Islands, Caymans, Turks and Caicos, 
Bahamas, Barbados, Bermuda--just on it goes, 2,832 entities in 
which they were allowed for years to hide profits, losses, move 
the entire accountability and transparency of a company so that 
they could turn around and say to the American citizen, not 
only did we not pay taxes, but Uncle Sam owes us over $250 
    Now, that is the law, and it bears looking at, and it bears 
changing. Shame on us for allowing it to stand, but more shame 
on them for not understanding the virtues of real 
accountability, real transparency, real business, and real 
responsibility to the American people, and I regret very deeply 
we are all reduced to these opening statements, which have 
their own sense of futility, because questions will not be 
answered, because the truth will not be forthcoming today, and 
there is a statement of its own in that fact.
    Thank you, Mr. Chairman.
    The Chairman. Thank you. Senator Stevens.

                    U.S. SENATOR FROM ALASKA

    Senator Stevens. Mr. Chairman, I remain concerned, as you 
and I were last week, that five or six committees are involved 
and have jurisdiction over these events, and I remain convinced 
also we must have a select committee to investigate into this 
    In my State, the teacher's fund, the State's permanent 
retirement fund suffered substantial loss, and I do believe 
that there has to be some way to convince the public that we 
are committed to honesty and integrity in our investments 
process, and to assure, as Senator Kerry says, their 
transparency, full disclosure, but that is going to take a long 
time, and it is not going to get anywhere if we have five or 
six committees all asking Mr. Lay and others to come forward 
and have a Fifth Amendment taken before each committee.
    I do believe we need a select committee. I would welcome 
seeing that our Chairman and Ranking Member of the Subcommittee 
being named the head of that committee, but in any event, just 
think Banking, Finance, Judiciary, this Committee, there are so 
many committees that are going to be involved here. Our duty is 
to try to make sure that this situation does not occur again, 
and to make certain that the private sector understands that we 
are going to be the watch dogs of the process to prevent it 
from happening again if it is at all possible, and so I would 
urge you to pursue again, as I will today at noon with the 
leaders, the concept of a select committee.
    Thank you very much.
    The Chairman. Well, I agree with you, Senator. It is 
heartening to see that the Intelligence Committees on both the 
House and the Senate side now have combined in order to bring 
order out of chaos with respect to our doubts of intelligence 
causing 9/11. I would hope we could get one. I hope somebody 
else, of course, would be the chairman, because it is the 
principal responsibility of the Banking Securities and Finance 
Committees here. That is what has really occurred.
    Senator Breaux.

                  U.S. SENATOR FROM LOUISIANA

    Senator Breaux. Thank you, Mr. Chairman.
    I am disappointed also that Mr. Lay is not going to be 
testifying. I do not think anybody in Congress or probably in 
Washington or anywhere else really thought that he was going to 
testify. If I was his attorney, I would certainly be advising 
him to take the Fifth Amendment, which is what he is going to 
do this morning, based upon the advice of counsel.
    I share some of the comments I think that Senator Kerry 
made, and the question is, is this the tip of the iceberg? I 
mean, did Enron invent this process, did Arthur Andersen invent 
this process, or is this, in fact, a process that is being used 
far too often by a number of publicly traded companies in this 
country, and so I think we have an obligation to look at Enron, 
we have an obligation to look at other companies that may also 
be engaged in some of the practices. I doubt whether Enron was 
the first to invent this process.
    The second question that I really think needs to be 
answered, and that is that is it possible that these types of 
transactions--over 2,800 subsidiaries, special purpose entities 
or partnerships that in effect were off the books in being able 
to hide the debts and liabilities--based upon accounting 
practices, or based upon the law, the federal law in many 
cases, whether, in fact, these were legal transactions.
    I for the life of me cannot imagine the law firms that are 
involved in this looking at these transactions and concluding 
that they were all illegal and then telling the companies to go 
forth and do it again. I bet they were probably saying yes, 
these things are legal under the current law, and they should 
not be. I mean, if they are, then it is our obligation to look 
at the law and make the changes necessary to make sure that 
this does not happen again in the future. It should not be 
legal if, in fact, it is. I am not sure whether it is or not. 
We should find that out, and then make recommendations on the 
    A final point is that accounting services that are doing 
audit practices clearly should not, cannot, must not in the 
future be engaged and also involving themselves with internal 
audits of a company, or preparing balance sheets for the 
company if, in fact, they are in charge of auditing the 
    There has to be a clear separation. The confidence of the 
capitalistic system in publicly traded companies in this 
country are truly at stake. If we cannot rely on outside 
auditors making statements about the condition of a publicly 
traded company, then, in fact, the whole system of how we do 
business in this country is at stake, and so there are a lot of 
things we need to investigate, and I applaud the Chairman for 
his work in this matter.
    The Chairman. Thank you. Senator Hutchison.

                    U.S. SENATOR FROM TEXAS

    Senator Hutchison. Thank you, Mr. Chairman.
    Mr. Chairman, I think everyone has acknowledged that Mr. 
Lay is going to take the Fifth Amendment today. This is not a 
criminal investigation. That is your right to do, but there are 
legitimate questions that Congress needs to have the answers 
to, and those are the questions that will keep from happening 
what happened at Enron, and I would just ask Mr. Lay to 
consider talking about laws that need to be changed, whether it 
is regarding accounting procedures--I think we are now seeing 
the ripple in the stock market. Every company that comes 
forward with an accounting practice that seems out of the 
ordinary is suffering for it, so what are the accounting 
processes that are out of the ordinary that are OK, which ones 
are not OK, how can we fix the accounting standards so that our 
stock market remains strong and the confidence of consumers 
remains strong?
    I have introduced a pension reform bill. Others on this 
Committee and in other parts of Congress also have introduced 
pension reform bills. I would like to know what we need to do 
in the way of information to protect employees' 401(k)'s. These 
are legitimate questions for Congress to ask, and I would like 
to ask Mr. Lay if he would consider answering them, because our 
job is going to be to try to protect a company from getting out 
of control, but it is not a criminal investigation, and I think 
Congress needs to ask these questions. We do need answers.
    I think we need to stabilize the stock market so there is a 
confidence here, and I would just also like to know what the 
CEO of a company could do, what should one do when they see the 
clear evidence? We do not know when you knew that something was 
wrong, but clearly, when there was a free fall in the stock, at 
some point the head of this company knew that it was cratering. 
What can a CEO do in that instance when it is in free fall to 
protect employees, to protect stockholders?
    I think these are legitimate questions, and I would like 
for Mr. Lay to try, rather than just taking the Fifth, as it is 
his right to do, look for the answers that he can give that do 
not have a criminal implication but would be helpful in giving 
Congress the information it needs to not overreact and not 
underreact, but do the right thing for the stockholders and the 
employees of this company and America.
    Thank you, Mr. Chairman.
    The Chairman. Senator Wyden.

                 STATEMENT OF HON. RON WYDEN, 
                    U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you very much, Mr. Chairman.
    Mr. Chairman, over the last couple of weeks, as this 
Committee and others requested the appearance of Mr. Lay and 
other top Enron executives, many Americans have been asking, 
why would these Enron executives testify? What do they have to 
gain by testifying? I strongly support the constitutional 
protections afforded Mr. Lay and all witnesses, but 
respectfully submit that the questions should not be, what do 
the Enron executives have to gain by testifying, but, rather, 
it is what they owe the American people at this point.
    Certainly, my constituents at home in Oregon who have had 
their 401(k)'s go from $900,000 to $100,000 in value, their 
first preference is to try to put Humpty Dumpty back together 
again. They know that is not very probable, but now they want 
an explanation, and at this point, like so many Americans, I am 
just incredulous.
    We are talking about accounting reforms, for example, now 
in the U.S. Congress. I wrote a law, over the opposition of the 
accounting profession requiring that accountants actively look 
for fraud and bring it to the attention of government 
regulators if they find any evidence that it is taking place. 
As far as I can tell, that law was honored more in the breach 
than in the observance in this case, but we will not know until 
we get to the facts.
    The fact of the matter is, it is just not possible to 
determine why the Enron ship is at the bottom of the ocean 
unless you hear from the captain, and I am especially troubled 
that we will not hear today because of the headlines in this 
morning's paper. The headlines this morning say, for the first 
time that Mr. Lay had a direct role in approving one of the 
most controversial of all the partnerships, the transactions 
between Enron and LJM2, a coinvestment transaction, and for the 
first time now there are reports that there is a direct link 
between Mr. Lay and this particular partnership.
    But it is not possible to piece this story together just by 
these newspaper headlines, so I think that given the number of 
Oregonians and the number of Americans that have been hurt, Mr. 
Chairman and colleagues, we just have to go forward and use all 
the investigative powers to find the facts, and I look forward 
that we will continue to do that in a bipartisan way.
    The Chairman. Very good.
    Senator Snowe.

                    U.S. SENATOR FROM MAINE

    Senator Snowe. Thank you, Mr. Chairman.
    I, too, join my colleagues in expressing regret that Mr. 
Lay will not be testifying and, although he is invoking the 
Fifth Amendment, that is his right to do so, his silence and 
the silence of other top executives will not deter us in 
pursuit of the truth, because as it has already been said, this 
bankruptcy is not a typical bankruptcy. It is a fairly of truly 
Homeric proportions. $67 billion in investor money has been 
lost, including the $1 billion belonging to the hard-working, 
trusting, loyal Enron employees, more than $1 billion.
    Mr. Powers testified before Congress last week. In offering 
his special investigative report, he said this tragedy was the 
result of failures at many levels and by many people, a flawed 
idea, self-enrichment by employees, inadequately designed 
controls, poor implementation, inattentive oversight, simple 
and not-so-simple accounting mistakes, and overreaching in a 
culture that appears to have encouraged pushing the limit.
    This is a scathing indictment, calling into question, 
certainly the illegalities of Enron's actions and the failure 
of top executives to put in place proper safeguards for 
investors and employees. It certainly shows that corporate 
corruption can have a profound influence in undermining the 
public's confidence in the underpinnings of our economic 
institutions, so the public has a very real and vested 
interested in getting at the truth to know what laws may have 
been broken and how we prevent such a catastrophe from 
recurring in the future.
    The chairman of the SEC said last week in testimony that 
our federal security laws are predicated on the philosophy that 
investors must be fully informed and confident that our markets 
are free from fraudulent, deceptive, and manipulative conduct. 
By every account that was not the culture, certainly not the 
transparency that existed with respect to Enron's bookkeeping.
    The special investigative report went on to say, there is a 
systemic and pervasive attempt by Enron's management to 
misrepresent the company's financial condition. In the report's 
words, there is a fundamental fault of leadership and 
management. Leadership and management began at the top with the 
CEO, Ken Lay, and that is why we wanted to hear from you today, 
Mr. Lay, because we wanted to get to the bottom of this by 
starting with the man at the top, and it is all the more 
critical, given the serious plausibility gap that exists 
between the facts as we know them and the assertions that have 
been made by you and other top executives that you were not 
aware of the precarious financial structure of Enron with 
respect to these partnerships, and that they created that 
precariousness, and that you did not purposely misrepresent the 
company's financial picture.
    The fact is, you founded Enron. You set up its structure, 
set the tone, you served as its chief executive officer for 
more than 15 years, with the exception of 6 months when you did 
not have your hand on the corporate helm, and even then you 
served as Chairman of the Board, and you may well not have 
known all of the details of all the financial transactions of 
your company, but the minutes do show you were at a meeting in 
November 1997 when the Chewco partnership was created and 
approved, and that partnership served as a marked departure 
from the previous practices of Enron and ultimately contributed 
to two-thirds of Enron's overstatement of income since 1997.
    It has been further reported that the Board waived the code 
of ethics rules to allow CFO Fastow to participate in the LJM 
partnerships with your recommendation, and at least with one of 
the partnerships the Board assigned responsibility to you to 
represent Enron in the event of any changes in the terms of the 
transactions from those presented to the Board, and the report 
found that there were significant changes for which there were 
no actions by you and others.
    When you factor in the sheer size of the LJM partnerships 
alone, it accounted for at least 40 percent of Enron's 
reportedly pre-tax income of $1.4 billion by the year 2000. I 
am just underscoring the fact that it raises serious and 
legitimate questions. How could you and others have not known 
the potential and serious financial ramifications that these 
partnerships posed to the company, that they obviously were 
critical components of Enron? They obviously contributed great 
wealth to those at the top.
    3 years ago, a Germany company called off a merger because 
it found your finances so troubling. Did that not send up a red 
flag? And, of course, as the memo from vice president Watkins, 
and obviously within a week of your assuming the CEO position 
again in August, you met with Ms. Watkins because you obviously 
found her heart-stopping memo foretelling the potential 
implosion of your company, that her concerns were obviously 
serious and credible, so you met with her, but yet you did not 
follow her suggestions that Enron hire outside consultants and 
lawyers to avoid a conflict of interest.
    In fact, they were told not to second-guess the accounting 
treatment of these partnerships, and so obviously we have a 
number of questions. There are a number of implausibilities 
that need to be addressed. You, as CEO, had the responsibility 
of creating a culture of honesty, responsibility, integrity, 
and trust, and obviously that did not happen in this instance, 
and now it is the employees and investors who are bearing the 
brunt of these massive schemes and failures.
    Thank you, Mr. Chairman.
    The Chairman. Senator Cleland.

                   U.S. SENATOR FROM GEORGIA

    Senator Cleland. Thank you, Mr. Chairman.
    Mr. Lay, I truly regret your failure to appear before this 
Committee last week and your decision not to answer any 
questions today. It seems that the veil of secrecy that has 
surrounded Enron decisions by top executives continues. As CEO 
of Enron, you held your company out to the public as a 
successful and wise investment behind this veil of secrecy. It 
is high time for Enron to answer to the public for the 
decisions you and others at Enron made that caused so many 
people to lose so much.
    This Committee is made up of publicly elected officials, 
and I believe you have a responsibility to answer to us. The 
real people you have the responsibility to answer to are the 
American people, the hundreds of thousands of people who had 
trust in your company and invested in it, particularly 262,000 
Georgia teachers that lost $127 million when your company 
    Dan Scotto, the Wall Street analyst who was dismissed from 
his job last year for writing an unflattering report, and now 
we know a realistic report on Enron, drew the appropriate 
comparison between Enron and the story of the emperor who 
paraded through town with no clothes as everyone stared, afraid 
to speak up. We now know Enron had no clothes.
    On August 15 of last year, Enron Vice President Sharon 
Watkins wrote a letter to you detailing questions about 
accounting practices of concern, and saying, ``I am incredibly 
nervous we will implode in a wave of accounting scandals.'' How 
right she was.
    On August 29, a middle manager who had been laid off by 
Enron sent an e-mail to the Board of Directors saying the house 
of cards are falling, you are potentially facing shareholder 
lawsuits, employee lawsuits, heat from analysts and newspapers. 
The market has lost overall confidence, and it is obvious why.
    How prophetic these words were. These two employees were 
willing to stand up and ask questions. Why weren't you and 
Enron's Board of Directors?
    Much has been made of the lock-out period employees faced 
in October of last year when they were unable to transfer 
rapidly declining shares of Enron's stock out of their 401(k) 
plans. Even if the change of plan administrators that caused 
the lock-out had previously been scheduled, why, in the light 
of the announced third quarter losses and the pending FEC 
investigation and knowing that Enron shares were plunging, was 
the lock-out period not postponed? How did so many people fail 
to say what was needed to be said, or ask what needed to be 
    I am looking forward to working with this Committee, as 
well as the Governmental Affairs Committee on which I serve, as 
we determine how a disaster like Enron can be prevented in the 
    Thank you, Mr. Chairman.
    The Chairman. Senator Smith.

                    U.S. SENATOR FROM OREGON

    Senator Smith. Thank you, Mr. Chairman. As I evaluate my 
own feelings this morning, I have really one emotion, and that 
is that of sorrow. I am sorry specifically for the people of 
Enron and its affiliates, who have lost so much, and I am also 
sorry for the cause that Enron championed, which was free 
    Oregon has a particular history with Enron, because of a 
merger that was concluded in 1997 with Portland General 
Electric. I first became acquainted with Enron as the president 
of the Oregon State Senate. I wondered at the time of that 
merger how this was going to work, because Enron's whole pitch 
was deregulating electrical markets, and the Pacific Northwest 
has a highly regulated market. Nevertheless, the merger was 
concluded, and Enron's officials, its representatives made a 
great pitch to deregulate our markets.
    I had some trepidation about how this was all going to work 
until about a year ago today, when the California market began 
to experience incredible difficulties with its experience in 
reregulating its markets. I do not call it deregulation. But I 
joined with Senator Feinstein in doing something that was 
frankly anathema to my own beliefs, and that is government 
interference in markets, because I, prior to politics, believed 
and practiced in business a free market profession, and it 
seemed very clear to me that what was going on was not a free 
market, but the right of a few to rig a market to the harm of 
many people.
    Now, it is one thing to hold back your product to drive up 
a price if nobody needs your product. It is quite another 
thing, and it is the very reason why we regulate our energy 
markets, when the product is so fundamental to the ability of 
people to have a job, to be warm in the winter, and to have 
light at night, to have a system that a few are able to game to 
the great harm of so many.
    And so the sorrow I feel is that our confidence in free 
markets is so shaken by this episode, but I say to people who 
wonder about this, this is not capitalism. This is a conspiracy 
that may be a crime. The courts will determine that, not this 
Committee, but when I called, with Senator Feinstein, for FERC 
intervention in the market, I did not have the evidence that I 
have now. I had a strong suspicion.
    It was not until I read in the New York Times an Enron 
official quoted on November 10, 2001, that I fully comprehended 
the Enron Corporation's philosophy. Said he, Enron's 
achievement in creating, quote, regulatory black holes, close 
quote, fits nicely with what he called the company's core 
management philosophy, which was to be the first mover into a 
market and make money in the initial chaos, and the lack of 
transparency. That is what I feared when I called for price 
caps. That is what I know today is what went wrong.
    Others have observed, Mr. Chairman, that this has many 
other facets. This story, we have to figure out how to make 
sure that it is never repeated again, to the harm of consumers, 
but specifically to all the people in Enron, in PGE, and to 
those who purchased its stock, trusting that what they were 
being told was the truth, but it was not, and our job is to see 
that the truth is told in the future to all people who want to 
have and should have confidence in our free market system.
    The Chairman. Very good.
    Senator Boxer.

                  U.S. SENATOR FROM CALIFORNIA

    Senator Boxer. Thank you very much, Mr. Chairman. I want to 
associate myself with the remarks of Senator Smith and, of 
course, many of my colleagues as well, but in this I want to 
build on what he said, because our states really got the brunt 
of this, as well as, of course, the employees that were treated 
so terribly, and the shareholders, so in my four or five 
minutes I think I can tell you the story of California.
    Mr. Lay, I know you are not going to talk to the Committee. 
You have a right not to, but I have a chance to talk to you, so 
that is what I am going to do, is talk to you.
    I have very strong feelings about what Enron did to my 
state. I would like to put in the record an article that just 
ran in the San Jose Mercury News just two days ago, ``Enron 
Collapse Strongly Felt in California.'' I would like to put 
that in the record.
    The Chairman. It will be included.
    [The information referred to follows:]

  Enron Collapse Strongly Felt in California; From Pensions to Energy 
                 Prices, Effect on Government Is Broad
                San Jose Mercury News, February 10, 2002
                  by Brandon Bailey and Chris O'Brien
    As the nation's leading cheerleader for energy deregulation, Enron 
played a major role in shaping the California power market that 
imploded in crisis last year. Now the company's spectacular collapse is 
threatening to cause statewide aftershocks for years to come.
    The force of Enron's collapse is being felt throughout state 
government, where it may affect attempts to renegotiate power 
contracts, to probe allegations of market manipulation, and to obtain 
refunds from energy companies accused of gouging.
    The unfolding debacle has touched the state employees pension fund, 
which invested in some dubious Enron partnerships, and has helped 
derail expansion plans of Calpine that would have made the San Jose 
company the largest energy generator in the world.
    State officials hope that new Enron investigations will persuade 
other power companies to lower prices, by giving the state leverage in 
renegotiating $40 billion worth of electricity contracts that were 
signed last year when prices were at their peak.
    But some analysts warn that Enron's collapse could leave the state 
vulnerable to a new cycle of power shortages, by making investors 
reluctant to finance new power plants.
    With revelations about Enron coming almost daily, the state's 
energy market could find itself operating under a cloud of uncertainty 
and turmoil for years to come.
    ``It's the fear factor people have about another Enron,'' said Gary 
Ackerman of the Western Power Trading Forum, an industry association. 
``Which company is going to be next?''
    Enron was never a major producer of electricity in California. 
Instead, the Houston-based company carved out a role in the middle. It 
bought power from generators and resold it to other traders as well as 
to California utilities and the agencies that assumed the role of 
buying power when the market began to collapse last year.
    Estimates of Enron's California market share vary, because most 
trading information is never made public. Government agencies say they 
are barred from releasing such data. But Enron claimed to be the West's 
biggest energy trader, with about 20 percent of the market nationwide.
Enron denies gouging
    Enron has denied charges of price gouging in California. But the 
company made one agency's confidential ``top 10'' list of power 
suppliers that together reaped $500 million in excess profits during 
one key period of 2000.
    What is clear is that Enron became an economic and political force 
in California--a presence both in the clubby hallways of the state 
Capitol and in the anonymous conference rooms where engineers and 
number-crunchers hammered out the state's new power system.
    In the early 1990s, Enron was among the first advocates of a 
sweeping reorganization of California's wholesale energy market. 
Joining forces with the state's manufacturers and large industrial 
firms, which wanted lower prices, Enron and its allies succeeded in 
getting California to adopt deregulation.
    ``Enron was the leader of the pack,'' said Eric Woychik, an 
economic consultant who participated in the early discussions. ``They 
were involved in every argument.''
    Once deregulation was enacted in 1996, allowing customers to buy 
electricity from other sources besides the state's utilities, Enron 
moved quickly to establish itself in the wholesale market. At the 
height of the power crisis, energy traders said, Enron's Web site 
became the first thing they checked every morning to learn the day's 
opening price.
    Enron gave more than $680,000 in campaign contributions to 
politicians of both major parties. It hired experts away from 
California's utilities and state energy agencies to represent its 
interests at regulatory hearings and in the Capitol. Its chairman, 
Kenneth Lay, called federal regulators and Gov. Gray Davis to promote 
his prescription for a free-market solution to the state's energy woes.
    Critics today say the cumbersome market structure that California 
adopted was difficult to monitor and easy for smart traders to abuse.
    Enron officials denied that was their goal. In interviews last 
year, they said they originally pushed for a different kind of market 
    Others were less forgiving.
    ``They didn't get everything they wanted, but they got enough to 
make a bundle of money,'' said Michael Shames of the Utility Consumers 
Action Network. ``They helped design a mechanism that they later 
    By the year 2000, wholesale energy prices had soared throughout 
California, driving Pacific Gas & Electric Co. into bankruptcy and 
forcing the state to take over the utilities' role of buying power for 
California consumers.
    Davis and other critics lumped Enron with power suppliers they 
accused of profiteering.
    But after months of investigations, state officials have been 
frustrated in their attempts to clearly define Enron's role in 
California and how it might have contributed to the crisis.
    Since Enron didn't own much generating capacity, it had little 
leverage to influence market prices, said Severin Borenstein, director 
of the University of California's Energy Institute.
    ``To know what their role was, you have to know the whole web of 
contracts they signed with producers and consumers,'' he said. ``And 
those are not public.''
    Consumer lawyer Michael Aguirre, after investigating the state's 
energy market for more than a year, believes Enron was able to 
influence prices through complex trading agreements. But unless 
investigators force the disclosure of detailed trading records, he 
said, ``We'll never know exactly'' what happened.
Records subpoenaed
    California's attorney general and a state Senate investigative 
committee both have issued subpoenas for Enron records, and both say 
the company has dragged its feet.
    While the threat of shortages has subsided, the state still is 
saddled with $40 billion in long-term energy contracts it signed last 
year. With prices much lower today, critics say the state panicked and 
agreed to pay too much.
    California officials have had little leverage to renegotiate those 
deals. But last month, the chairman of the Federal Energy Regulatory 
Commission promised a new inquiry into whether Enron used its market 
power to drive up prices.
    If that investigation shows market prices were artificially 
inflated or unreasonable, officials say, it could be grounds for 
invalidating other contracts. Steve Maviglio, a news officer for Davis, 
said officials are hoping to convince other suppliers that ``it's in 
everybody's best interests'' to renegotiate before the investigation is 
    Enron's collapse has also sent ripples through the state's business 
and investment communities.
    The University of California says it lost nearly $145 million on 
its investments in Enron stock, while two of the state's public-
employee pension funds also lost nearly $90 million.
    The respected California Public Employees Retirement fund, which 
had been known as an advocate for stronger corporate governance, was 
embarrassed by revelations that it had invested in one of the dubious 
partnerships that Enron used to hide its debt from investors.
Calpine scales back
    Close to home, San Jose-based Calpine has struggled to avoid being 
tarred with comparisons to Enron. Its stock price has declined 68 
percent since Enron declared bankruptcy. Last month, Calpine announced 
that it would slow a plan to build dozens of new power plants in an 
effort to soothe the nerves of investors.
    The Enron bankruptcy also has created uncertainty for thousands of 
businesses and institutions that get natural gas and electricity 
directly from Enron, mostly under contracts they signed a few years ago 
when Enron was trying to build a retail business.
    But many of those customers oppose a plan by state regulators that 
could force them back to their local utilities, which are charging 
higher rates. That includes the University of California and California 
State University systems, which use Enron power at most of their 
    ``So far, service is continuing undisturbed and the lights are 
still on,'' said Charles McFadden, a University of California 
information officer. He said the university expects to save about $12 
million this year on a contract it negotiated with Enron in 1998.
                       Notes: Investigating Enron
                         What Enron Left Behind
    How the collapse of Enron affects California now and down the road:

   California continues to pay for electricity at prices far 
        above market rates, under long-term contracts signed when 
        prices peaked.

   State officials hope to prod other power companies to lower 
        prices by giving the state leverage in renegotiating $40 
        billion worth of electricity contracts.

   Enron's collapse could leave the state vulnerable to a new 
        cycle of power shortages, by making investors reluctant to 
        finance new power plants.

   San Jose-based energy company Calpine has slowed down plans 
        to build dozens of new power plants.

   University of California and state employees retirement 
        funds suffered multimillion-dollar losses through Enron 

    Senator Boxer. Mr. Lay, my state was bled dry by price-
gouging. Many pension plans went under--I should not say ``went 
under,'' lost hundreds of millions of dollars, because there 
was a limit on what they could put into Enron, I might say, a 
limit that I support, in 401(k) plans as well, but what you did 
to the employees was without conscience. That is how I feel.
    I am going to tell this California story in three to four 
minutes, really using the words of the principals more than 
anything else. Originally, Enron said that California would 
save billions of dollars by deregulation. This is a quote from 
Jeffrey Skilling. Under deregulation, California, ``would save 
about $8.9 billion per year,'' but that did not happen, Mr. 
Chairman. As a result of the market manipulation during this 
deregulation, California paid a huge amount for electricity and 
let us look at this. We went from paying $7.4 billion for all 
of our energy needs the next year to $27.1 billion. Look at 
this, a 400 percent increase, or, I should say, 266 percent 
increase in spending on electricity and a 4 percent increase in 
demand, so while the Administration was saying, you use too 
much electricity, we had gone up 4 percent, prices went up 266 
    Californians were begging for help. We were asking FERC to 
help us. Right before you and Senator Feinstein did your bill, 
Bob Filner and I did ours, the same bill, FERC, please impose 
some type of cost-based pricing. Nothing really happened.
    What was Enron saying during this crisis? Jeffrey 
Skilling's quote: ``We are the good guys. We are on the side of 
the angels.'' That is what he was saying in public, but what 
Enron was really thinking was that California was being played 
for a fool, and this is what he said at a conference, ``You 
know what the difference is between the State of California and 
the Titanic? At least when the Titanic went down, the lights 
were on,'' so in public we are the good guys, in private making 
jokes that our consumers were being destroyed.
    It took a long time for FERC to help us, and we spent a 
long time wondering why. It was almost a year. Well, the San 
Francisco Chronicle helped us to understand it.
    Mr. Lay, I wanted to ask you about this. You were at a 
meeting with Dick Cheney, and this is what--you handed him a 
memo, ``The Administration should reject any attempt to re-
regulate wholesale power markets by adopting price caps or 
returning to archaic methods of determining the cost-base of 
wholesale power. Price caps, even if imposed on a temporary 
basis, will be detrimental to power markets and will discourage 
private investment. . . .''
    And lo and behold, Vice President Cheney said when asked by 
the L.A. Times about price caps, ``I do not see that as a 
possibility, and, in fact, any package you can wrap it in, any 
fancy rhetoric you can prop it up with, it does not solve the 
problem.'' So, clearly, we saw the Enron philosophy being 
carried out here.
    Now, I also want to know who Enron spoke to at FERC. In 
January I wrote to FERC Commissioner Wood, asking him for a 
listing of all meetings and phone calls between Enron 
executives and FERC. I still have not received this 
information. They keep saying it is coming. They will not give 
me a date certain. I hope FERC does not stonewall us the way 
Enron has and, if necessary, Mr. Chairman, I may call on you to 
help get that information.
    FERC finally acted. The business community in California 
was at its wit's end, Mr. Chairman. We were going under. We 
could not take these prices any more, and when FERC acted and 
they imposed soft caps. The electricity price went down, and we 
were doing just fine, and during that period of time. Mr. Lay, 
I wanted to ask you about this, because we now know, because we 
have seen it in your SEC filings, that during this time 
California was keeping you afloat with these prices, you were 
unloading your shares of stock during this period, millions and 
millions and millions of dollars during this period, telling 
your employees everything was great and they should buy. So Mr. 
Lay, we got relief. There were no more blackouts.
    There is just one more piece of the puzzle, and then I am 
done. As soon as this happened, what did some of your allies 
do? I wanted to ask you about this. There was a television 
campaign to blame Governor Gray Davis for this crisis. They 
called it ``gray-outs,'' for Gray Davis. They said, he is 
pointing fingers and blaming others. Gray Davis says he is not 
responsible for California's energy problem, but there are 
gray-outs from Gray Davis, so this became political.
    We wanted to find out who paid for those ads. We know who 
headed up the group. We know who that is, but it was--I will 
give you the name for the record, Mr. Scott Reed, but we do not 
know who paid for the ads, and we have had to sue to find out, 
and so I wanted to ask you if you knew anything about this ad 
campaign which tried to take the blame away from where it 
belongs and to make it political and put it onto the Governor, 
but you know, we are going to find out, because there is a 
lawsuit on it.
    Secrecy, as Senator Cleland says, surrounds this whole 
Enron disaster. We cannot even find out who paid for ads 
blaming our Governor for this disaster. We cannot find out much 
of anything, but whether it is one committee or six--and 
frankly, Mr. Chairman, I do not care if it is one committee or 
six, if it takes six to get to the bottom of it, I am all for 
it. If it takes one, that is fine, too, but we will find out 
the truth.
    Thank you.
    The Chairman. Senator Brownback.

                    U.S. SENATOR FROM KANSAS

    Senator Brownback. Thank you, Mr. Chairman.
    It is important that oversight hearings like this happen so 
we can get facts about what happened at Enron and why it 
happened, and what we can do to make sure it does not happen 
again. I was hopeful that we would be able to get that done 
today, but it appears as if we are not going to hear many facts 
in the testimony today, and I regret that, but I do hope it is 
going to be coming out in the near future.
    I am concerned particularly about several issues that I 
want to raise here, and some of my colleagues have already 
raised some of these already, but I want to reiterate them, 
because I think they are things that are important for us as a 
policy determination as we move forward.
    I am particularly concerned about reform, particularly in 
pension areas. 401(k)'s and other private sector retirement 
savings plans have been an important and successful part of the 
retirement strategy for many working Americans, and we owe it 
to the American public to do what we can to strengthen employee 
pensions and to make appropriate changes to the laws that are 
necessary for us to strengthen those pension plans. I think 
that is something that clearly the situation calls out for.
    Nearly half of all Americans invested directly or 
indirectly in the equity market's corporate financial 
community, and the regulators need to restore the public's 
trust in our capital markets, and continue to provide financial 
leadership. More importantly, the thousands of Enron retirees 
and employees whose savings were wiped out and the millions of 
anxious investors in the United States and around the world 
demand that leadership.
    Now, the threat of new laws and regulations should not be 
the sole motive here. Rather, the corporate community's own 
desire to win back the public's confidence should be the 
driving force. It has to demonstrate quickly and effectively in 
their own initiative why the average investors should trust 
them again with their money.
    As it has already been reported by the special 
investigative committee from Enron, the collapse of Enron is a 
result of a management team and its Board, together with the 
auditors, failing to do the right thing. I wish we could hear 
more specifically about that today from the CEO of the company. 
These include bad investments and new economy ventures, off-
balance-sheet entities being set up with creative accounting to 
hide massive losses from such ventures--most of these ventures 
were collateralized by Enron stock--and finally, the true 
financial picture being hidden from the investment community 
through obscure reporting.
    Actions like these led to the collapse of confidence in 
reporting and integrity in the management. No company, however 
strong its business model, can survive that kind of 
catastrophe, those failures in internal controls. The corporate 
community should take some immediate steps in several areas.
    First, I call on corporate boards to strengthen the 
requirements for financial experts on audit committees. Audit 
committees need to be proactive and engaged, and willing to 
challenge management and the auditors. We should also review 
various proposals for reform of the Financial Accounting 
Standards Board. There are going to be some accounting issues 
we need to look at as well.
    Mr. Chairman, I appreciate you holding this hearing, and 
Mr. Lay, I know you can feel a palpable sense of 
disappointment, anger that a number of us have heard from our 
constituents who have lost millions of dollars in this. They 
want answers. We want answers. We were hopeful we were going to 
get some of those today so we could move forward with the 
public policymaking process. I would hope at some point in time 
we are going to get those.
    Thank you.
    The Chairman. Very good. Senator Carnahan.

                   U.S. SENATOR FROM MISSOURI

    Senator Carnahan. Thank you, Mr. Chairman. The reason the 
scandal is so offensive to most of us is that Enron's conduct 
violated the most basic of moral principles, principles that 
all of us tried to instill in our children--honesty, integrity, 
trust, fair play, and personal responsibility. These are the 
core values for most American values, and the foundation on 
which our nation is built. When these core values are 
shattered, America is weakened.
    Any institution without moral bearings is like a ship 
without a rudder. In light of recent events, idealistic young 
people once drawn to a career in business or finance might well 
have reason to reconsider. Enron has given pause to investors 
wondering where to place their savings for safe and reasonable 
    Mr. Lay, we are all stunned and confused by Enron's 
behavior, and especially by your unwillingness to come clean 
with the American people. We want to know how one of the 
nation's largest corporations under your watch evaporated in a 
matter of months. We want to know, or have an explanation for 
why the man who was at the helm of the ship allowed it to sink. 
Like passengers aboard the Titanic, thousands were blissfully 
unaware that hidden below the waterline lurked a danger over 
which they had no control.
    Surely you have some explanation for this unparalleled 
corporate tragedy and erosion of moral values, but all we have 
heard is the one explanation offered by Mr. Skilling. He told 
Congress that he was unaware of the true condition of Enron, 
that he was unfamiliar with the financial schemes being used to 
hide the company's losses and to mask its debts, but I find 
ignorance a difficult defense. You and the top executives at 
Enron were paid enormous sums of money presumably because of 
your financial and management expertise. It was your job to 
understand what the company was doing. It was your job to 
approve or disapprove of its course. Your failure has 
disheartened employees and investors alike.
    My heart goes out to the thousands of loyal Enron workers 
who lost not only their jobs but their life savings. They 
trusted you, and you told them that they should invest in Enron 
stock, and they trusted you when you told them to hold onto 
those investments. Enron's so-called aggressive accounting 
practices not only produced four years of false financial 
statements, it created a legacy of lost confidence. 
Fortunately, America's premier businesses, both small and 
large, do not look at what they can get away with through the 
use of cavalier accounting methods. They want to do the right 
thing for their employees and shareholders, and the right thing 
for their communities and the nation.
    Somehow, Enron got off course, and I am sorry you have 
chosen not to help us uncover what went wrong, because in 
failure there are always lessons to be learned, but despite 
your unwillingness to speak, I will continue to ask the 
question that I find so terribly haunting, a question that gets 
to those core values that define us as Americans. I want to 
know why no one in authority at Enron stood up and said, this 
is wrong.
    The Chairman. Thank you. Senator Ensign.

                    U.S. SENATOR FROM NEVADA

    Senator Ensign. Thank you, Mr. Chairman.
    Mr. Chairman, I think that it is critical that the Congress 
take its time to examine this important issue. Many times we 
react because the emotions are high, and I think it is critical 
that we take the time to find out all of the facts in this 
case, because while we want to find out what happened here, 
this is more of an academic process at this point, but also a 
legal process for the Congress to find out what happened in an 
effort to prevent this from happening again. It is critical 
that we restore our confidence in our financial markets, our 
public markets, in the accounting profession and in the legal 
    The public must know when they are investing in their 
401(k) plans that they have the confidence in transparent, 
reliable information. The facts presented on a financial 
statement must be true. Right now, there are a lot of questions 
in people's minds, that when they are reading these public 
companies' financial statements, is anything else going on like 
what happened at Enron?
    Mr. Lay, last year at a shareholders meeting you said some 
of your best and your brightest people could actually bring 
your company down, because some of their best ideas--while they 
had some of the best ideas--also could have some of the worst 
ideas. You said, because of that, it was critical that you and 
your management team watch closely and know what your employees 
were doing. I think this is critical for any effective 
management organization.
    You also said at that time that in an interview I saw last 
night on television, or it was during the shareholders' 
meeting, you talked about your corporate culture, and how 
integrity was one of the most important parts of your corporate 
culture, and integrity had been slipping a bit.
    Mr. Lay, I think that as a manager, as a CEO, you had an 
incredible responsibility of such a large company to the 
public, to your employees, to your customers, and as CEO, you 
ultimately were responsible for Enron corporate culture, 
because it is set at the top. As any CEO understands, and it is 
I think deplorable, (1) that either you did not know what was 
going on, or (2) that if you knew what was going on. How did 
you think that you could get away with it?
    It seems so obvious to anyone who looks at it that this was 
a pyramid scheme that was doomed to fail. You cannot set up 
false earnings and expect that not to be found out at some 
point. At some point you have to pay the piper, as they say.
    Senator Kerry mentioned earlier about how we want to, and 
we try to go into emerging markets and talk about the wonderful 
things that capitalism has done for our country, and we talk 
about the rule of law, and transparency, and how it is so 
important for people to be able to have confidence in how they 
are investing in the free market system.
    Mr. Lay, I believe you bear a great deal of responsibility 
for shaping the confidence of us being able to export 
capitalism, of us being able to tell our story, and it is going 
to be a challenge for the Congress, regulators, everybody 
involved, and the accounting profession, for us to bring that 
confidence back to what it was.
    I hope that you decide at some point to do the right thing. 
You know, everybody makes mistakes in life, and I hope you 
learn from your mistakes, and you are willing to try to make up 
for those mistakes by taking full responsibility for what 
happened, telling your story, and helping us prevent it from 
happening in the future.
    Thank you, Mr. Chairman.
    The Chairman. Very good. Senator Nelson.

                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Thank you, Mr. Chairman. It is a tough time 
for you, Mr. Lay. It is a tough time for the nation. I wanted 
to ask you just a quick question about the Florida retirement 
system. It was one of 33 pension funds, and it is the one that 
got hit the hardest.
    When the stock was dropping after the SEC had announced its 
investigation, the money manager for the Florida retirement 
system, whose former manager still sits on the Enron Board, 
that money manager was purchasing about 3 million shares as the 
stock was dropping, which begs the question, what was the 
communication, if any, from the company or those around the 
company to the fourth largest pension fund in the country about 
acquiring the stock, and why was that stock acquired?
    Mr. Chairman, that is what I would ask. Thank you.
    The Chairman. Very good. Senator Allen.

                   U.S. SENATOR FROM VIRGINIA

    Senator Allen. Thank you, Mr. Chairman.
    While Mr. Lay most likely will be not answering any 
questions today, exercising his Fifth Amendment rights, I will 
not comment on the exercise of those rights, or that legal 
judgment. I do share the sorrow and the aggravation and the 
frustration and the sentiments of all of my colleagues who have 
spoken before me. This Enron situation and the questions 
surrounding this financial implosion have shaken the 
credibility of the current system of security standards.
    It has brought to bear questions as to the ethics, the 
accuracy of accountants' reports, those of consultants, 
lawyers, and corporate boards, as well as questioning even the 
safeguards and the people who were supposed to ensure that 
whether they were employees and retirees or other investors 
have accurate information and all of this we see with the 
evaporation of people's retirement savings, with the collapse 
of the Enron stock.
    Moreover, it has been said by Senator Smith, Senator Ensign 
and others that what you have here, Mr. Lay, is something that 
when I speak to Boy Scout groups and others--I do not know who 
the quote is from, but here is where the sadness is. There is a 
saying that when wealth is lost, a little bit is lost, when 
health is lost, something significant is lost, but when 
character is lost, all is lost.
    Officers of publicly traded companies have a primary 
responsibility and duty to serve honestly. The owners of the 
company, the shareholders, clearly the chief officers of Enron 
failed in their duty, and shamefully breached that trust. That 
is a sad situation, and it is a responsibility you will bear, 
maybe not in this Committee, but in your conscience and I know 
when you go to sleep every night.
    I am confident, though, Mr. Chairman, that through careful 
examination of the facts and information that we learn from 
these hearings, as well as what we read, we will be able to 
come to proper safeguards for the future. The public and this 
Congress will learn the truth, what went wrong, and work to 
ensure that it does not occur again.
    It is my hope that Mr. Lay will not escape liability, 
whether that his criminal or civil, for any violations of law 
or fiduciary duties. As I said when we had this subpoena vote, 
let us be realistic and understand that all of these 
allegations of whether there is destruction of evidence, 
insider trading, fraud or other illegalities will be prosecuted 
and published to the maximum extent of the law in the courts. I 
and other members of this Committee need to be focused on 
prevention in the future so that such fraud, such misleading 
statements, such neglect or breach of fiduciary responsibility 
as to the financial condition of a company does not occur in 
the future.
    Knowledge and information are very powerful tools that all 
investors need to have. I am optimistic, Mr. Chairman--maybe at 
this time when people are frustrated we should not be 
optimistic, but I am optimistic that there is enough goodwill 
and good effort here on a bipartisan basis in this Congress, as 
well as those in other branches, to work together on retirement 
security changes, put in proper safeguards, make sure that 
employees who work hard and save for their future do not have 
it swindled.
    Mr. Lay, you will be held accountable in another venue. As 
far as the Senate and the House and others, we will work 
carefully and hopefully, also responsibly to prevent such 
actions and activities from occurring in the future.
    Thank you, Mr. Chairman.
    The Chairman. Senator Lott.

                 STATEMENT OF HON. TRENT LOTT, 

    Senator Lott. Mr. Chairman, thank you. I know there have 
been a lot of opening statements, and I have reviewed a lot of 
what has been said, and I do not want to attempt to add to all 
of that. I think it is appropriate we have this hearing. This 
clearly is a tragedy, and a lot of innocent people have been 
hurt, and we need to find out why that happened and how it 
happened, and what we can do to prevent this sort of thing in 
the future.
    I hope the administration will pursue what happened 
aggressively both at the Justice Department and the Securities 
and Exchange Commission, and I hope that we, after appropriate 
hearings, which is our role, will move as quickly as possible 
to see if we can develop legislation that would be more helpful 
to the employees and the stockholders in a situation like this, 
and also take a serious look at the accounting rules on the 
    So while I am sure it will be easy to do a lot of political 
positioning on this, and I am not accusing anybody of doing 
that, I hope that what will come out of it is not just finger-
pointing but some results, and I would like to be a part of 
    Thank you, Mr. Chairman.
    The Chairman. Very good.
    Well, much has been said about the development of a culture 
of corporate corruption, but there is also the culture of 
political corruption, and maybe we can get some good out of 
this whole situation in that there is no better example than 
Kenny boy for cash and carry government. I hope that this 
shames us into acting over on the House side and then on the 
Senate side and send a campaign reform bill to the President. 
We have got to clean up our own and maybe that is the good we 
will get out of this situation.
    Mr. Lay, would you please take the witness chair there and 
let me swear you in. Would you raise your right hand, please? 
Do you swear that the testimony that you give to this Committee 
will be the truth, the whole truth, and nothing but the truth, 
so help you God?
    Mr. Lay. I do.
    The Chairman. Thank you. Mr. Lay, do you have a statement 
for the Committee?


    Mr. Lay. A very brief statement, Mr. Chairman.
    Mr. Chairman, I come here today with a profound sadness 
about what has happened to Enron, its current and former 
employees, retirees, shareholders, and other stakeholders. I 
also wanted to respond to the best of my knowledge and 
recollection to the questions you and your colleagues have 
about the collapse of Enron. I have, however, been instructed 
by my counsel not to testify based upon my Fifth Amendment 
constitutional rights.
    I am deeply troubled about asserting these rights, because 
it may be perceived by some that I have something to hide, but 
after agonizing consideration I cannot disregard my counsel's 
instructions. Therefore, I must respectfully decline to answer 
on Fifth Amendment grounds all the questions of this Committee 
and Subcommittee, and of those of any other congressional 
committee and subcommittee.
    When providing their instruction, my counsel referred me to 
an excerpt from a unanimous Supreme Court decision of less than 
a year ago. Quote: ``One of the Fifth Amendment's basic 
functions is to protect innocent men.'' I respectfully ask you 
not to draw a negative inference because I am asserting my 
Fifth Amendment constitutional protection on instruction of 
    Thank you, Mr. Chairman.
    The Chairman. Well, under that circumstance, Mr. Lay, the 
Committee excuses you, and I want to turn the investigation 
over to the Chairman of our Consumer Subcommittee, Senator 
    Senator Dorgan. Mr. Chairman, thank you very much. We have 
a series of three votes that will begin in about five minutes. 
I believe it would be best if the Committee takes a brief 
recess. We will reconvene at 11:30 a.m.
    Senator Dorgan. The hearing will reconvene. If we can have 
people take their seats and close the door, my colleagues will 
be here momentarily. We had a series of three votes, as I 
previously announced. They took longer than expected, and I 
apologize for the delay. As I indicated previously, we were 
going to be hearing from Mr. William Powers, Jr. He is now at 
the witness table. Mr. Powers is a member of the Enron Board of 
Directors, I believe made a member of the Board of Directors 
last fall, and Chairman of the Special Investigative Committee 
that was enabled by the Board of Directors to evaluate what had 
happened in a number of areas with respect to the Enron 
    Mr. Powers, you have testified previously on the U.S. House 
side of this Capitol, and we now ask for your appearance today 
before the Senate. Our colleagues will be appearing shortly, 
but what I would like to do is to ask you to provide us with 
your statement today, following which we will ask a series of 
questions. Mr. Powers, your entire statement will be made a 
part of the permanent record of the Committee, and we would ask 
you summarize, but we want you to take as much time as you feel 
is necessary, as well.


    Mr. Powers. Thank you, Mr. Chairman. Mr. Chairman, 
distinguished Members of the Committee, my name is William 
Powers. I am the Dean of the University of Texas Law School. 
For the past three months, I have served as Chairman of the 
Special Investigative Committee of the Board of Directors of 
Enron Corporation. I appreciate the opportunity, Mr. Chairman, 
to come here today and testify to the Committee.
    As you know, during October of last year, questions were 
being raised about Enron's transactions with partnerships that 
were being controlled by its Chief Financial Officer, Andrew 
Fastow. In the middle of October, Enron announced that it was 
taking an after-tax charge of more than $500 million against 
its earnings because of transactions with one of those 
partnerships. Enron also announced a reduction in shareholder 
equity of more than a billion dollars.
    At the end of October, the Enron Board established a 
special committee to investigate these matters, and then asked 
me if I would join the Board for the purpose of chairing that 
committee and conducting that investigation. With the help of 
counsel from Wilmer, Cutler & Pickering here in Washington, and 
professional accounting advisors from Deloitte & Touche, we 
have spent the last three months conducting that investigation.
    Our committee's report was filed on February 2. It covers a 
lot of ground and it will, I hope, be a helpful starting point, 
but only a starting point, for the necessary further 
investigations by congressional committees, by the Securities & 
Exchange Commission, and by the Department of Justice. A copy 
of the executive summary to that report is attached to my 
statement here.
    Many questions are currently part of the public discussion, 
such as questions related to the employees' retirement savings 
plans, as Senator Hutchison and many others made in their 
remarks this morning, and sales of Enron securities by 
insiders. All of those are important issues. They are matters 
of vital importance, but they went beyond the charge that we 
were given here.
    The employees loss to their retirement plans is a tragic 
story, but again, we did not address that or any of those other 
matters in our report. We were charged with investigating 
transactions between Enron and partnerships controlled by its 
Chief Financial Officer, or people who worked in his 
department. That is what our report discusses.
    Mr. Chairman, as I have said before, what we found in our 
investigation was absolutely appalling. First, we found that 
Fastow and other Enron employees involved in these partnerships 
enriched themselves in the aggregate by tens of millions of 
dollars they should have never received. Fastow got at least 
$30 million, Michael Kopper at least $10 million, and two 
others, $1 million each, and still two more amounts that we 
believe were in the hundreds of thousands of dollars.
    Second, we found that some transactions were improperly 
structured from an accounting point of view. It is important to 
note that if these transactions had been structured correctly, 
or properly, Enron could have kept assets and liabilities, 
especially debt, off of its balance sheet, but Enron did not 
follow the proper accounting rules.
    But beyond these, we found something even more troubling 
than those individual instances of misconduct, or failures to 
follow the accounting rules. We found a systematic and 
pervasive attempt by Enron's management to misrepresent the 
company's financial condition. Enron management used these 
partnerships to enter into transactions that it could not or 
would not do with unrelated commercial entities. Many of the 
most significant transactions apparently were not designed to 
achieve any bona fide economic objectives. They were designed 
to affect how Enron reported its earnings to its shareholders 
and the public.
    As our report demonstrates, these transactions were 
extremely complex, and I will not try to describe them in any 
detail here, but I do think it would be useful to give just one 
example. It involves efforts by Enron to hedge against losses 
on investments that Enron had made. Enron was not just a 
pipeline and energy trading company. It also had large 
investments in other businesses, some of which appreciated 
substantially in value. These were volatile investments, and 
Enron was concerned because it had recognized the gains when 
these investments appreciated, and it did not want to recognize 
the losses if the investments declined in value, so Enron 
purported to enter into certain hedging transactions in order 
to avoid recognizing losses from these investments.
    The problem was, these hedges were not real. The idea of a 
hedge is normally to contract with a creditworthy outside 
partner that is prepared, for a price, to take on the economic 
risk of an investment. If the value of the investment goes 
down, that outside party will bear the loss. That is not what 
happened here, though. Essentially, Enron in these transactions 
was hedging with itself.
    The outside parties with which Enron hedged were the so-
called Raptors. The purported outside investor in them was a 
Fastow partnership. In reality, these were entities in which 
only Enron had any real economic stake, and whose main assets 
were Enron's own stock. The notes of Enron's corporate 
secretary from the meeting of the Finance Committee regarding 
the Raptors captures the reality. Those notes say, ``does not 
transfer economic risk, but transfers P&L volatility.''
    These were not real economic hedges. They just affected 
Enron's earnings statements by allowing Enron to avoid 
reporting losses on its investments. As it turned out, the 
value of Enron's investments fell at the same time the value of 
Enron's stock fell, and the Raptors became unable to meet their 
obligations on the supposed hedges, but even if the hedges had 
not failed in the sense I just described, the Raptors would 
have paid Enron with the stock that Enron had provided in the 
first place. Enron would simply have paid itself back.
    This raises an important point that is easy to miss in the 
thicket of these very complex transactions. There has been a 
great deal of discussion about who understood what about 
Fastow, and about Fastow's partnerships, but there is no 
question that virtually everyone, everyone from the Board of 
Directors on down, virtually everyone understood that the 
company was seeking to offset its investment losses with its 
own stock. That is not the way it is supposed to work. Real 
earnings are supposed to be compared to real losses.
    As a result of these transactions, Enron improperly 
inflated its reported earnings for a 15-month period, from the 
third quarter of 2000 through the third quarter of 2001, by 
more than $1 billion. That means that more than 70 percent of 
Enron's reported earnings for this period were not real.
    How could this have happened? The tragic consequences of 
the related party transactions and accounting errors were the 
result of failures at many levels, and by many people. There 
was a flawed idea, self-enrichment by employees, inadequately 
designed controls, poor implementation, inattentive oversight, 
simple and not-so-simple accounting mistakes, and overreaching 
in a culture that appears to have encouraged pushing the 
    Whenever this many things go wrong, it is not just the 
active one or two people. There was misconduct by Fastow and 
other senior employees of Enron, terrible misconduct. There 
were failures in the performance of Enron's outside advisors, 
and there was a fundamental default of leadership and 
    Leadership and management begin at the top with the CEO, 
Ken Lay. In this company, leadership and management depended as 
well on the Chief Operating Officer, Jeff Skilling, and it 
depended on the Board of Directors. In the end, this is a 
tragedy that could have and should have been avoided.
    Mr. Chairman, I hope that our report and the work of this 
Committee will at least help reduce the danger that this will 
happen again to some other company.
    Thank you, Mr. Chairman.
    [The prepared statement and executive summary of Mr. Powers 

Prepared Statement of William C. Powers, Jr., Member of the Enron Board 
    of Directors and Chairman of the Special Investigation Committee
    Mr. Chairman and distinguished Members of the Committee. My name is 
William Powers. I am the Dean of the University of Texas Law School. 
For the past three months, I have served as Chairman of the Special 
Investigative Committee of the Board of Directors of Enron Corporation. 
I appreciate the opportunity to come and testify before you today.
    As you know, during October of last year, questions were being 
raised about Enron's transactions with partnerships that were 
controlled by its Chief Financial Officer, Andrew Fastow. In the middle 
of October, Enron announced that it was taking an after-tax charge of 
more than $500 million against its earnings, because of transactions 
with one of those partnerships. Enron also announced a reduction in 
shareholder equity of more than a billion dollars. At the end of 
October, the Enron Board established a Special Committee to investigate 
these matters, and then asked me if I would join the Board for the 
purpose of chairing that Committee, and conducting that investigation. 
With the help of counsel from Wilmer, Cutler & Pickering and 
professional accounting advisors from Deloitte & Touche, we have spent 
the last three months conducting that investigation.
    Our Committee's Report was filed on February 2. It covers a lot of 
ground and will, I hope, be a helpful starting point for the necessary 
further investigations by Congressional Committees, by the Securities 
and Exchange Commission, and by the Department of Justice. A copy of 
the Executive Summary is attached to my Statement here.
    Many questions currently part of public discussion--such as 
questions relating to the employees' retirement savings and sales of 
Enron securities by insiders--are beyond the scope of the charge we 
were given. These are matters of vital importance. The employees' loss 
of their retirement plans is a tragic story. But we did not address 
these matters in our Report.
    We were charged with investigating transactions between Enron and 
partnerships controlled by its Chief Financial Officer, or people who 
worked in his department. That is what our Report discusses. Mr. 
Chairman, as I have said before: What we found was appalling.
    First, we found that Fastow--and other Enron employees involved in 
these partnerships--enriched themselves, in the aggregate, by tens of 
millions of dollars they should never have received. Fastow got at 
least $30 million, Michael Kopper at least $10 million, two others $1 
million each, and still two more amounts we believe were at least in 
the hundreds of thousands of dollars.
    Second, we found that some transactions were improperly structured 
from an accounting point of view. It is important to note that, if they 
had been structured correctly, Enron could have kept assets and 
liabilities (especially debt) off of its balance sheet. But Enron did 
not follow the accounting rules.
    But we found something even more troubling than those individual 
instances of misconduct, and failures to follow accounting rules. We 
found a systematic and pervasive attempt by Enron's Management to 
misrepresent the Company's financial condition. Enron Management used 
these partnerships to enter into transactions that it could not, or 
would not, do with unrelated commercial entities. Many of the most 
significant transactions apparently were not designed to achieve bona 
fide economic objectives. They were designed to affect how Enron 
reported its earnings.
    As our Report demonstrates, these transactions were extremely 
complex. I won't try to describe them in detail here. But I do think it 
would be useful to give just one example. It involves efforts by Enron 
to ``hedge'' against losses on investments it had made.
    Enron was not just a pipeline and energy trading company. It also 
had large investments in other businesses, some of which had 
appreciated substantially in value. These were volatile investments, 
and Enron was concerned because it had recognized the gains when these 
investments appreciated, and it didn't want to recognize the losses if 
the investments declined in value. So Enron purported to enter into 
certain ``hedging'' transactions in order to avoid recognizing losses 
from its investments. The problem was that the hedges weren't real. The 
idea of a hedge is normally to contract with a credit-worthy outside 
party that is prepared--for a price--to take on the economic risk of an 
investment. If the value of the investment goes down, that outside 
party will bear the loss. That is not what happened here. Essentially, 
Enron was hedging with itself.
    The outside parties with which Enron ``hedged'' were the so-called 
``Raptors.'' The purported outside investor in them was a Fastow 
partnership. In reality, these were entities in which only Enron had a 
real economic stake, and whose main assets were Enron's own stock. The 
notes of Enron's corporate secretary, from a meeting of the Finance 
Committee regarding the Raptors, capture the reality: ``Does not 
transfer economic risk but transfers P+L volatility.'' These were not 
real economic hedges; they just affected Enron's earnings statement by 
allowing Enron to avoid reporting losses on its investments.
    As it turned out, the value of Enron's investments fell at the same 
time that the value of Enron stock fell, and the Raptors became unable 
to meet their obligations on the ``hedges.'' But even if the hedges had 
not failed in the sense I just described, the Raptors would have paid 
Enron with the stock that Enron had provided in the first place; Enron 
would simply have paid itself back.
    This raises an important point that is easy to miss in the thicket 
of these very complex transactions. There has been much discussion 
about who understood what about Fastow and his partnerships. But there 
is no question that virtually everyone, from the Board of Directors on 
down, understood that the company was seeking to offset its investment 
losses with its own stock. That is not the way it is supposed to work. 
Real earnings are supposed to be compared to real losses.
    As a result of these transactions, Enron improperly inflated its 
reported earnings for a 15-month period--from the third quarter of 2000 
through the third quarter of 2001--by more than $1 billion. This means 
that more than 70 percent of Enron's reported earnings for this period 
were not real.
    How could this have happened? The tragic consequences of the 
related-party transactions and accounting errors were the result of 
failures at many levels and by many people: a flawed idea, self-
enrichment by employees, inadequately-designed controls, poor 
implementation, inattentive oversight, simple (and not-so-simple) 
accounting mistakes, and overreaching in a culture that appears to have 
encouraged pushing the limits.
    Whenever this many things go wrong, it is not just the act of one 
or two people. There was misconduct by Fastow and other senior 
employees of Enron. There were failures in the performance of Enron's 
outside advisors. And there was a fundamental default of leadership and 
    Leadership and management begin at the top, with the CEO, Ken Lay. 
In this company, leadership and management depended as well on the 
Chief Operating Officer, Jeff Skilling. And it depended on the Board of 
    In the end, this is a tragedy that could and should have been 
avoided. I hope that our Report, and the work of this Committee, will 
help reduce the danger that it will happen to some other company.
                   Executive Summary and Conclusions
    The Special Investigative Committee of the Board of Directors of 
Enron Corp. submits this Report of Investigation to the Board of 
Directors. In accordance with our mandate, the Report addresses 
transactions between Enron and investment partnerships created and 
managed by Andrew S. Fastow, Enron's former Executive Vice President 
and Chief Financial Officer, and by other Enron employees who worked 
with Fastow.
    The Committee has done its best, given the available time and 
resources, to conduct a careful and impartial investigation. We have 
prepared a Report that explains the substance of the most significant 
transactions and highlights their most important accounting, corporate 
governance, management oversight, and public disclosure issues. An 
exhaustive investigation of these related-party transactions would 
require time and resources beyond those available to the Committee. We 
were not asked, and we have not attempted, to investigate the causes of 
Enron's bankruptcy or the numerous business judgments and external 
factors that contributed it. Many questions currently part of public 
discussion--such as questions relating to Enron's international 
business and commercial electricity ventures, broadband communications 
activities, transactions in Enron securities by insiders, or management 
of employee 401(k) plans--are beyond the scope of the authority we were 
given by the Board.
    There were some practical limitations on the information available 
to the Committee in preparing this Report. We had no power to compel 
third parties to submit to interviews, produce documents, or otherwise 
provide information. Certain former Enron employees who (we were told) 
played substantial roles in one or more of the transactions under 
investigation--including Fastow, Michael J. Kopper, and Ben F. Glisan, 
Jr.--declined to be interviewed either entirely or with respect to most 
issues. We have had only limited access to certain workpapers of Arthur 
Andersen LLP (``Andersen''), Enron's outside auditors, and no access to 
materials in the possession of the Fastow partnerships or their limited 
partners. Information from these sources could affect our conclusions.
    This Executive Summary and Conclusions highlights important parts 
of the Report and summarizes our conclusions. It is based on the 
complete set of facts, explanations and limitations described in the 
Report, and should be read with the Report itself. Standing alone, it 
does not, and cannot, provide a full understanding of the facts and 
analysis underlying our conclusions.
    On October 16, 2001, Enron announced that it was taking a $544 
million after-tax charge against earnings related to transactions with 
LJM2 Co-Investment, L.P. (``LJM2''), a partnership created and managed 
by Fastow. It also announced a reduction of shareholders' equity of 
$1.2 billion related to transactions with that same entity.
    Less than one month later, Enron announced that it was restating 
its financial statements for the period from 1997 through 2001 because 
of accounting errors relating to transactions with a different Fastow 
partnership, LJM Cayman, L.P. (``LJM1''), and an additional related-
party entity, Chewco Investments, L.P. (``Chewco''). Chewco was managed 
by an Enron Global Finance employee, Kopper, who reported to Fastow.
    The LJM1- and Chewco-related restatement, like the earlier charge 
against earnings and reduction of shareholders' equity, was very large. 
It reduced Enron's reported net income by $28 million in 1997 (of $105 
million total), by $133 million in 1998 (of $703 million total), by 
$248 million in 1999 (of $893 million total), and by $99 million in 
2000 (of $979 million total). The restatement reduced reported 
shareholders' equity by $258 million in 1997, by $391 million in 1998, 
by $710 million in 1999, and by $754 million in 2000. It increased 
reported debt by $711 million in 1997, by $561 million in 1998, by $685 
million in 1999, and by $628 million in 2000. Enron also revealed, for 
the first time, that it had learned that Fastow received more than $30 
million from LJM1 and LJM2. These announcements destroyed market 
confidence and investor trust in Enron. Less than one month later, 
Enron filed for bankruptcy.
                          Summary of Findings
    This Committee was established on October 28, 2001, to conduct an 
investigation of the related-party transactions. We have examined the 
specific transactions that led to the third-quarter 2001 earnings 
charge and the restatement. We also have attempted to examine all of 
the approximately two dozen other transactions between Enron and these 
related-party entities: what these transactions were, why they took 
place, what went wrong, and who was responsible.
    Our investigation identified significant problems beyond those 
Enron has already disclosed. Enron employees involved in the 
partnerships were enriched, in the aggregate, by tens of millions of 
dollars they should never have received--Fastow by at least $30 
million, Kopper by at least $10 million, two others by $1 million each, 
and still two more by amounts we believe were at least in the hundreds 
of thousands of dollars. We have seen no evidence that any of these 
employees, except Fastow, obtained the permission required by Enron's 
Code of Conduct of Business Affairs to own interests in the 
partnerships. Moreover, the extent of Fastow's ownership and financial 
windfall was inconsistent with his representations to Enron's Board of 
    This personal enrichment of Enron employees, however, was merely 
one aspect of a deeper and more serious problem. These partnerships--
Chewco, LJM1, and LJM2--were used by Enron Management to enter into 
transactions that it could not, or would not, do with unrelated 
commercial entities. Many of the most significant transactions 
apparently were designed to accomplish favorable financial statement 
results, not to achieve bona fide economic objectives or to transfer 
risk. Some transactions were designed so that, had they followed 
applicable accounting rules, Enron could have kept assets and 
liabilities (especially debt) off of its balance sheet; but the 
transactions did not follow those rules.
    Other transactions were implemented--improperly, we are informed by 
our accounting advisors--to offset losses. They allowed Enron to 
conceal from the market very large losses resulting from Enron's 
merchant investments by creating an appearance that those investments 
were hedged--that is, that a third party was obligated to pay Enron the 
amount of those losses--when in fact that third party was simply an 
entity in which only Enron had a substantial economic stake. We believe 
these transactions resulted in Enron reporting earnings from the third 
quarter of 2000 through the third quarter of 2001 that were almost $1 
billion higher than should have been reported.
    Enron's original accounting treatment of the Chewco and LJM1 
transactions that led to Enron's November 2001 restatement was clearly 
wrong, apparently the result of mistakes either in structuring the 
transactions or in basic accounting. In other cases, the accounting 
treatment was likely wrong, notwithstanding creative efforts to 
circumvent accounting principles through the complex structuring of 
transactions that lacked fundamental economic substance. In virtually 
all of the transactions, Enron's accounting treatment was determined 
with extensive participation and structuring advice from Andersen, 
which Management reported to the Board. Enron's records show that 
Andersen billed Enron $5.7 million for advice in connection with the 
LJM and Chewco transactions alone, above and beyond its regular audit 
    Many of the transactions involve an accounting structure known as a 
``special purpose entity'' or ``special purpose vehicle'' (referred to 
as an ``SPE'' in this Summary and in the Report). A company that does 
business with an SPE may treat that SPE as if it were an independent, 
outside entity for accounting purposes if two conditions are met: (1) 
an owner independent of the company must make a substantive equity 
investment of at least 3% of the SPE's assets, and that 3% must remain 
at risk throughout the transaction; and (2) the independent owner must 
exercise control of the SPE. In those circumstances, the company may 
record gains and losses on transactions with the SPE, and the assets 
and liabilities of the SPE are not included in the company's balance 
sheet, even though the company and the SPE are closely related. It was 
the technical failure of some of the structures with which Enron did 
business to satisfy these requirements that led to Enron's restatement.
              Summary of Transactions and Matters Reviewed
    The following are brief summaries of the principal transactions and 
matters in which we have identified substantial problems:
The Chewco Transaction
    The first of the related-party transactions we examined involved 
Chewco Investments L.P., a limited partnership managed by Kopper. 
Because of this transaction, Enron filed inaccurate financial 
statements from 1997 through 2001, and provided an unauthorized and 
unjustifiable financial windfall to Kopper.
    From 1993 through 1996, Enron and the California Public Employees' 
Retirement System (``CalPERS'') were partners in a $500 million joint 
venture investment partnership called Joint Energy Development 
Investment Limited Partnership (``JEDI''). Because Enron and CalPERS 
had joint control of the partnership, Enron did not consolidate JEDI 
into its consolidated financial statements. The financial statement 
impact of non-consolidation was significant: Enron would record its 
contractual share of gains and losses from JEDI on its income statement 
and would disclose the gain or loss separately in its financial 
statement footnotes, but would not show JEDI's debt on its balance 
    In November 1997, Enron wanted to redeem CalPERS' interest in JEDI 
so that CalPERS would invest in another, larger partnership. Enron 
needed to find a new partner, or else it would have to consolidate JEDI 
into its financial statements, which it did not want to do. Enron 
assisted Kopper (whom Fastow identified for the role) in forming Chewco 
to purchase CalPERS' interest. Kopper was the manager and owner of 
Chewco's general partner. Under the SPE rules summarized above, Enron 
could only avoid consolidating JEDI onto Enron's financial statements 
if Chewco had some independent ownership with a minimum of 3% of equity 
capital at risk. Enron and Kopper, however, were unable to locate any 
such outside investor, and instead financed Chewco's purchase of the 
JEDI interest almost entirely with debt, not equity. This was done 
hurriedly and in apparent disregard of the accounting requirements for 
nonconsolidation. Notwithstanding the shortfall in required equity 
capital, Enron did not consolidate Chewco (or JEDI) into its 
consolidated financial statements.
    Kopper and others (including Andersen) declined to speak with us 
about why this transaction was structured in a way that did not comply 
with the non-consolidation rules. Enron, and any Enron employee acting 
in Enron's interest, had every incentive to ensure that Chewco complied 
with these rules. We do not know whether this mistake resulted from bad 
judgment or carelessness on the part of Enron employees or Andersen, or 
whether it was caused by Kopper or others putting their own interests 
ahead of their obligations to Enron.
    The consequences, however, were enormous. When Enron and Andersen 
reviewed the transaction closely in 2001, they concluded that Chewco 
did not satisfy the SPE accounting rules and--because JEDI's non-
consolidation depended on Chewco's status--neither did JEDI. In 
November 2001, Enron announced that it would consolidate Chewco and 
JEDI retroactive to 1997. As detailed in the Background section above, 
this retroactive consolidation resulted in a massive reduction in 
Enron's reported net income and a massive increase in its reported 
    Beyond the financial statement consequences, the Chewco transaction 
raises substantial corporate governance and management oversight 
issues. Under Enron's Code of Conduct of Business Affairs, Kopper was 
prohibited from having a financial or managerial role in Chewco unless 
the Chairman and CEO determined that his participation ``does not 
adversely affect the best interests of the Company.'' Notwithstanding 
this requirement, we have seen no evidence that his participation was 
ever disclosed to, or approved by, either Kenneth Lay (who was Chairman 
and CEO) or the Board of Directors.
    While the consequences of the transaction were devastating to 
Enron, Kopper reaped a financial windfall from his role in Chewco. This 
was largely a result of arrangements that he appears to have negotiated 
with Fastow. From December 1997 through December 2000, Kopper received 
$2 million in ``management'' and other fees relating to Chewco. Our 
review failed to identify how these payments were determined, or what, 
if anything, Kopper did to justify the payments. More importantly, in 
March 2001 Enron repurchased Chewco's interest in JEDI on terms Kopper 
apparently negotiated with Fastow (during a time period in which Kopper 
had undisclosed interests with Fastow in both LJM1 and LJM2). Kopper 
had invested $125,000 in Chewco in 1997. The repurchase resulted in 
Kopper's (and a friend to whom he had transferred part of his interest) 
receiving more than $10 million from Enron.
The LJM Transactions
    In 1999, with Board approval, Enron entered into business 
relationships with two partnerships in which Fastow was the manager and 
an investor. The transactions between Enron and the LJM partnerships 
resulted in Enron increasing its reported financial results by more 
than a billion dollars, and enriching Fastow and his co-investors by 
tens of millions of dollars at Enron's expense.
    The two members of the Special Investigative Committee who have 
reviewed the Board's decision to permit Fastow to participate in LJM 
notwithstanding the conflict of interest have concluded that this 
arrangement was fundamentally flawed.\1\ A relationship with the most 
senior financial officer of a public company--particularly one 
requiting as many controls and as much oversight by others as this one 
did--should not have been undertaken in the first place.
    \1\ One member of the Special Investigative Committee, Herbert S. 
Winokur, Jr., was a member of the Board of Directors and the Finance 
Committee during the relevant period. The portions of the Report 
describing and evaluating actions of the Board and its Committees are 
solely the views of the other two members of the Committee, Dean 
William C. Powers, Jr. of the University of Texas School of Law and 
Raymond S. Troubh.
    The Board approved Fastow's participation in the LJM partnerships 
with full knowledge and discussion of the obvious conflict of interest 
that would result. The Board apparently believed that the conflict, and 
the substantial risks associated with it, could be mitigated through 
certain controls (involving oversight by both the Board and Senior 
Management) to ensure that transactions were done on terms fair to 
Enron. In taking this step, the Board thought that the LJM partnerships 
would offer business benefits to Enron that would outweigh the 
potential costs. The principal reason advanced by Management in favor 
of the relationship, in the case of LJM1, was that it would permit 
Enron to accomplish a particular transaction it could not otherwise 
accomplish. In the case of LJM2, Management advocated that it would 
provide Enron with an additional potential buyer of assets that Enron 
wanted to sell, and that Fastow's familiarity with the Company and the 
assets to be sold would permit Enron to move more quickly and incur 
fewer transaction costs.
    Over time, the Board required, and Management told the Board it was 
implementing, an ever-increasing set of procedures and controls over 
the related-party transactions. These included, most importantly, 
review and approval of all LJM transactions by Richard Causey, the 
Chief Accounting Officer; and Richard Buy, the Chief Risk Officer; and, 
later during the period, Jeffrey Skilling, the President and COO (and 
later CEO). The Board also directed its Audit and Compliance Committee 
to conduct annual reviews of all LJM transactions.
    These controls as designed were not rigorous enough, and their 
implementation and oversight was inadequate at both the Management and 
Board levels. No one in Management accepted primary responsibility for 
oversight; the controls were not executed properly; and there were 
structural defects in those controls that became apparent over time. 
For instance, while neither the Chief Accounting Officer, Causey, nor 
the Chief Risk Officer, Buy, ignored his responsibilities, they 
interpreted their roles very narrowly and did not give the transactions 
the degree of review the Board believed was occurring. Skilling appears 
to have been almost entirely uninvolved in the process, notwithstanding 
representations made to the Board that he had undertaken a significant 
role. No one in Management stepped forward to address the issues as 
they arose, or to bring the apparent problems to the Board's attention.
    As we discuss further below, the Board, having determined to allow 
the related party transactions to proceed, did not give sufficient 
scrutiny to the information that was provided to it thereafter. While 
there was important information that appears to have been withheld from 
the Board, the annual reviews of LJM transactions by the Audit and 
Compliance Committee (and later also the Finance Committee) appear to 
have involved only brief presentations by Management (with Andersen 
present at the Audit Committee) and did not involve any meaningful 
examination of the nature or terms of the transactions. Moreover, even 
though Board Committee-mandated procedures required a review by the 
Compensation Committee of Fastow's compensation from the partnerships, 
neither the Board nor Senior Management asked Fastow for the amount of 
his LJM-related compensation until October 2001, after media reports 
focused on Fastow's role in LJM.
    From June 1999 through June 2001, Enron entered into more than 20 
distinct transactions with the LJM partnerships. These were of two 
general types: asset sales and purported ``hedging'' transactions. Each 
of these types of transactions was flawed, although the latter 
ultimately caused much more harm to Enron.
    Asset Sales. Enron sold assets to LJM that it wanted to remove from 
its books. These transactions often occurred close to the end of 
financial reporting periods. While there is nothing improper about such 
transactions if they actually transfer the risks and rewards of 
ownership to the other party, there are substantial questions whether 
any such transfer occurred in some of the sales to LJM.
    Near the end of the third and fourth quarters of 1999, Enron sold 
interests in seven assets to LJM1 and LJM2. These transactions appeared 
consistent with the stated purpose of allowing Fastow to participate in 
the partnerships--the transactions were done quickly, and permitted 
Enron to remove the assets from its balance sheet and record a gain in 
some cases. However, events that occurred after the sales call into 
question the legitimacy of the sales. In particular: (1) Enron bought 
back five of the seven assets after the close of the financial 
reporting period, in some cases within a matter of months; (2) the LJM 
partnerships made a profit on every transaction, even when the asset it 
had purchased appears to have declined in market value; and (3) 
according to a presentation Fastow made to the Board's Finance 
Committee, those transactions generated, directly or indirectly, 
``earnings'' to Enron of $229 million in the second half of 1999 
(apparently including one hedging transaction). (The details of the 
transactions are discussed in Section VI of the Report.) Although we 
have not been able to confirm Fastow's calculation, Enron's reported 
earnings for that period were $570 million pre-tax) and $549 million 
    We have identified some evidence that, in three of these 
transactions where Enron ultimately bought back LJM's interest, Enron 
had agreed in advance to protect the LJM partnerships against loss. If 
this was in fact the case, it was likely inappropriate to treat the 
transactions as sales. There also are plausible, more innocent 
explanations for some of the repurchases, but a sufficient basis 
remains for further examination. With respect to those transactions in 
which risk apparently did not pass from Enron, the LJM partnerships 
functioned as a vehicle to accommodate Enron in the management of its 
reported financial results.
    Hedging Transactions. The first ``hedging'' transaction between 
Enron and LJM occurred in June 1999, and was approved by the Board in 
conjunction with its approval of Fastow's participation in LJM1. The 
normal idea of a hedge is to contract with a creditworthy outside party 
that is prepared--for a price--to take on the economic risk of an 
investment. If the value of the investment goes down, that outside 
party will bear the loss. That is not what happened here. Instead, 
Enron transferred its own stock to an SPE in exchange for a note. The 
Fastow partnership, LJM1, was to provide the outside equity necessary 
for the SPE to qualify for non-consolidation. Through the use of 
options, the SPE purported to take on the risk that the price of the 
stock of Rhythms NetConnections Inc. (``Rhythms''), an interact service 
provider, would decline. The idea was to ``hedge'' Enron's profitable 
merchant investment in Rhythms stock, allowing Enron to offset losses 
on Rhythms if the price of Rhythms stock declined. If the SPE were 
required to pay Enron on the Rhythms options, the transferred Enron 
stock would be the principal source of payment.
    The other ``hedging'' transactions occurred in 2000 and 2001 and 
involved SPEs known as the ``Raptor'' vehicles. Expanding on the idea 
of the Rhythms transaction, these were extraordinarily complex 
structures. They were funded principally with Enron's own stock (or 
contracts for the delivery of Enron stock) that was intended to 
``hedge'' against declines in the value of a large group of Enron's 
merchant investments. LJM2 provided the outside equity designed to 
avoid consolidation of the Raptor SPEs.
    The asset sales and hedging transactions raised a variety of 
issues, including the following:
    Accounting and Financial Reporting Issues. Although Andersen 
approved the transactions, in fact the ``hedging'' transactions did not 
involve substantive transfers of economic risk. The transactions may 
have looked superficially like economic hedges, but they actually 
functioned only as ``accounting'' hedges. They appear to have been 
designed to circumvent accounting rules by recording hedging gains to 
offset losses in the value of merchant investments on Enron's quarterly 
and annual income statements. The economic reality of these 
transactions was that Enron never escaped the risk of loss, because it 
had provided the bulk of the capital with which the SPEs would pay 
    Enron used this strategy to avoid recognizing losses for a time. In 
1999, Enron recognized after-tax income of $95 million from the Rhythms 
transaction, which offset losses on the Rhythms investment. In the last 
two quarters of 2000, Enron recognized revenues of $500 million on 
derivative transactions with the Raptor entities, which offset losses 
in Enron's merchant investments, and recognized pre-tax earnings of 
$532 million (including net interest income). Enron's reported pre-tax 
earnings for the last two quarters of 2000 totaled $650 million. 
``Earnings'' from the Raptors accounted for more than 80% of that 
    The idea of hedging Enron's investments with the value of Enron's 
capital stock had a serious drawback as an economic matter. If the 
value of the investments fell at the same time as the value of Enron 
stock fell, the SPEs would be unable to meet their obligations and the 
``hedges'' would fail. This is precisely what happened in late 2000 and 
early 2001. Two of the Raptor SPEs lacked sufficient credit capacity to 
pay Enron on the ``hedges.'' As a result, in late March 2001, it 
appeared that Enron would be required to take a pre-tax charge against 
earnings of more than $500 million to reflect the shortfall in credit 
capacity. Rather than take that loss, Enron ``restructured'' the Raptor 
vehicles by, among other things, transferring more than $800 million of 
contracts to receive its own stock to them just before quarter-end. 
This transaction apparently was not disclosed to or authorized by the 
Board, involved a transfer of very substantial value for insufficient 
consideration, and appears inconsistent with governing accounting 
rules. It continued the concealment of the substantial losses in 
Enron's merchant investments.
    However, even these efforts could not avoid the inevitable results 
of hedges that were supported only by Enron stock in a declining 
market. As the value of Enron's merchant investments continued to fall 
in 2001, the credit problems in the Raptor entities became insoluble. 
Ultimately, the SPEs were terminated in September 2001. This resulted 
in the unexpected announcement on October 16, 2001, of a $544 million 
after-tax charge against earnings. In addition, Enron was required to 
reduce shareholders' equity by $1.2 billion. While the equity reduction 
was primarily the result of accounting errors made in 2000 and early 
2001, the charge against earnings was the result of Enron's ``hedging'' 
its investments--not with a creditworthy counter-party, but with 
    Consolidation Issues. In addition to the accounting abuses 
involving use of Enron stock to avoid recognizing losses on merchant 
investments, the Rhythms transaction involved the same SPE equity 
problem that undermined Chewco and JEDI. As we stated above, in 2001, 
Enron and Andersen concluded that Chewco lacked sufficient outside 
equity at risk to qualify for non-consolidation. At the same time, 
Enron and Andersen also concluded that the LJM1 SPE in the Rhythms 
transaction failed the same threshold accounting requirement. In recent 
Congressional testimony, Andersen's CEO explained that the firm had 
simply been wrong in 1999 when it concluded (and presumably advised 
Enron) that the LJM1 SPE satisfied the non-consolidation requirements. 
As a result, in November 2001, Enron announced that it would restate 
prior period financials to consolidate the LJM1 SPE retroactively to 
1999. This retroactive consolidation decreased Enron's reported net 
income by $95 million (of $893 million total) in 1999 and by $8 million 
(of $979 million total) in 2000.
    Self-Dealing Issues. While these related-party transactions 
facilitated a variety of accounting and financial reporting abuses by 
Enron, they were extraordinarily lucrative for Fastow and others. In 
exchange for their passive and largely risk-free roles in these 
transactions, the LJM partnerships and their investors were richly 
rewarded. Fastow and other Enron employees received tens of millions of 
dollars they should not have received. These benefits came at Enron's 
    When Enron and LJM1 (through Fastow) negotiated a termination of 
the Rhythms ``hedge'' in 2000, the terms of the transaction were 
extraordinarily generous to LJM1 and its investors. These investors 
walked away with tens of millions of dollars in value that, in an 
arm's-length context, Enron would never have given away. Moreover, 
based on the information available to us, it appears that Fastow had 
offered interests in the Rhythms termination to Kopper and four other 
Enron employees. These investments, in a partnership called 
``Southampton Place,'' provided spectacular returns. In exchange for a 
$25,000 investment, Fastow received (through a family foundation) $4.5 
million in approximately two months. Two other employees, who each 
invested $5,800, each received $1 million in the same time period. We 
have seen no evidence that Fastow or any of these employees obtained 
clearance for those investments, as required by Enron's Code of 
Conduct. Kopper and the other Enron employees who received these vast 
returns were all involved in transactions between Enron and the LJM 
partnerships in 2000--some representing Enron.
Public Disclosure
    Enron's publicly-filed reports disclosed the existence of the LJM 
partnerships. Indeed, there was substantial factual information about 
Enron's transactions with these partnerships in Enron's quarterly and 
annual reports and in its proxy statements. Various disclosures were 
approved by one or more of Enron's outside auditors and its inside and 
outside counsel. However, these disclosures were obtuse, did not 
communicate the essence of the transactions completely or clearly, and 
failed to convey the substance of what was going on between Enron and 
the partnerships. The disclosures also did not communicate the nature 
or extent of Fastow's financial interest in the LJM partnerships. This 
was the result of an effort to avoid disclosing Fastow's financial 
interest and to downplay the significance of the related-party 
transactions and, in some respects, to disguise their substance and 
import. The disclosures also asserted that the related-party 
transactions were reasonable compared to transactions with third 
parties, apparently without any factual basis. The process by which the 
relevant disclosures were crafted was influenced substantially by Enron 
Global Finance (Fastow's group). There was an absence of forceful and 
effective oversight by Senior Enron Management and in-house counsel, 
and objective and critical professional advice by outside counsel at 
Vinson & Elkins, or auditors at Andersen.
                            The Participants
    The actions and inactions of many participants led to the related-
party abuses, and the financial reporting and disclosure failures, that 
we identify in our Report. These participants include not only the 
employees who enriched themselves at Enron's expense, but also Enron's 
Management, Board of Directors and outside advisors. The factual basis 
and analysis for these conclusions are set out in the Report. In 
summary, based on the evidence available to us, the Committee notes the 
    Andrew Fastow. Fastow was Enron's Chief Financial Officer and was 
involved on both sides of the related-party transactions. What he 
presented as an arrangement intended to benefit Enron became, over 
time, a means of both enriching himself personally and facilitating 
manipulation of Enron's financial statements. Both of these objectives 
were inconsistent with Fastow's fiduciary duties to Enron and anything 
the Board authorized. The evidence suggests that he (1) placed his own 
personal interests and those of the LJM partnerships ahead of Enron's 
interests; (2) used his position in Enron to influence (or attempt to 
influence) Enron employees who were engaging in transactions on Enron's 
behalf with the LJM partnerships; and (3) failed to disclose to Enron's 
Board of Directors important information it was entitled to receive. In 
particular, we have seen no evidence that he disclosed Kopper's role in 
Chewco or LJM2, or the level of profitability of the LJM partnerships 
(and his personal and family interests in those profits), which far 
exceeded what he had led the Board to expect. He apparently also 
violated and caused violations of Enron's Code of Conduct by 
purchasing, and offering to Enron employees, extraordinarily lucrative 
interests in the Southampton Place partnership. He did so at a time 
when at least one of those employees was actively working on Enron's 
behalf in transactions with LJM2.
    Enron's Management. Individually, and collectively, Enron's 
Management failed to carry out its substantive responsibility for 
ensuring that the transactions were fair to Enron--which in many cases 
they were not--and its responsibility for implementing a system of 
oversight and controls over the transactions with the LJM partnerships. 
There were several direct consequences of this failure: transactions 
were executed on terms that were not fair to Enron and that enriched 
Fastow and others; Enron engaged in transactions that had little 
economic substance and misstated Enron's financial results; and the 
disclosures Enron made to its shareholders and the public did not fully 
or accurately communicate relevant information. We discuss here the 
involvement of Kenneth Lay, Jeffrey Skilling, Richard Causey, and 
Richard Buy.
    For much of the period in question, Lay was the Chief Executive 
Officer of Enron and, in effect, the captain of the ship. As CEO, he 
had the ultimate responsibility for taking reasonable steps to ensure 
that the officers reporting to him performed their oversight duties 
properly. He does not appear to have directed their attention, or his 
own, to the oversight of the LJM partnerships. Ultimately, a large 
measure of the responsibility rests with the CEO.
    Lay approved the arrangements under which Enron permitted Fastow to 
engage in related-party transactions with Enron and authorized the 
Rhythms transaction and three of the Raptor vehicles. He bears 
significant responsibility for those flawed decisions, as well as for 
Enron's failure to implement sufficiently rigorous procedural controls 
to prevent the abuses that flowed from this inherent conflict of 
interest. In connection with the LJM transactions, the evidence we have 
examined suggests that Lay functioned almost entirely as a Director, 
and less as a member of Management. It appears that both he and 
Skilling agreed, and the Board understood, that Skilling was the senior 
member of Management responsible for the LJM relationship.
    Skilling was Enron's President and Chief Operating Officer, and 
later its Chief Executive Officer, until his resignation in August 
2001. The Board assumed, and properly so, that during the entire period 
of time covered by the events discussed in this Report, Skilling was 
sufficiently knowledgeable of and involved in the overall operations of 
Enron that he would see to it that matters of significance would be 
brought to the Board's attention. With respect to the LJM partnerships, 
Skilling personally supported the Board's decision to permit Fastow to 
proceed with LJM, notwithstanding Fastow's conflict of interest. 
Skilling had direct responsibility for ensuring that those reporting to 
him performed their oversight duties properly. He likewise had 
substantial responsibility to make sure that the internal controls that 
the Board put in place--particularly those involving related-party 
transactions with the Company's CFO--functioned properly. He has 
described the detail of his expressly-assigned oversight role as 
minimal. That answer, however, misses the point. As the magnitude and 
significance of the related party transactions to Enron increased over 
time, it is difficult to understand why Skilling did not ensure that 
those controls were rigorously adhered to and enforced. Based upon his 
own description of events, Skilling does not appear to have given much 
attention to these duties. Skilling certainly knew or should have known 
of the magnitude and the risks associated with these transactions. 
Skilling, who prides himself on the controls he put in place in many 
areas at Enron, bears substantial responsibility for the failure of the 
system of internal controls to mitigate the risk inherent in the 
relationship between Enron and the LJM partnerships.
    Skilling met in March 2000 with Jeffrey McMahon, Enron's Treasurer 
(who reported to Fastow). McMahon told us that he approached Skilling 
with serious concerns about Enron's dealings with the LJM partnerships. 
McMahon and Skilling disagree on some important elements of what was 
said. However, if McMahon's account (which is reflected in what he 
describes as contemporaneous talking points for the discussion) is 
correct, it appears that Skilling did not take action (nor did McMahon 
approach Lay or the Board) after being put on notice that Fastow was 
pressuring Enron employees who were negotiating with LJM--clear 
evidence that the controls were not effective. There also is 
conflicting evidence regarding Skilling's knowledge of the March 2001 
Raptor restructuring transaction. Although Skilling denies it, if the 
account of other Enron employees is accurate, Skilling both approved a 
transaction that was designed to conceal substantial losses in Enron's 
merchant investments and withheld from the Board important information 
about that transaction.
    Causey was and is Enron's Chief Accounting Officer. He presided 
over and participated in a series of accounting judgments that, based 
on the accounting advice we have received, went well beyond the 
aggressive. The fact that these judgments were, in most if not all 
cases, made with the concurrence of Andersen is a significant, though 
not entirely exonerating, fact.
    Causey was also charged by the Board of Directors with a 
substantial role in the oversight of Enron's relationship with the LJM 
partnerships. He was to review and approve all transactions between 
Enron and the LJM partnerships, and he was to review those transactions 
with the Audit and Compliance Committee annually. The evidence we have 
examined suggests that he did not implement a procedure for identifying 
all LJM1 or LJM2 transactions and did not give those transactions the 
level of scrutiny the Board had reason to believe he would. He did not 
provide the Audit and Compliance Committee with the full and complete 
information about the transactions, in particular the Raptor III and 
Raptor restructuring transactions, that it needed to fulfill its 
    Buy was and is Enron's Senior Risk Officer. The Board of Directors 
also charged him with a substantial role in the oversight of Enron's 
relationship with the LJM partnerships. He was to review and approve 
all transactions between them. The evidence we have examined suggests 
that he did not implement a procedure for identifying all LJM1 or LJM2 
transactions. Perhaps more importantly, he apparently saw his role as 
more narrow than the Board had reason to believe, and did not act 
affirmatively to carry out (or ensure that others carried out) a 
careful review of the economic terms of all transactions between Enron 
and LJM.
    The Board of Directors. With respect to the issues that are the 
subject of this investigation, the Board of Directors failed, in our 
judgment, in its oversight duties. This had serious consequences for 
Enron, its employees, and its shareholders.
    The Board of Directors approved the arrangements that allowed the 
Company's CFO to serve as general partner in partnerships that 
participated in significant financial transactions with Enron. As noted 
earlier, the two members of the Special Investigative Committee who 
have participated in this review of the Board's actions believe this 
decision was fundamentally flawed. The Board substantially 
underestimated the severity of the conflict and overestimated the 
degree to which management controls and procedures could contain the 
    After having authorized a conflict of interest creating as much 
risk as this one, the Board had an obligation to give careful attention 
to the transactions that followed. It failed to do this. It cannot be 
faulted for the various instances in which it was apparently denied 
important information concerning certain of the transactions in 
question. However, it can and should be faulted for failing to demand 
more information, and for failing to probe and understand the 
information that did come to it. The Board authorized the Rhythms 
transaction and three of the Raptor transactions. It appears that many 
of its members did not understand those transactions--the economic 
rationale, the consequences, and the risks. Nor does it appear that 
they reacted to warning signs in those transactions as they were 
presented, including the statement to the Finance Committee in May 2000 
that the proposed Raptor transaction raised a risk of ``accounting 
scrutiny.'' We do note, however, that the Committee was told that 
Andersen was ``comfortable'' with the transaction. As complex as the 
transactions were, the existence of Fastow's conflict of interest 
demanded that the Board gain a better understanding of the LJM 
transactions that came before it, and ensure (whether through one of 
its Committees or through use of outside consultants) that they were 
fair to Enron.
    The Audit and Compliance Committee, and later the Finance 
Committee, took on a specific role in the control structure by carrying 
out periodic reviews of the LJM transactions. This was an opportunity 
to probe the transactions thoroughly, and to seek outside advice as to 
any issues outside the Board members' expertise. Instead, these reviews 
appear to have been too brief, too limited in scope, and too 
superficial to serve their intended function. The Compensation 
Committee was given the role of reviewing Fastow's compensation from 
the LJM entities, and did not carry out this review. This remained the 
case even after the Committees were on notice that the LJM transactions 
were contributing very large percentages of Enron's earnings. In sum, 
the Board did not effectively meet its obligation with respect to the 
LJM transactions.
    The Board, and in particular the Audit and Compliance Committee, 
has the duty of ultimate oversight over the Company's financial 
reporting. While the primary responsibility for the financial reporting 
abuses discussed in the Report lies with Management, the participating 
members of this Committee believe those abuses could and should have 
been prevented or detected at an earlier time had the Board been more 
aggressive and vigilant.
    Outside Professional Advisors. The evidence available to us 
suggests that Andersen did not fulfill its professional 
responsibilities in connection with its audits of Enron's financial 
statements, or its obligation to bring to the attention of Enron's 
Board (or the Audit and Compliance Committee) concerns about Enron's 
internal controls over the related-party transactions. Andersen has 
admitted that it erred in concluding that the Rhythms transaction was 
structured properly under the SPE non-consolidation rules. Enron was 
required to restate its financial results for 1999 and 2000 as a 
result. Andersen participated in the structuring and accounting 
treatment of the Raptor transactions, and charged over $1 million for 
its services, yet it apparently failed to provide the objective 
accounting judgment that should have prevented these transactions from 
going forward. According to Enron's internal accountants (though this 
apparently has been disputed by Andersen), Andersen also reviewed and 
approved the recording of additional equity in March 2001 in connection 
with this restructuring. In September 2001, Andersen required Enron to 
reverse this accounting treatment, leading to the $1.2 billion 
reduction of equity. Andersen apparently failed to note or take action 
with respect to the deficiencies in Enron's public disclosure 
    According to recent public disclosures, Andersen also failed to 
bring to the attention of Enron's Audit and Compliance Committee 
serious reservations Andersen partners voiced internally about the 
related-party transactions. An internal Andersen e-mail from February 
2001 released in connection with recent Congressional hearings suggests 
that Andersen had concerns about Enron's disclosures of the related-
party transactions. A week after that e-mail, however, Andersen's 
engagement partner told the Audit and Compliance Committee that, with 
respect to related-party transactions, ``[r]equired disclosure [had 
been] reviewed for adequacy,'' and that Andersen would issue an 
unqualified audit opinion. From 1997 to 2001, Enron paid Andersen $5.7 
million in connection with work performed specifically on the LJM and 
Chewco transactions. The Board appears to have reasonably relied upon 
the professional judgment of Andersen concerning Enron's financial 
statements and the adequacy of controls for the related party 
transactions. Our review indicates that Andersen failed to meet its 
responsibilities in both respects.
    Vinson & Elkins, as Enron's longstanding outside counsel, provided 
advice and prepared documentation in connection with many of the 
transactions discussed in the Report. It also assisted Enron with the 
preparation of its disclosures of related-party transactions in the 
proxy statements and the footnotes to the financial statements in 
Enron's periodic SEC filings.\2\ Management and the Board relied 
heavily on the perceived approval by Vinson & Elkins of the structure 
and disclosure of the transactions. Enron's Audit and Compliance 
Committee, as well as in-house counsel, looked to it for assurance that 
Enron's public disclosures were legally sufficient. It would be 
inappropriate to fault Vinson & Elkins for accounting matters, which 
are not within its expertise. However, Vinson & Elkins should have 
brought a stronger, more objective and more critical voice to the 
disclosure process.
    \2\ Because of the relationship between Vinson & Elkins and the 
University of Texas School of Law, the portions of the Report 
describing and evaluating actions of Vinson & Elkins are solely the 
views of Troubh and Winokur.
    Enron Employees Who invested in the LJM Partnerships. Michael 
Kopper, who worked for Fastow in the Finance area, enriched himself 
substantially at Enron's expense by virtue of his roles in Chewco, 
Southampton Place, and possibly LJM2. In a transaction he negotiated 
with Fastow, Kopper, and his co-investor in Chewco received more than 
$10 million from Enron for a $125,000 investment. This was inconsistent 
with his fiduciary duties to Enron and, as best we can determine, with 
anything the Board--which apparently was unaware of his Chewco 
activities--authorized. We do not know what financial returns he 
received from his undisclosed investments in LJM2 or Southampton Place. 
Kopper violated Enron's Code of Conduct not only by purchasing his 
personal interests in Chewco, LJM2, and Southampton, but also by 
secretly offering an interest in Southampton to another Enron employee.
    Ben Glisan, an accountant and later McMahon's successor as Enron's 
Treasurer, was a principal hands-on Enron participant in two 
transactions that ultimately required restatements of earnings and 
equity: Chewco and the Raptor structures. Because Glisan declined to be 
interviewed by us on Chewco, we cannot speak with certainty about 
Glisan's knowledge of the facts that should have led to the conclusion 
that Chewco failed to comply with the non-consolidation requirement. 
There is, however, substantial evidence that he was aware of such 
facts. In the case of Raptor, Glisan shares responsibility for 
accounting judgments that, as we understand based on the accounting 
advice we have received, went well beyond the aggressive. As with 
Causey, the fact that these judgments were, in most if not all cases, 
made with the concurrence of Andersen is a significant, though not 
entirely exonerating, fact. Moreover, Glisan violated Enron's Code of 
Conduct by accepting an interest in Southampton Place without prior 
disclosure to or consent from Enron's Chairman and Chief Executive 
Officer--and doing so at a time when he was working on Enron's behalf 
on transactions with LJM2, including Raptor.
    Kristina Mordaunt (an in-house lawyer at Enron), Kathy Lynn (an 
employee in the Finance area), and Anne Yaeger Patel (also an employee 
in Finance) appear to have violated Enron's Code of Conduct by 
accepting interests in Southampton Place without obtaining the consent 
of Enron's Chairman and Chief Executive Officer.
                                *  *  *
    The tragic consequences of the related-party transactions and 
accounting errors were the result of failures at many levels and by 
many people: a flawed idea, self-enrichment by employees, inadequately-
designed controls, poor implementation, inattentive oversight, simple 
(and not-so-simple) accounting mistakes, and overreaching in a culture 
that appears to have encouraged pushing the limits. Our review 
indicates that many of those consequences could and should have been 

    Senator Dorgan. Mr. Powers, thank you very much. Your 
report is very helpful, and most of us on the Committee have 
heard your testimony in the U.S. House of Representatives. We 
have since that time heard testimony from others, including Mr. 
Skilling. I would like to ask a series of questions to begin 
with, and let me thank you again for being willing to appear 
here today.
    Can you tell us again what you did not investigate, and 
why? We understand what you did investigate, especially with 
respect to Mr. Fastow and the partnerships. What did the Board 
of Directors ask you not to investigate, and why?
    Mr. Powers. Well, they asked us to investigate the related-
party transactions, and the reason for that is that questions 
were being raised about them in the newspapers, and 
particularly The Wall Street Journal. At the time we started 
our investigation, similar questions were not being raised 
about other partnerships, and as several Senators this morning 
mentioned, there are many, many other partnerships, other than 
these related-party transactions. They were not being 
questioned, and for that reason we were not asked to go into 
    I should say it was an extremely demanding task. We had a 
great deal on our plate in the 3 months we had, even in these 
    Senator Dorgan. But those questions were raised at the time 
that you were conducting the investigation. As I understand the 
point, that they were not raised prior to the Board empaneling 
you, but during the conducting of your investigation all of 
these issues had been raised. I specifically wonder about 
insider trading, which also would be of great significance, and 
perhaps would involve the Board of Directors and key officers 
of the company. Did you go back to the Board and suggest that 
perhaps we need to also address insider trading? I am just 
trying to understand here the focus.
    Mr. Powers. Mr. Chairman, let me say here, those are 
absolutely crucial and important issues that need to be 
investigated. To be frank, it was all we could do, working very 
diligently and very hard, to get to the bottom of these 
transactions, and I think we have performed a service in 
outlining these transactions, but we simply did not have the 
time or the resources to look more broadly into these other 
    Senator Dorgan. Mr. Powers, when you looked at the related 
partnerships, did you ask the corporation for the names of the 
investors in the partnerships and, if you did, did you receive 
those names, and let me ask, how many partnerships did you 
    Mr. Powers. We reviewed the LJM partnerships and Chewco, 
the related party, the related-party partnerships, the related-
party transactions. We did not review all the other 
    Senator Dorgan. Did you review, for example, Braveheart?
    Mr. Powers. No.
    Senator Dorgan. So you reviewed several partnerships. Did 
you seek the names of all of the investors in those 
    Mr. Powers. We sought the materials from the partnerships, 
and the partnerships did not cooperate with us.
    Senator Dorgan. The partnerships did not cooperate?
    Mr. Powers. The partnerships did not.
    Senator Dorgan. How many partnerships do you estimate 
existed in this corporation?
    Mr. Powers. I have seen figures up close to 3,000, and you 
are quite right, it is an important point to note we only 
investigated three of them--now, they were related-party 
transactions, partnerships--and found these problems.
    Senator Dorgan. Mr. Powers, I believe you indicated that 
you spoke with Mr. Lay. Your investigation had the opportunity 
to meet with and speak with Mr. Lay and ask him questions.
    Mr. Powers. Yes.
    Senator Dorgan. Who did not speak with you that you 
requested to speak to in this corporation? Did you have the 
cooperation of all of the officers of the company and all the 
directors of the company, or were there those who refused to 
meet with you?
    Mr. Powers. Well, the people that were then currently 
employed by the company did cooperate with us. Kopper did not 
cooperate with us. Others who were no longer with the company 
involved in these transactions did not cooperate with us. 
Fastow, we had a very--about an hour interview with him, and 
there was very little information exchanged. It was not as 
though he totally refused to talk with us, but he was not 
cooperative in the interview.
    Senator Dorgan. You met with Mr. Lay, Mr. Skilling, and Mr. 
    Mr. Powers. We met with Mr. Skilling; we had an interview 
with Mr. Skilling. We met with Mr. Fastow, but extremely little 
information was exchanged. I would say it was an uncooperative 
    Senator Dorgan. Would you agree that, based on looking at 
several partnerships and telling me that you do not know who 
the investors in the partnerships that you looked at were, that 
for us to understand how you put the pieces of this puzzle 
together, ultimately we are going to have to evaluate what are 
all the partnerships and who are all the investors in these 
partnerships. Would you agree that is an important piece of 
information to understand what happened?
    Mr. Powers. I think it is a vital piece of information, and 
again, we see this as laying out some basic facts. It is a 
start, but we did not have the ability to compel testimony, we 
did not have subpoena power.
    Senator Dorgan. Help me to understand the partnerships you 
did look at. For example, if Enron owned 97 percent of a 
partnership, they would have met the 3 percent test. But in 
order to have records for an auditor, would the corporation not 
have to have the records of that partnership, including the 
outside investors, because how would an auditing firm 
understand whether the 3 percent test has been met? And, if 
that is the case, and I would expect that to be the case, did 
you seek those records from the Enron Corporation and not get 
    Mr. Powers. We got what we sought from Enron.
    Senator Dorgan. Did you seek the names of the investors in 
the three partnerships that you investigated?
    Mr. Powers. I do not believe Enron had that. Enron tried to 
keep a distance from these LJM partnerships.
    Senator Dorgan. But I am not asking what you believe. I am 
asking whether you sought the information and they refused to 
provide it, or you sought the information and they said we do 
not have it.
    Mr. Powers. Yes. It is the latter.
    Senator Dorgan. Is that not totally implausible, that a 
company that has a 97 percent stake in a partnership would say 
to you, an investigator on behalf of the Board of Directors, or 
an auditing firm that would come in who said, show us the 
records, is it not implausible for them to say, we do not have 
records? That is unbelievable to me.
    Mr. Powers. Well, they did not have--the LJM partnerships 
would provide 3 percent equity, under this 3 percent equity 
test, into a transaction with which Enron was doing business, 
and as long as LJM showed up with the 3 percent equity, from 
Enron's point of view, they just dealt with the general partner 
of LJM.
    Senator Dorgan. How would they know whether the 3 percent 
test is met? I mean, I am asking not just for these three 
partners, or these three partnerships, but we are going to need 
to try to understand what is the quilt that was put together 
here in order to understand really what is the dimension of 
what happened here. What are the interlocking investments made 
by whom? You indicated you limited your inquiry to the three 
partnerships, and that you were unable to get the information 
on who the investors were in the three partnerships because the 
partnerships were separate and special purpose entities, and as 
such, the information is deemed to be private.
    Mr. Powers. They dealt through their general partner, and 
Enron's position, what the Enron people we interviewed told us 
as to why they did not know who those investors in LJM were, 
was that they wanted--this is what Enron is saying to us.
    Senator Dorgan. Did you believe that?
    Mr. Powers. Well, I am not sure I can pass on the 
credibility of it. Clearly, Fastow did not want people looking 
into what was going on in those partnerships. Enron's 
explanation was they wanted to keep a distance with those 
partnerships, and did not look into them as to--or things like 
Fastow's compensation, and issues of that sort.
    Senator Wyden. Would the Chairman yield for just 1 second?
    Senator Dorgan. I would be happy to yield.
    Senator Wyden. There was a very significant development 
today, Mr. Powers, and that was the newspaper account that 
indicates that Mr. Lay personally signed off on the LJM 
coinvestment deal. Did you find any evidence that that was the 
case, because the news today is saying this was a deal approval 
sheet from June of 2000, and that would, if confirmed, undercut 
the argument Mr. Lay has been making that he did not know much 
about what was going on. Can you tell us anything about this 
pretty significant development today?
    Mr. Powers. We note that in our report there was one 
instance where we were able to identify that Mr. Lay had signed 
off on a deal approval sheet for one of the underlying 
transactions with LJM, and it is on, I think, page 144 of our 
    Senator Wyden. I thank my colleague for yielding. I think 
this is significant, because it is the first time at least I 
have seen any evidence that he had personally signed off on one 
of these questionable partnerships and this, in my view, 
directly undercuts the argument that Mr. Lay did not know what 
was going on. I thank my colleague very much for his courtesy 
in yielding.
    Mr. Powers. Senator, that is in our report. That instance 
is in our report.
    Senator Dorgan. I have a broad range of questions, and I 
appreciate your patience. Our inquiry here is to try to have 
you help us understand this operation. Based upon what you 
understand, and my understanding of the records that I have 
seen, was it not the case that the 3 percent in some of the 
partnerships that you studied involved--controlled in some 
cases by Enron employees, and if so, the entity could not 
possibly have been an arm's length transaction? I am just 
trying to understand how we get to the names of all the 
investors and all the partnerships if you could not get to the 
names of the investors in the three you studied with the 
sanction of the Board of Directors to go do it.
    I will come back to this question, and I also will come to 
a question of while you were doing this study, reports came out 
about shredding that was going on in Enron, and I will ask if 
the Board of Directors might have urged you to take a look at 
that, or if you asked questions of Mr. Lay, Mr. Skilling and 
others who authorized shredding and what documents were 
    The reason I will ask that is I think in order for you to 
do your work, you are going to want to have known as you 
conducted this inquiry whether the company was busy shredding 
documents you needed. Clearly, the Congress is very interested 
in whether the documents that were being shredded were 
documents we need for this evaluation.
    So I have a range of other questions. Maybe you will want 
to answer the shredding question now, then I will turn to 
Senator Hollings.
    Mr. Powers. Well, when that first came up in the company we 
read about it in the newspapers, and when the FBI came in to 
investigate the company we cooperated, and I think we had a 
secure system for the Enron documents that we had. There is 
surely, there may be information on those documents that were 
shredded that would have helped us, and surely they would help 
anyone else that is investigating, and especially people with 
subpoena power that can investigate.
    We did not see a hole in the documentation for the 
transactions we were looking into, so we were able to figure 
out what these Raptor and Chewco transactions were like with 
the documents we had. Whether there are handwritten notes or 
other things on the other documents that we did not have, say, 
multiple documentation in similar transactions, we cannot say, 
and it is a serious issue.
    Senator Dorgan. We will have several rounds of questioning. 
Senator Hollings.
    The Chairman. Well, Senator Wyden asked Dean Powers about 
that sign-off on Jedi. Enron consolidated Jedi. There is no 
indication in the Board minutes that this consolidation was 
ever presented to the Board. Lay did not know about the 
consolidation, and does not recall that the consolidation was 
ever brought to the Board, yet his signature was there.
    Mr. Powers. His signature, which we document in the report, 
was on a transaction called Backbone, which was a transaction, 
it was a sale of some dark cable to one of the LJM, I think 
    The Chairman. Well, Dean, how much does that represent? I 
am trying to get to the off-balance-sheet debt, and you had 
Jedi, LJM, and one other. I said you only got the three of 
them. My just quick study, that would represent about $1\1/2\ 
to $3 billion. What would you say it would represent, how much 
debt as a result of these related-party transactions? In other 
words, they did not appear on the balance sheet.
    Mr. Powers. I do not have the exact figure. I think the 
range you suggest is about right.
    The Chairman. Well, I would ask the Committee to put in the 
record the assets and debts shown that appeared according to 
The New York Times, that record there, and it shows some $30 
billion, and yet your report only covers 3 of the $20 billion.
    [The information referred to follows:]

    Enron's Collapse; Complex Web of Relationships in Boom and Bust
                  The New York Times, January 13, 2002
                            by John Schwartz
    The cast of characters in the Enron drama is lengthy, and their 
relationships are complex.
The Executives
    Kenneth L. Lay gained national fame as the chairman and chief 
executive of Enron, a company that reshaped the nation's energy 
markets--and notoriety as the company flamed out spectacularly. A man 
with a doctorate in economics and an evangelical belief in free 
markets, Mr. Lay turned an old-fashioned gas pipeline operator into the 
world's biggest energy trader. But when Enron faltered, he could not 
explain the company's finances to the satisfaction of Wall Street or of 
Dynegy Inc., a rival that offered to rescue Enron but ultimately walked 
away from a proposed merger.
    Mr. Lay's longtime No. 2, Jeffrey K. Skilling, fostered a culture 
at Enron described as creative and cutthroat. He led the company into 
new markets, setting up trading desks for paper, chemicals, water 
rights and high-speed Internet service.
    Mr. Skilling was chief executive for six months, resigning last 
August. He said last month that he was stunned by the company's rapid 
    Enron replaced its chief financial officer, Andrew S. Fastow, in 
October, seeking to placate investors and regulators who had begun 
questioning a set of unusual partnerships he arranged to shift debt off 
the company's books. Two weeks later, the company revised its 
accounting for the partnerships, wiping away about $600 million in 
profits it had reported over the previous five years. Mr. Fastow earned 
$30 million from his investments in the deals.
The Board
    Enron recruited prominent people to its Board of Directors, but 
given the company's collapse, analysts give them low marks. The 
directors include Wendy L. Gramm, the former chairwoman of the 
Commodities Futures Trading Commission and the wife of Senator Phil 
Gramm, Republican of Texas.
    Ms. Gramm serves on the Board's audit committee, which is 
responsible for the company's accounting and financial reporting. Until 
1998, she owned Enron shares; when the Gramms decided that the stock 
presented conflict of interest issues, she sold her shares for 
$300,000. Since then, the company has placed her Board pay in a 
``deferred account'' that can be tapped later.
    Also on the Board is Dr. John Mendelsohn, president of the M. D. 
Anderson Cancer Center, one of Houston's most prestigious institutions. 
Enron has donated more than $600,000 to the center in the last five 
years. Another audit committee member, Lord John Wakeham, was in 
Margaret Thatcher's inner circle when she was Britain's prime minister.
The Lawyers
    No corporate crisis would be complete without celebrity lawyers, 
and the Enron debacle has enlisted some of the biggest. David Boies, 
who took on Microsoft in the federal antitrust suit, is representing 
Mr. Fastow. Robert S. Bennett, who represented President Bill Clinton 
in the Paula Jones scandal, is representing Enron in Washington.
The Politicians
    Mr. Lay--``Kenny Boy'' to his friend George W. Bush--is a major 
contributor to both political parties. Mr. Lay and other Enron 
executives have given more than $550,000 to Mr. Bush in his political 
    Enron's executives met with Vice President Dick Cheney four times 
last year to discuss energy matters. When Mr. Cheney was chief 
executive of Halliburton, a unit of the company built Houston's new 
baseball stadium, Enron Field. Before he became the president's top 
economic counselor, Lawrence B. Lindsey was a paid adviser to Enron. 
Karl Rove, Mr. Bush's chief political strategist, and I. Lewis Libby, 
Mr. Cheney's chief of staff, were investors in the company.
    The ties reach far beyond the White House. The Republican national 
chairman, Marc Racicot, the former governor of Montana, was a lobbyist 
for the company until last week. In Texas, Mr. Bush's successor, Rick 
Perry, has been criticized for appointing a top Enron executive to the 
state's Public Utility Commission.
The Accountants
    Joseph F. Berardino, chief executive of the accounting firm Arthur 
Andersen, Enron's longtime auditor, is caught in the Enron net. In 
December, he told Congress that Enron might have illegally hidden 
information from its auditors. Last week, Andersen disclosed that its 
employees had destroyed documents related to its auditing of Enron--
even after the government began investigating Enron's fall.
    If the story seems to take on the breadth of a Cecil B. DeMille 
epic, that may only be appropriate. For there is a cast of thousands: 
the company's investors, including Enron employees who saw their 
retirement savings disappear virtually overnight. Their loss--and their 
anger--guarantee that the investigations of Enron are only beginning.

    The Chairman. It says here, and I am reading from Business 
Week now, Dean Powers, Enron's bankruptcy filing shows $13 
billion in debt for the parent company and an additional $18.1 
billion for affiliates, but that does not include at least $20 
more billion estimated to exist off the balance sheet, so you 
folks only looked at 3 of the $20 billion.
    Mr. Powers. That is correct, and still there were these 
problems we uncovered.
    The Chairman. Well, this report we said will be here. We 
have got Dean Powers' report, so our work is done for us, not 
at all. That is just a cursory review at best, is that not 
    Mr. Powers. Absolutely. It is a start, and we think you are 
absolutely right on that.
    The Chairman. And, for example, maybe you can explain the 
statement on page 3. Enron utilized off-balance-sheet 
transactions because the company was growing quickly, and the 
balance sheet was not large enough to handle the growth. What 
do you mean, they do not have that wide a piece of paper down 
in Texas? What do you mean, the balance sheet was not large 
enough to handle the growth?
    Mr. Powers. I think they needed to take on more debt than 
their balance sheet would support. That actually was Lay's 
explanation when we interviewed Lay.
    The Chairman. Well, to make only a cursory report just a 
bare start, Dean, you attracted the rats leaving the sinking 
ship. Why are you swimming toward the ship? Everybody wonders 
about that, and I have got the highest respect for you and the 
law school. In fact, I have worked with the business school 
down there, George Kozmeski, for years, at the University in 
Austin, but to take on this thing, and then be made a part of 
it, put on the Board for one, just to make an investigation, 
you are investigating the Board, then all of a sudden you are 
part of the Board, so a Dean of a law school ordinarily would 
not take on a conflict of interest, would he?
    Mr. Powers. Well, I thought when I was asked that Enron was 
a major company in Texas, important for the Texas economy, and 
getting to the bottom of these transactions, I thought I could 
do a service, and while I agree fully this is just a start----
    The Chairman. So you are not near finding out what 
happened, what caused their collapse.
    Mr. Powers. Not near the bottom, I don't think.
    The Chairman. And you are going to continue to work?
    Mr. Powers. The charge of the Committee has been completed. 
I think a lot of what----
    The Chairman. You are not even near to making a conclusion 
and yet you do not know what happened.
    Mr. Powers. Well, we got on to get to the bottom of these 
transactions that were being discussed in the newspapers, these 
related party transactions, which do have special problems.
    The Chairman. With only $17 billion not covered. Let me ask 
you, you said on January 16, some 12 of you met with Mr. 
Kenneth Lay to take his testimony as to what went on, is that 
not correct?
    Mr. Powers. Yes. I was at that interview.
    The Chairman. Did you use a stenographer?
    Mr. Powers. We did not. We had a 17-page single-space 
memorandum. We have been working with the staff to provide the 
results of all of our interviews to the Committee.
    The Chairman. Now, wait a minute, you say you did not use a 
stenographer, so all of you were making different notes from 
time to time as he testified, were you not?
    Mr. Powers. Well, somebody took notes.
    The Chairman. Can you furnish those notes for us?
    Mr. Powers. Well, we turned those notes as a draft into the 
    The Chairman. I understand that.
    Mr. Powers. We did not keep the notes.
    The Chairman. You shredded the notes?
    Mr. Powers. Senator, there is nothing that is not in the 
report, and this was the standard, accepted way that has been 
worked by many investigators over a long period of time to do 
internal investigations, is to use the procedure that we used.
    The Chairman. The standard procedure is not to take down 
the testimony of the gentleman that you are investigating and 
otherwise, while you took some notes, to destroy the notes, 
that is your testimony?
    Mr. Powers. We used those to prepare a very detailed, 
within 24 hours in all but a few cases, very careful, accurate, 
complete description of what went on in those interviews, and I 
do think that is standard practice in investigations of this 
    The Chairman. Thank you, Mr. Chairman.
    Senator Dorgan. Senator Fitzgerald.
    Senator Fitzgerald. Thank you, Mr. Chairman. Dean Powers, I 
thought that the report that you did was very good, very 
professional. You obviously had top people working on your 
team, but I am very concerned that the Board limited your 
mandate just to related-party transactions because, as I read 
your report, it makes it sound like all the fake earnings were 
simply being caused by one rogue CFO, and as Senator Hollings 
has pointed out, your report only digs into those related-party 
transactions that involved Mr. Fastow, and there were 
apparently many other questionable transactions with other 
partnerships or SPE's that were off the books that need to be 
looked into.
    Has your committee gone back to the Board and recommended 
further review of more transactions?
    Mr. Powers. Well, of course, the answer is we have not. The 
company is in bankruptcy. Things are being done in conjunction 
with the creditors' committee now. It is a very different 
situation than we started, and I will be candid about it, I 
need to return to devote my full time and efforts to the 
University of Texas Law School, so I am not sure I am in a 
position to do that.
    Senator Fitzgerald. Is the Board just going to leave the 
rest of the investigation to the Justice Department, the SEC, 
and perhaps plaintiffs' attorneys?
    Mr. Powers. Well, I think those entities are investigating, 
and as far as I know the Board does not have----
    Senator Fitzgerald. Why did the Board limit your mandate to 
partnerships in which you had an Enron insider as general 
partner of the partnership? What was the policy rationale for 
limiting your review in that way?
    Mr. Powers. Well, those partnerships, for the very reasons 
we point out in the report, are very troubling because of the 
conflict of interest with Fastow being on both sides of the 
deal, were especially troubling, and questions had been raised 
in the financial press, and so those were the transactions we 
looked into. I do not think we possibly could have done 
anything like this kind of investigation over a broader range 
of transactions, which is not to say it is not important that 
those investigations be done. It is crucial that they be done.
    Senator Fitzgerald. Well, I think there was one written 
report about the Braveheart partnership where Braveheart 
borrowed $115 million from Canadian Imperial Bank of Commerce. 
Enron guaranteed their borrowings, and then Braveheart took 
$110 million of that and paid it to Enron for a worthless 
broadband video business that had no revenues to speak of, no 
clients and no income. Apparently that was not a related-party 
partnership, and that is why you did not look into it.
    Mr. Powers. Correct.
    Senator Fitzgerald. But it is possible that there were 
dozens, or even more other transactions wherein the valuation 
of the asset being transferred to the partnership is in 
question, and Enron could have paid an inflated price for it.
    Mr. Powers. Absolutely. We found these problems in one 
small area, and we do not in any way want to suggest that--much 
more investigation needs to be done, and especially by bodies 
with subpoena power, and who can compel testimony.
    Senator Fitzgerald. You are aware, though, that your report 
just focusing on those partnerships that involved the insiders 
and Mr. Fastow's CFO office and Mr. Fastow himself, that that 
encourages the perception which I think now is kind of out 
there amongst the general public that all the troubles seemed 
to stem from just this one guy.
    Mr. Powers. Well, certainly we tried to be very careful in 
the report to make the point you are quite right we are making, 
that this looked at a very narrow part of Enron, and it does 
not by any means finish appropriate investigations.
    Senator Fitzgerald. Now, with respect to those transactions 
you looked at between Enron and the Fastow partnerships, it 
seems to me that a big question is, who was doing the 
valuations of the assets being transferred from Enron to the 
partnerships? Your report talks about there being all sorts of 
asset sales where Enron would take an apparently questionable 
asset, transfer it to the partnership, and they would get paid 
a huge sum. Who was supposed to be doing the valuations?
    Mr. Powers. Well, Enron did have people who did evaluations 
of certain kinds of transactions like hedges, for example, but 
ultimately--and that is one of the problems with these 
transactions, is Fastow was often negotiating on one side and 
people that worked for him were negotiating on the other side, 
so these were not arm's length.
    Senator Fitzgerald. There is one Board report where Fastow 
said, and I can't remember what asset he said he was 
transferring to a partnership, but he said they were going to 
get an opinion from Price Waterhouse Cooper that in their 
opinion the value being received back by Enron was more than 
the value that they were transferring to LJM, and I guess that 
should have raised some questions. Why is LJM giving more than 
this asset is worth? That alone did not make sense. Was Price 
Waterhouse Coopers involved in a lot of the valuations? Did you 
see them?
    Mr. Powers. In many of the evaluations of certain kinds of 
transactions, other transactions were negotiated.
    Senator Fitzgerald. I know you referred us to page 144 and 
145, where there is that Backbone transaction, and I notice at 
the end that was a deal that Mr. Lay had himself personally 
approved, but I notice that in Backbone the EBS, the Enron 
Broadband Services wanted to do this transaction because they 
felt substantial pressure to meet their second quarter numbers.
    Did Mr. Lay and Mr. Skilling produce an earnings budget, 
and did they give that to people throughout the company and 
pressure them to meet their earnings numbers? Did you do any 
delving into that?
    Mr. Powers. Not that I know of. With the chair's 
indulgence, I have people who did the investigation with me, so 
I want to get these accurate if I may.
    From interviews, different areas did have earnings targets. 
The connection of those particular earnings targets to Lay and 
Skilling is more remote.
    Senator Fitzgerald. Did you find out whether Mr. Lay had 
hedged his own positions by entering into derivative 
    Mr. Powers. I do not know whether he did or not.
    Senator Fitzgerald. I gather there will be another round.
    Senator Dorgan. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    Mr. Powers, I want to talk to you about the role of the 
accountants in all of this, and I will tell you in starting, as 
you know, there is a great discussion around the country about 
the need for various accounting reforms, and people are pretty 
much shocked to learn that there already is a federal law on 
the books today that requires that accountants look for fraud 
and move quickly to bring it to the attention of the Securities 
and Exchange Commission if it was not corrected, and I spent 
nine years trying to get this law on the books, fighting the 
profession again and again.
    Now, I do not want to ask you for a legal opinion here, but 
I want to take you through this law, because my reading of it 
is that an awful lot of it really did not seem to get much 
attention from the Houston office of Arthur Andersen. Do you 
have an opinion before we start in, because I am going to take 
you through 10(a) of the Securities and Exchange Act to get 
your opinion on each section of this law that is on the books 
right now, and do you have any sense as we begin whether 10(a) 
should have been triggered by what was going on?
    Mr. Powers. I do not. I tried to figure out what went on 
with these transactions with a lot of help, but I am not a 
securities law or accounting expert.
    Senator Wyden. But I guess, Dean Powers, section 2 of the 
law speaks specifically to related-party transactions. Did they 
comply with that section of the law? That was the area you 
zeroed in on. That firm has to have procedures to look at 
questionable transactions when they involve related-party 
transactions, and I sure as heck do not get a sense that they 
complied with it, do you?
    Mr. Powers. Again, I am not an expert on the law. They 
certainly did not oversee these related-party transactions.
    Senator Wyden. Well, that, to me, is a violation of section 
10(a). I mean, it says that they have to have procedures in 
place to identify related-party transactions and then bring 
them to the attention of the company. Do you get the sense that 
was complied with?
    Mr. Powers. The company all the way up to the Board of 
Directors did know that these entities existed, and there were 
related-party transactions. I am not an expert on that law, and 
I do not have an opinion whether it was complied with. It 
certainly raises serious issues that people who are experts on 
the enforcement of that law, I agree, need to look into.
    Senator Wyden. Well, with all due respect, I do not know 
how you can do a thorough inquiry without putting the statute 
over here that is a law on the books today. If you just look at 
what is going on in this country, there is just hours and hours 
of attention being devoted to having a debate about new laws. 
What I just described to you is a law on the books right now to 
look at related-party transactions, and I still want you to 
tell me whether you looked at those related-party transactions 
in conjunction with a law that is on the books right now.
    Mr. Powers. We tried to figure out what had happened, and 
we did not evaluate whether the conduct violated a particular 
securities law or accounting law.
    Senator Wyden. Well, with respect to the related-party 
transactions, the ones you looked at, when it was brought to 
the attention of the company, did you find any evidence that 
they took corrective action? That is required by federal law. 
What did you find?
    Mr. Powers. We concluded that they did not oversee these 
transactions adequately.
    Senator Wyden. But, specifically on that point, when you 
found questionable activity in the related-party transactions, 
did the company, based upon your effort to examine what they 
did, take corrective action?
    Mr. Powers. We only delivered our report to the company, 
what, on February 2.
    Senator Wyden. This was required a long time before. That 
is what I think we have learned, was there a discussion about 
questionable activity, the law says you are required at that 
point to either get it corrected by management, or it goes 
directly to the SEC, and I would just like to have some sense, 
as you followed the related-party transactions in those three 
areas, whether you saw anything indicating that they took 
corrective action. Maybe your associates would like to get into 
it. It is a fairly straightforward question.
    Mr. Powers. I understand. I did not come across anything 
with reference to that law. I did not come across anything of 
that sort. We did not find anything with reference to Andersen 
that Andersen referred to that law, though Andersen did not 
fully--we were not able to interview the Andersen people. We 
saw some of their work papers and not others. Not to my 
    Senator Wyden. There is internal e-mail indicating that 
there was concern about exposure on this. When you are talking 
about a law that is on the books today, and that requires if 
questionable activity is taking place with respect to related-
party transactions, I think it is important to find out if 
there is any evidence, when it is brought to the attention of 
the company, whether it was corrected, and you are telling me 
at least at this point you have not found any evidence that it 
was done, is that right?
    Mr. Powers. That is correct.
    Senator Wyden. Let me ask you, with respect to the 
cooperation that you had from Arthur Andersen, you said you had 
only limited access to the work papers in the Houston office of 
Arthur Andersen. Do you believe there was significant relevant 
information you were not able to uncover?
    Mr. Powers. From Arthur Andersen? Yes. We did not have 
access to any of their 2001 work papers. They would have been 
very helpful to us.
    Senator Wyden. What questions would you have liked to ask 
Mr. Fastow and Michael Kopper if you had been in a position to 
get access to some of those documents?
    Mr. Powers. Well, we would have liked to have found out 
from Kopper and Fastow more about the LJM partnerships, as I 
answered earlier, that we were not able to get cooperation from 
those partnerships themselves.
    Senator Dorgan. Let me just ask another question if you 
would yield on that point. Why were you not able to have access 
to the Arthur Andersen material? Did you ask for it and Arthur 
Andersen refused to provide it?
    Mr. Powers. We asked from the start of the investigation. 
We wanted to set up interviews with Andersen and look at their 
work papers. We negotiated with them over some period of time. 
We finally got access to some of their work papers. There was 
talk about interviews. We tried to get copies of the work 
papers, and did not. We, as I said, were not given access to 
any of the 2001 work papers as those negotiations were going 
on. We then--Enron discharged Arthur Andersen in January, and 
the lawyers for Arthur Andersen called and said we are not 
going to cooperate any further.
    Senator Dorgan. That is surprising because Arthur Andersen 
was employed by the company and the Board of Directors, and was 
paid a significant amount of money.
    Senator Wyden. Mr. Chairman, I know my time has expired. I 
am concerned about these two issues. First, the question of 
compliance with section 10(a), and second the question of 
Arthur Andersen limiting your access to these critical 
documents--I find it just totally implausible that Arthur 
Andersen's office in Houston failed to understand that the 
purpose of these related-party transactions was to sweep debts 
and liabilities under the rug. I think just any other 
explanation strikes me as totally implausible.
    I hope that we will get a chance to have another round of 
questioning, but I do think the combination of what looks to me 
like ignoring a federal law that is on the books right now that 
could have rooted out much of this trouble, plus the 
unwillingness to give you access to the documents, is the kind 
of one-two punch that has injured a lot of Americans, and I 
look forward to the next round.
    Mr. Powers. We agree. We would like to have heard 
Andersen's explanation of that.
    Senator Dorgan. Senator Inouye.
    Senator Inouye. Thank you very much.
    Dean Powers, although you were not provided access to these 
records and files and reports, and although the Andersen firm 
did not cooperate with you, you were able to, in your executive 
summary on page 5, make certain conclusions. For example, that 
the original accounting treatment was clearly wrong, and 
accounting treatment was likely wrong in the other 
transactions, and that Enron's records show that Andersen 
received $5.7 million for advice over and above the regular 
audit fees.
    You were able to reach the conclusion that they were 
clearly wrong. Wrong in what sense, sir?
    Mr. Powers. Well, they have admitted in their restatement 
some accounting errors, so clearly they were wrong in those. 
Our view, based upon the accounting advice that we have, was 
that they did not provide sufficient independent accounting 
advice to Enron about the nature of these transactions. They 
were hedging devices that were basically Enron hedging with 
itself, and that is inappropriate, and Andersen would be in a 
position to bring professional judgment and evaluation on that, 
and they did not do it.
    Senator Inouye. This may not be a proper question, but did 
you believe at any time that such advice could be criminal in 
    Mr. Powers. Well, we did not ourselves make an evaluation 
of that. It certainly is something that I know both the Justice 
Department and the SEC is looking into this, and I think 
appropriately so, but we did not ourselves try to ascertain 
whether there was criminal conduct.
    Senator Inouye. It is strange to see a firm such as 
Andersen, internationally known, providing advice that would be 
in your words clearly wrong in basic accounting, in the 
structuring of transactions and such.
    In your work as Dean of the law school, have you come 
across other cases of this nature with accounting firms?
    Mr. Powers. No, but that is not, accounting is not my 
field. I teach product liability and tort law, mainly.
    Senator Inouye. Well, I just hope that Andersen and that 
firm can clarify this for us. In your work on the Board, were 
you able to interview Mr. Lay?
    Mr. Powers. Yes, we were.
    Senator Inouye. And, did he suggest to you that he was 
fully advised by Andersen?
    Mr. Powers. In our interview, this is what he said to us. 
He said that he thought these transactions were OK because 
Andersen had signed off on them.
    Senator Inouye. Because Andersen signed off?
    Mr. Powers. Yes. Andersen had approved them. Yes, that is 
what he said.
    Senator Inouye. Did the company counsel also advise Mr. Lay 
that Andersen was correct?
    Mr. Powers. Other people in the company, mainly the chief 
accounting officer who gave that advice, that is my 
recollection of the interview.
    Senator Inouye. So the legal counsel, the accounting 
counsel on the Enron management team all felt that Andersen was 
    Mr. Powers. I do not know whether they felt Andersen was 
correct. They referred to the fact that Andersen had approved 
many of these transactions, had reviewed and approved many of 
these transactions. That is what they said.
    Senator Inouye. Do you believe there is a conspiracy 
brewing here?
    Mr. Powers. Well, I think people, I mean, certainly in the 
finance group and in the accounting group understood these 
transactions very well.
    Senator Inouye. Did you understand these transactions to be 
valid, illegal?
    Mr. Powers. I think they understood the nature of the 
transactions. It is hard for me to see how hedging with one's 
own stock could be a legitimate economic hedge. As I said in my 
opening statement, there are, I think it is at the Finance 
Committee meeting, notes taken there that people understood 
this is hedging P&L volatility, that is the accounting aspects 
of it, rather than really shifting any economic risk.
    Senator Inouye. So your conclusion is that they knowingly 
did the wrong thing?
    Mr. Powers. They knew they were hedging with their own 
stock, and that was inappropriate. Whether they knew it was 
inappropriate, they said in their interviews they did not 
understand it to be inappropriate.
    Senator Inouye. Thank you very much.
    Mr. Powers. Thank you, Senator.
    Senator Dorgan. Senator Carnahan.
    Senator Carnahan. Thank you, Mr. Chairman. I would like to 
address a few corrective measures that you might suggest to 
this Committee. As you know, a record number of Americans are 
participating in the stock market right now through 401(k) 
pension plans and private investment accounts, and even online 
    The average Americans now are becoming shareholders, and 
they have to rely on other people to protect their interests. 
They expect management to focus on implementing a successful 
and profitable business plan, and they can rely on boards of 
directors to oversee the company's management and add yet 
another layer of protection and, of course, they rely on 
various government regulators to prevent fraud and corruption. 
On all fronts, Enron's shareholders were poorly served.
    In your opinion, what are some immediate steps that the 
Congress could take to give investors confidence that what 
transpired at Enron would not happen at other companies in the 
    Mr. Powers. If I may preface this, I am not a securities 
law or accounting expert. To me, as an investor, I might add, a 
very modest investor, one key thing is transparency, that 
whatever is going on financially inside the company ought to be 
accessible to investors and certainly their analysts.
    Not being an expert, I do not know whether that is because 
there were existing laws that might have been violated, or laws 
that need to be enhanced, but that does seem to be an important 
area of inquiry that committees, such as this, I think as a 
citizen and not as an expert, ought to look into.
    I do think issues about the independence of accountants 
seem to be an issue that is an important one. I do not myself 
have a particular solution to that.
    Can I just add, I do think that the tragedy of the retirees 
in their 401(k) plans is a serious human tragedy that I do not 
have the solution to that, either, but also it is something 
that needs to be looked into.
    Senator Carnahan. You are a relatively new member of the 
Enron Board of Directors, and I am sure you are aware that the 
Board is meant to represent the shareholders. Your report 
indicates that the Board of Directors failed in its oversight 
duties. Could you tell the Committee what reforms have been 
instituted among Enron's Board to ensure that it does not 
preside over a fraudulent management in the future?
    Mr. Powers. I was brought on the Board to conduct this 
investigation. I believe that the Board, in cooperation with 
the Creditors' Committee, will be restructuring itself. I do 
not know that that has taken place. I think there is a 
regularly scheduled Board meeting today, and that may or may 
not have occurred.
    Senator Carnahan. What kind of tough questions do you think 
boards should be asking of accountants and executives and 
    Mr. Powers. I think one lesson I have learned from seeing 
the complexity of these transactions, if people on boards do 
not understand, or claim that they do not understand what a 
transaction is doing before they are asked to approve it--now, 
there are many things that go on in a company that boards do 
not manage the company, but when something comes to the board, 
that is in their purview, they ought to understand. If it is 
too complex to understand----
    Senator Carnahan. They just accept the recommendation and 
give it a rubber stamp?
    Mr. Powers. If I were on a board and somebody came to me 
with a transaction I did not understand, I would like to think 
that I made sure that I understood it or not go forward with 
    Senator Carnahan. Thank you.
    Senator Dorgan. Senator Hutchison.
    Senator Hutchison. Thank you, Mr. Chairman.
    I want to put a little bit in perspective some of the 
earlier questions about the processes for the internal 
investigation, and ask you this question. You were brought on 
the Board for the specific purpose of doing an internal 
investigation around the end of October.
    Mr. Powers. Yes, the very end of October, that is correct.
    Senator Hutchison. And what was your process in determining 
what an internal investigation should accomplish, and the 
process that you would use to have that as differentiated from 
some other type of outside investigation?
    Mr. Powers. Well, actually, about, or sometime about a 
week, I think, or maybe a bit more than that, before I actually 
came on the Board to conduct the investigation, the Board had 
set up this special committee with different people on it and 
had hired Wilmer, Cutler, & Pickering, a Washington law firm.
    Senator Hutchison. When you say different people, do you 
mean people off the Board or people on the Board?
    Mr. Powers. People on the Board who had been involved in 
the transactions, and I was brought on, as was Ray Trobe, to be 
a majority of the Board of people that were not there when any 
of these transactions took place, but the Board had hired 
Wilmer, Cutler & Pickering. They had hired Deloitte and 
Touche--Wilmer, Cutler & Pickering is a leading firm in 
conducting these investigations, and I think conducted a superb 
investigation here, and that was how we went about structuring 
how this investigation would take place.
    Senator Hutchison. So you had the law firm, then, that had 
done internal investigations, and the process for those was 
different, and was it standard in internal investigations that 
you interviewed with the group and then one person did a 
memorandum about the interview and you all approved it? Was 
that said to be a standard operating procedure?
    Mr. Powers. Yes, it was.
    Senator Hutchison. Was part of that just for time purposes 
that you did not take transcripts and then store that?
    Mr. Powers. I think that was part of it, but remember also 
we did not have any subpoena power, and we had to rely upon the 
cooperation of witnesses, and our goal was to find out what 
happened, and we were not trying to replicate a criminal 
investigation and, for example, we did get Ken Lay to talk with 
us, so I think we were able to get information through this 
process and that is why lawyers over the years have developed 
these processes for internal investigations to get cooperation 
with people inside the company.
    Senator Hutchison. Did the nature of your internal 
investigation change from October, when you started this, until 
early February?
    Mr. Powers. No. We kept our same task. We worked very 
carefully with the SEC. We provided them documents and some 
briefings. At some point the Justice Department did start to 
investigate, and we worked with them to be sure we would be 
providing them with any documents or information they would 
need, but that basic investigation to just simply find out what 
happened we followed through with.
    Senator Hutchison. How did the SEC come into this? Did they 
ask to see the progress, the SEC?
    Mr. Powers. The SEC started an inquiry and then finally an 
investigation. They were, I think, willing to let us 
investigate. We did provide them with a lot of documents, and 
we were in constant contact with them to make sure that we were 
fulfilling our obligations to them.
    Senator Hutchison. The last question on this point. You 
said that this is the end of your investigation. Do you intend 
to stay on the Board of Enron?
    Mr. Powers. No. I intend to resign from the Board of Enron 
as soon as I am assured that I have fulfilled my obligations to 
the SEC.
    To come back to the notion that our report is just a start, 
but that start and our task of the special committee is over, 
and I need to devote full time to being the Dean of the law 
    Senator Hutchison. Let me just ask you again, back on the 
things that you have learned from which we could fashion the 
right approach to reform, I think there must be some reform, 
probably, in accounting procedures and transparency, and also 
on pensions. In what you saw in the transparency and accounting 
processes, was the information available and given to outside 
people, whether it was an analyst or a Board member, that would 
have given them an indication that something was this wrong at 
    Mr. Powers. Well, certainly not this wrong. The disclosures 
to the investing world did disclose that there were 
transactions between an entity owned by Fastow and Enron. They 
were not kept secret in that sense.
    Senator Hutchison. Excuse me, but you said Mr. Fastow 
actually pursued an ethical clearance on those, did you not?
    Mr. Powers. Yes. The Board approved Fastow's involvement, 
but I was talking about, that was at the Board. The disclosure 
of those transactions to the public. They were disclosed in 
minimal terms, and as we point out in the report, they were 
not--there was a lot of information about those transactions 
that was not fully disclosed.
    Senator Hutchison. Even when the Board was required to act, 
were they required to say it was OK for Mr. Fastow to have his 
joint role? Were they told that it was within the code of 
    Mr. Powers. They made the findings. This is now disclosures 
to the Board. I was talking earlier about disclosures to the 
public, but disclosures to the Board. For example, the Board 
did not look into what Fastow's compensation was. They did not 
insist that he tell them what that compensation would be.
    Senator Hutchison. Would there have been any reason to 
question that there was not added compensation for this other 
    Mr. Powers. Well, by the time they got to LJM2 it was a big 
enough partnership that it should have raised red flags that 
there may be quite a bit of compensation available there just 
because of the size and the nature of the partnership. LJM1 did 
not have that much money in it.
    Senator Hutchison. Well, I see my time is up. Is there 
anything else that you would say we should look at in reform on 
making those transparencies transparent to an average board 
member or analyst, or stockholder?
    Mr. Powers. I think it is absolutely crucial there be 
transparency to the public and to the shareholders.
    Senator Hutchison. Of information that is made available to 
the board? Should it all be there?
    Mr. Powers. I think enough information should be disclosed 
in the financial statements in a clear enough way that makes 
the investing public understand, either understand the nature 
of the business and its financial risks, or understand that it 
is too complicated and they cannot understand it, but it ought 
to be disclosed to the public.
    Senator Hutchison. Thank you, Mr. Chairman.
    Senator Dorgan. Senator Nelson.
    Senator Nelson. Thank you, Mr. Chairman. Mr. Powers, I am 
going to ask you a series of questions that you may, in your 
investigation, have come into confrontation with some of the 
facts that might illuminate the answers to some of these 
questions, but just to lay the predicate, our Florida 
retirement fund is one of the largest in the country. It is the 
fourth largest pension fund in the country, and just to give 
you a sense of what was happening I will quote from a New York 
Times article that sums it up pretty quickly.
    Last October, after Enron announced $1.2 billion in losses, 
and the SEC opened its investigation, the fund, meaning the 
Florida retirement fund, bought $7.1 million more of Enron 
stock, and after Enron's Chief Financial Officer, Fastow, was 
ousted on October 24, the fund bought another $16.1 million 
worth of stock, and when Enron announced last November that it 
had overstated its profits, the fund bought still another $11.7 
    The story also reported that an Alliance Capital executive, 
which was the outside money manager that was buying this, Frank 
Savage, also is a member of Enron's Board. Do you know Frank 
    Mr. Powers. I do know Frank Savage. I do not know his 
connection with the pension fund.
    Senator Nelson. When Mr. Lay took over as CEO last August, 
he publicly stated that he wanted to focus on investor 
confidence and, during the course of your investigation, did 
you review any policies or communications on whether Enron 
executives or Board members promoted the purchase of the stock 
by public institutional investors, such as the Florida 
retirement fund?
    Mr. Powers. No, we did not look into that. It is an 
important issue, but we did not investigate that.
    Senator Nelson. From what you observed, do you have any 
opinion on corporate executives or Board members soliciting the 
purchase of stock by employees or others?
    Mr. Powers. I do not. They should follow the legal 
requirements and be truthful, but I do not have an opinion on 
    Senator Nelson. Between June and November of last year, do 
you have any personal knowledge if any Board members or Enron 
executives made calls to public institutional investors to 
promote the stock?
    Mr. Powers. I do not have any knowledge of that.
    Senator Nelson. Are you aware of any Board members with 
direct or indirect ties to Florida and outside money managers 
that purchased stock for the state pension fund?
    Mr. Powers. No, I do not, Senator.
    Senator Nelson. Other than what I just told you about Mr. 
    Mr. Powers. That is correct.
    Senator Nelson. It is my understanding he resigned from 
that outside money manager in August. There had been plenty of 
Enron stock that had already been purchased, but it was not at 
this particular time when the stock was plummeting in value.
    On November 19, Enron filed its quarterly report to the SEC 
revealing that the company owed $690 million in loans. Do you 
know if anyone in Enron made calls to money managers and others 
to stabilize the stock before the loans came due?
    Mr. Powers. I do not know.
    Senator Nelson. You obviously see where my line of 
questioning is going, which is what I am concerned about. Does 
Enron have a conflict of interest policy for its Board of 
    Mr. Powers. Yes.
    Senator Nelson. Do you know if that conflict of interest 
policy would cover any of these things we are talking about 
    Mr. Powers. I do not. I would have to look more carefully 
at them.
    Senator Nelson. Your committee report describes hands-on 
participation by Arthur Andersen in structuring some of the 
partnerships which your committee saw as a major part of the 
auditor independence problems between the company and Arthur 
    Mr. Powers. Yes, that is correct.
    Senator Nelson. I agree with your committee's evaluation of 
the auditor independence and, thus, a number of us are working 
on legislation to change the rules so that accountants could 
not perform any management consulting for firms that they 
audit. Do you think, on the basis of what you have seen here, 
that companies should consider changing their auditors, say, 
every 5 to 7 years?
    Mr. Powers. Well, as I said, I am not an expert in 
accounting, and I am reluctant to have a firm proposal. I will 
say the issues you are raising were surprising to me how much 
involvement an accounting firm could have on the audit side and 
what has come to be called the consulting side, although I do 
understand sometimes the audit function has to take place 
during the actual implementation of the transactions, as well.
    Senator Nelson. A number of us are also interested in the 
Board of Directors' independence. The Council of Institutional 
Investors, Arthur Levitt, and others have recommended that 
company boards meet a strict definition of independence, and 
that means no additional consulting fees, use of the corporate 
aircraft, and support of director-connected philanthropies and 
institutions. Do you have any sense in Enron's case how many 
current Board members could meet this standard?
    Mr. Powers. I do not. I assume many of them have used the 
corporate jet. On the other issues, I do not know.
    Senator Nelson. Like director-connected philanthropies and 
so forth, you just do not know that?
    Mr. Powers. Correct.
    Senator Nelson. I want to look into also directing the SEC 
to amend disclosure rules requiring specific disclosure of any 
links between the directors and the company and the company 
executives. In your investigation, do you have a sense of how 
many current Board members have other relationships with the 
    Mr. Powers. I do not, one way or the other. I do not know 
if they have other relationships with the company.
    Senator Nelson. This Committee has requested further 
information from Enron on all of its partnerships. Do you have 
a sense of when we will be able to see any additional 
information from the company on the investors in these 
    Mr. Powers. I do not. I certainly--I mean, as I told 
Senator Hutchison, I will not be a Board member very long. I 
certainly would support, as has our special committee, support 
any information that is helpful in these investigations, but I 
do not know when the company's lawyers are going to be able to 
respond to that.
    Senator Nelson. Mr. Chairman, may I ask just one quick 
final question? In 1999, Enron was reviewing the possibility of 
a merger with a German company called Eon. Media reports 
indicate that the German company did not pursue the merger 
partially because of their concerns about the Enron 
partnerships that you looked into. Did your Committee look back 
at this failed merger and investigate why the company did not 
at that point review the structure and debt of those 
    Mr. Powers. We did not.
    Senator Nelson. Thank you, Mr. Chairman.
    Senator Dorgan. We likely will be dealing with the pension 
issues as the subject of a future hearing.
    Senator Nelson. What issues?
    Senator Dorgan. The pension fund issues you raised.
    Senator Nelson. Thank you very much.
    Senator Dorgan. Let me ask, Mr. Powers, I think you 
described this morning the purpose of the investigation was 
narrower than it was to look at the transactions with three 
partnerships. You did that and you issued a report early in 
February, and Mr. Lay resigned late in January.
    As a Board member, did Mr. Lay resign prior to the report 
because he would have been dismissed when the report came out? 
Did Mr. Lay resign under pressure from the Board?
    Mr. Powers. I think Mr. Lay resigned with a suggestion from 
the creditors' committee due to the bankruptcy.
    Senator Dorgan. So, if he had not resigned voluntarily, the 
Board was prepared to take action to vacate that?
    Mr. Powers. Well, the Board did not--we had not given the 
Board the report. I believe after our report came out Mr. Lay 
then resigned as a director also.
    Senator Dorgan. As a Board member, though, knowing what you 
know from the report, would you have wanted Mr. Lay to remain 
    Mr. Powers. No, and I think that was the feeling of the 
rest of the Board, as well.
    Senator Dorgan. Let me ask, other employees now inside the 
Enron Corporation who have not yet been identified in your 
report publicly, for example, because you looked at only three 
partnerships, and because we know there are hundreds, perhaps 
thousands, as a Board member are you worried there are others 
inside the corporation who were involved in the construction of 
these partnerships who are still at their desks on the job?
    Mr. Powers. Let me first say, the huge majority of all 
Enron employees are honest and hard-working. Would I be worried 
that there might be issues elsewhere in the company? I would be 
worried. I have no--we did not investigate them, but it 
certainly would call for scrutiny.
    Senator Dorgan. But because you examined only three 
partnerships, and you described why you choose those three, one 
would logically be worried, based upon what you found in those 
three, that there are other things happening in perhaps other 
    Mr. Powers. One of the things we point out in the report is 
that there was a corporate culture of extreme aggressiveness in 
pushing to and beyond the limits, and that would raise 
    Senator Dorgan. I called it a corporate culture of 
corruption. Would that be accurate?
    Mr. Powers. Certainly in these partnerships I think that is 
    Senator Dorgan. Let me ask you about Mr. Skilling's 
statements for a moment. Mr. Skilling testified, as you know, 
in the U.S. House of Representatives before a subcommittee, and 
Mr. Skilling stated with regard to the LJM partnerships he 
believed at that time there were adequate controls in place, 
that the controls were being complied with, and that he was 
discharging to the full extent of his mandate his obligations 
to the Board with respect to the process that as in place. Can 
you respond to that? Do you believe Mr. Skilling is accurate in 
that representation?
    Mr. Powers. Well, with respect to oversight of the 
transactions with the LJM partnerships, there is very strong 
evidence that Mr. Skilling was to play a substantial role in 
overseeing those transactions to make sure that they were at 
arm's length.
    For example, at a Finance Committee meeting, the minutes 
discuss or show Fastow describing to the Finance Committee 
Skilling's role. I think Mr. Skilling said he was in and out of 
that meeting. The minutes show in the very next paragraph that 
Skilling and Fastow went on to describe more of what the 
benefits were, that the evidence shows that--and certainly the 
Board believed he was taking a much more robust oversight role 
than his testimony indicated, and I must say his testimony was 
consistent with the testimony he gave to us when we interviewed 
him. He said he was only vaguely familiar with the 
    Senator Dorgan. But in his testimony, he said, look, I did 
everything that was required of me. It seems to me your report 
says that is nonsense.
    Mr. Powers. Our conclusion is that is not true, is that he 
did not perform the oversight functions that the Board thought 
he was performing.
    Senator Dorgan. Now, I want to ask a couple of other 
questions. One, let me just ask the question about what the 
Board now is doing. You are now a member of the Board of 
Directors. I think you recognize from the questions asked today 
there is much you did not investigate that perhaps, if you were 
on a board launching an investigation today, you would 
certainly say, let us look at this insider trading, and a whole 
series of things, but because this report does not include 
that, we now have a partial portrait of three partnerships, and 
then we have a cascade of other charges and allegations and 
information that is coming out. I mentioned Braveheart as one.
    What is the Board doing now? Is the Board of Directors now 
saying, whoa, wait a second, there is a whole lot more here 
that we did not look at, we need on an internal basis now to 
take a look at these issues? Is that what the Board is 
thinking, or is the Board thinking, well, we just looked at 
these three areas and we did not ask anybody to look at 
anything else, so we will just wait and see what others 
    Mr. Powers. I think the Board, at the Board meeting that I 
intended to present this report, there was a great deal of 
discussion of setting up a process to restructure the Board, 
and that given Enron's bankruptcy needs to be done with close 
consultation with the creditors. It is my prediction that over 
a short period of time, with the cooperation of the creditors' 
committee, the Board will be entirely restructured, with the 
exception of Mr. Trobe, who was brought on, as I was, to 
conduct this investigation.
    Senator Dorgan. What does restructure mean?
    Mr. Powers. New Board members.
    Senator Dorgan. Dumping the old Board members? So the old 
Board members will be dumped?
    Mr. Powers. Yes.
    Senator Dorgan. And replaced by new Board members?
    Mr. Powers. Yes. I think that is--I cannot say that for 
certain, but that process was put in place last week, I think 
with the anticipation that there would be a totally new Board 
with cooperation of the creditors.
    Senator Dorgan. I suspect you do not know the answer to 
this, but let me ask, in recent days we have discovered that 
just prior to the recalculation of profits, or actually losses 
for the company, that about $55 million in bonuses were given 
to the employees in the Enron Corporation. Did you come across 
that information as you took a look at what was going on?
    Mr. Powers. Yes.
    Senator Dorgan. Was that something that the Board of 
Directors was knowledgeable of and approved of?
    Mr. Powers. Yes, and the advice of the bankruptcy lawyers 
was that it was--and this is what they were saying, was it was 
important to keep the trading business operating. In fact, the 
trading business was sold to UBS Warburg so that there would be 
some asset for the creditors, including the employees, and 
those who were creditors of the company, and that that was a 
necessary thing to do in bankruptcy to keep people who would 
keep the profitable parts of the business running.
    Senator Dorgan. Do we have a list, or did you get a list of 
who received those bonuses?
    Mr. Powers. I am not sure. I would have to check my 
    Senator Dorgan. If you did, would you make those available 
to us?
    Mr. Powers. Yes.
    Senator Dorgan. I am going to extend my questions just for 
a few minutes, then I will recognize my two colleagues.
    I want to refer you to a memo by Sharon Watkins of last 
August, and she wrote a memo to Mr. Lay in which she talked 
about, she is nervous that this will implode in a wave of 
accounting scandals. It will be seen as nothing but an 
elaborate accounting hoax.
    She said, we booked the Condor and Raptor deals. We enjoyed 
a wonderfully high stock price and many executives sold stock, 
and that is the key issue here. We booked these deals, we 
enjoyed a wonderfully high stock price, many executives sold 
stock, and when we then tried to reverse or fix these deals, 
like robbing a bank in 1 year and trying to pay it back two 
years later, this and several other things in the material I 
have looked at from the boxes of material we have received from 
the company, and from the report that you have authored, 
suggests to me that a lot of activity occurred here in order to 
boost stock value so that insiders could profit, and they did 
immensely, $1.1 billion in stock sales by insiders.
    Now, that includes the Board of Directors and officers of 
the corporation. You did not take a look at that, but should 
one? Should one not take a hard look at that, especially 
inasmuch as it was not just officers, but Board of Directors of 
the company and, from the Watkins' memo and others, the 
implication seems to be that this was more than just booking 
some profits and so on, and the consequences of which people 
were able to sell stock at high prices?
    The implication is that this was a scheme, this was a 
deliberate kind of scheme in which you could pump it up, sell a 
bunch of stock, get rich quick, and then you leave the cleanup 
to somebody else at some later date and do not worry about the 
    Mr. Powers. Well, I agree that is a very serious issue that 
is raised by her letter, and several of the questions today 
about trading by insiders and, yes, my opinion is that does 
need to be investigated. We did not investigate it, but it does 
need to be investigated.
    Senator Dorgan. In your report on page 73, you said LJM 
had--excuse me, quote, ``we understand that LJM ultimately too 
had approximately 50 limited partners,'' and then you mentioned 
some of them, Home Assurance, Arkansas Teachers Retirement, 
MacArthur Foundation, Merrill Lynch, J. P. Morgan, Citicorp, 
First Union, DeutscheBank, GE Capital, Kleinwort Benson. The 50 
limited partners, is that a population that you are certain of? 
Did you see the names of the 50 limited partners, or is that 
what you were simply told?
    Mr. Powers. I think it is what we were told, and some we 
knew without going into the partnership documents. If I could, 
with your indulgence.
    Senator Dorgan. Sure.
    Mr. Powers. That--actually, that particular list came from 
an Andersen work paper that we were allowed to look at but not 
copy, and I am informed that we just wrote down that list.
    Senator Dorgan. So we know that that work paper in the 
possession of Arthur Andersen--I am sorry. Proceed, if you want 
to amplify.
    Mr. Powers. We have our copy that we would be happy to 
    Senator Dorgan. Does that have the 50 names on it?
    Mr. Powers. We do not have the paper. We have a list that 
we copied down, is my understanding, that we just physically 
wrote down, but we do have that list.
    Senator Dorgan. Let me try to understand, because 
ultimately, as I have indicated previously, we are going to try 
to get to the partners, the partnerships I should say, and all 
the investors of LJM2. Do you feel confident that there were 
approximately 50 partners?
    Mr. Powers. That is the only source we have, in my 
understanding now, is that piece of paper in the Andersen work 
papers we did go look at.
    Senator Dorgan. And, you believe the company did not have 
that information, but the accounting firm did? I am talking 
about the corporation.
    Mr. Powers. We were not able to find that within the 
company. We cannot for sure say somebody in the company did not 
have it, but we were not able to find that list from inside the 
    Senator Dorgan. As I indicated earlier today, I talked with 
Mr. Cooper, the interim CEO of the company, who has pledged to 
make available all of the information that he has, and 
especially on the investors in the partnerships, so you tell me 
that you received that information from Arthur Andersen, from a 
work paper from Arthur Andersen that you could not keep, is 
that right?
    Mr. Powers. That is one of them, that when we went and then 
wanted copies, we did not get copies, but they had written down 
those 50 names.
    Senator Dorgan. So you have those 50 names?
    Mr. Powers. Yes.
    Senator Dorgan. You will provide them to this Committee?
    Mr. Powers. Absolutely.
    Senator Dorgan. Well, that is a very small start. We have 
been, as you know, for a month and a half on this Committee 
asking the corporation and asking all who are relevant to 
receive these requests that we need to understand what is the 
matrix of the investors, friends, businesses, and others who 
were brought into this web, this complex web of partnerships, 
who are they, how much did they invest, did they always make 
money on these investments?
    It looks to me like the corporation was back-stopping 
everything with respect to these investments, so we need to get 
that information, and at least today at 1:30 in the afternoon 
we will get the first 50 names, and we appreciate our ability 
to do that, and that comes courtesy of your copying a piece of 
information given by Arthur Andersen but then subsequently 
taken back by them, so we will hope the rest of the names will 
not be quite so hard to receive, or to achieve, and we will 
    I have a couple of other questions, but let me go on to 
Senator Fitzgerald next, and then Senator Wyden.
    Senator Fitzgerald. Dean Powers, your report, and I think 
the page is 133 if I recall correctly, is the one--I am saying 
it off the top of my head. I believe that is the page where you 
have the chart that shows how most of the company's earnings 
during the 15-month period were coming from the Raptor 
    Mr. Powers. That is correct.
    Senator Fitzgerald. From the third quarter of 2000 through 
the third quarter of 2001, Enron reported earnings of $1\1/2\ 
billion, and according to your calculations of your committee, 
Raptor's contribution to those earnings was over $1 billion, 
$1.77 billion, so I calculate that to be 71 percent of Enron's 
earnings coming from roughly transactions with Raptors. During 
that 15-month period, and as your report in my judgment 
conclusively demonstrates, those earnings are fictitious.
    Now, you previously said you only looked at transactions 
with three partnerships, and this is a company that has how 
many partnerships?
    Mr. Powers. I have read in the high 2,000's.
    Senator Fitzgerald. Is it your belief that there were 
transactions during that period with other partnerships that 
you were not looking at?
    Mr. Powers. Well, there are certainly issues and 
transactions in following those other partnerships. I would say 
these partnerships in our view were designed with this, the 
goal you see on page 133 in mind.
    Senator Fitzgerald. There is no other reason to form these 
    Mr. Powers. There is no bona fide economic purpose for the 
hedging transactions.
    Senator Fitzgerald. I guess what I am getting to, it is 
possible, since you only looked at three of these, that all of 
Enron's earnings for that period were fictitious, because the 
rest, the $429 million of their earnings without transactions 
with Raptors could have been generated by transactions with 
other partnerships that were beyond the scope of your 
    Mr. Powers. That is correct. We did not validate the other 
sources of that income.
    Senator Fitzgerald. My theory for a long time, and before 
your report came out, was that they really had a very simple 
scheme. They would simply borrow money, and by filtering the 
borrowed money through partnerships, they would report that 
money as earnings, and the way they would accomplish that is, 
they would enable the partnership to find investors or find 
lenders by providing some underlying credit support or 
guarantee from Enron, and then they would use the pretext that 
they were selling an asset, or as you point out, oftentimes its 
asset sales, other times it is hedging transactions under the 
pretext of doing an asset sale to one of these partnerships.
    They would take some questionable asset, transfer it over 
to the partnership, cause the partnership to pay a huge amount 
for the asset, and then Enron would book that as earnings, and 
at the end of the day they were really just borrowing the 
money, and the technical reason they had to file bankruptcy, I 
would imagine, is all these debts caught up with them and they 
had billions of dollars in indebtedness that they had to repay, 
and they could not pay it.
    I guess it is very difficult for me to believe that the 
senior managers of Enron could have just been floating around 
the office, coming in every day, working very hard, and be 
totally unaware that at least 71 percent of their income was 
coming from bogus transactions. I mean, am I missing something 
here? Is it plausible to you that Skilling and Lay just had no 
idea where even in a general sense their company was getting 
their earnings?
    Mr. Powers. I share your concern that you would think they 
would know where their earnings were coming from. I agree.
    Senator Fitzgerald. And had you not just joined the Board 
in October, but from what I have read, for years the hit on 
Enron, or the criticism that some financial writers had made, 
and of course there is that famous Fortune Magazine article 
that seems very prescient now by Bethany McLain. That was 
about, almost a year ago, where she asked the question, can 
somebody just explain where Enron earns its money, and Lay and 
Skilling constantly had a hard time answering questions from 
analysts and reporters.
    They could never explain simply how Enron made its money, 
could they? I mean, did you ask people, did your committee ask 
people within Enron how they thought the company earned money?
    Mr. Powers. Our company did not look into that, and I do 
not want to just keep repeating it, we had a very full plate 
over a three month period. We did not ask where the other 
income was coming from. We found out where $1 billion of the 
income was coming from with these hedge relationships.
    Senator Fitzgerald. Now, did you interview Mr. McMahon?
    Mr. Powers. Yes. I did not personally, but the committee 
staff did.
    Senator Fitzgerald. And the committee also interviewed Mr. 
    Mr. Powers. Yes.
    Senator Fitzgerald. And you found, the committee found the 
discrepancy that was apparently last week at the House hearing 
between Mr. Skilling's version of what Mr.McMahon had said to 
him and what Mr. McMahon said he had told Skilling? Can you 
refresh my recollection on what your committee found Mr. 
McMahon said he said to Skilling?
    Mr. Powers. McMahon said that he said to Skilling, and he 
told us in his interview that he raised issues about these 
related party transactions that were more than a mere complaint 
about McMahon's compensation, as Skilling had tried to 
characterize it, and McMahon did have talking points, a copy of 
talking points, so that meeting----
    Senator Fitzgerald. Has he turned those talking points over 
to you?
    Mr. Powers. Yes.
    Senator Fitzgerald. Could this Committee get a copy of 
those, and those are represented by McMahon to be 
contemporaneous talking points?
    Mr. Powers. Yes.
    Senator Fitzgerald. And so does your committee come to a 
conclusion about who was telling the truth in that situation, 
or are you just reporting what your interview showed?
    Mr. Powers. We tried to report what our interview showed, 
but I will say McMahon's version is supported by McMahon's 
    Senator Fitzgerald. Did you interview Sharon Watkins?
    Mr. Powers. We asked, and she declined to be interviewed, I 
must say for understandable reasons. She did not talk with us.
    Senator Fitzgerald. Why would she not? What are the 
understandable reasons? She was the one who kind of----
    Mr. Powers. I meant to say, I do not think she thought she 
had something to hide. She preferred not to talk with us.
    Senator Fitzgerald. Did you talk to any people down below 
who told you that it was widely known that something was awry 
in the way the company was always able to book earnings?
    Mr. Powers. Well, we certainly--I mean, that was the impact 
of the Watkins' letter.
    Senator Fitzgerald. She knew that. Did she believe----
    Mr. Powers. We did interview--we interviewed over 60 
people, I believe. We did interview people who were further 
down who had problems and issues with particular transactions.
    Senator Fitzgerald. If I could conclude, and I am running a 
little bit over, and if Senator Wyden would just indulge me, I 
do want to followup.
    One thing that is very prominent in your report is a 
criticism of the accounting firm, and I would stipulate that 
Arthur Andersen certainly should have flagged these hundreds, 
perhaps thousands of what appear to have been questionable 
transactions, but I do have a question in that it is possible 
that in some cases, let us say, an asset sale to a partnership, 
the partnership could have complied with the accounting rules 
for being a legitimate, off-the-books partnership, as long as 
it really had 3 percent ownership by bona fide outside people.
    And it seems to me that the question of fraud arises 
specifically with respect to the valuations of the assets that 
were transferred from Enron to the partnerships, and I guess 
that I want to reiterate what I suggested earlier, that we need 
to know a lot more about how those valuations were done, and 
your report also says that sometimes Enron would sell an asset 
to the partnership right before the end of the quarter, clearly 
designed to boost their earnings, but then after the quarter 
was over, the partnership would sell the asset back to Enron 
for even more than Enron had sold the asset to the partnership 
in the first place, and then I imagine the partnership was 
booking income on its books and showing its partners that it 
was making a profit, while Enron was showing that it was also 
making a profit at the close of its reporting period. Do you 
know if the reporting periods of the partnerships and Enron 
    Mr. Powers. I do not. From the best of our knowledge, they 
were both on a calendar year, and so they were on the same 
schedule of reporting periods.
    Senator Fitzgerald. So it does not appear that they were 
kiting these assets back and forth so they could both report--
    Mr. Powers. Not from what we found.
    Senator Fitzgerald. Thank you very much, Dean Powers.
    Senator Dorgan. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    Dean Powers, the report states clearly that sweetheart 
deals with the partnerships enriched the insiders in a variety 
of ways, tens of millions of dollars, and you state that this 
was done, quote, ``at Enron's expense.'' My question to you is, 
is this not akin to embezzlement? I mean, it looks to me like 
fancier legal footwork.
    Mr. Powers. I am not a criminal lawyer. I do not know the 
definition, the full definition of embezzlement. It is very 
troubling behavior that ought to be investigated to determine 
whether it is criminal.
    Senator Wyden. Now, with respect to my constituents and how 
they look at this, they look at this like there was a double 
standard out there that essentially people who were powerful 
made vast sums of money, and now people in Oregon, if you had 
$900,000 in a 401(k), you might have $100,000, and what they 
want to know is, were there adequate safeguards in place that 
were in force to make sure that they would be protected? Was 
that the case, or was this just bad luck, or was the deal 
stacked against them?
    Mr. Powers. We conclude there were not adequate safeguards 
in place to prevent this from happening.
    Senator Wyden. How was Mr. Lay's role--when he took over in 
August, was he active? Was he an ongoing participant in what 
was taking place at the company? I mean, it was clearly going 
down, and they were having problems. What was his role when he 
came on in August?
    I mean, you have told us essentially that what Mr. Skilling 
has said, that he did not really know a whole lot about what 
was taking place. There are questions about that, because 
certainly the broad outlines were fairly apparent. You have 
told us there were not adequate safeguards in place. Mr. Lay 
comes on in August. Did he move to change any of that? Did he 
take steps at that point to protect the people I represent and 
other Americans who are just hammered as a result of this?
    Mr. Powers. Well, when Mr. Lay became the CEO again, I will 
say one thing he did was unwind these Raptor transactions that 
had been constantly propped up. That is what ended up causing 
the restatement in earnings in October. By that point, these 
Raptor transactions were unsalvagable.
    Senator Wyden. Well, I think nobody is going to quarrel 
with trying to deal with one transaction, but to deal with one 
transaction when this vessel is just plunging and taking on 
water everywhere is not much solace to the people I represent, 
and if you are telling me that he found a way to address one 
transaction, I guess that is one more than anybody else thinks 
at this point, but given the amount of pain this inflicted, it 
does not sound like much.
    Tell me about Arthur Andersen finally. I think you have 
already heard me say I think the Houston office of Arthur 
Andersen took the public out of certified public accountant. I 
mean, I do not think they complied with the law. We have gone 
through that. They certainly did not assist you in your 
inquiry. I mean, you were not a hostile plaintiff's lawyer, for 
Pete's sake. You were somebody who was working for the Board, 
and they still did not cooperate with you.
    And maybe you can explain to me their documents policy. 
They would let you look at some documents. They would not let 
you see other documents, and then there were some documents 
that they would let you copy. I mean, did they give you any 
explanation as to how they have put together this curious 
documents policy?
    Mr. Powers. Well, we were not able to--I mean, aside from 
the documents, we were not able to interview their accountants 
to get that explanation. We would have liked to have asked them 
those questions.
    Senator Wyden. But did they tell you how they came up with 
this particular policy? I mean, this firm has certainly given 
us lots to be curious about.
    Mr. Powers. You mean, how they decided which documents and 
which not?
    Senator Wyden. How they decided what they were going to let 
you see, what they were going to let you copy, why that was 
different from not cooperating at all.
    Mr. Powers. There were long negotiations as to what we were 
going to see and what we were not going to see, and over time 
we got to see some things and not others.
    Senator Wyden. Tell us about the negotiations. Tell us why 
they would not let you see some of the things you wanted to 
    Mr. Powers. They did not have a very fulsome explanation. 
They basically made excuses that they had other demands on 
their time and they would get to it.
    Senator Wyden. They said they were too busy to let you see 
these documents?
    Mr. Powers. They dragged it on, and that was the result.
    Senator Wyden. Mr. Chairman, I think that sort of sums it 
up. We have now heard that these accountants, who in my view 
clearly ignored a federal statute that is on the books that 
requires that they look for fraud, report it to the SEC and 
others when it is found, that there is strong evidence of it 
now were too busy to actually cooperate with an internal Enron 
    This is just unbelievable. This is not somebody who is a 
hostile plaintiff's lawyer. This is somebody who is working for 
the company, and a major accounting firm in this country has 
said they were too busy to cooperate with an internal 
investigation. I think that just sums it up, and I intend to 
stay with you if we are going to go to a third round.
    Senator Dorgan. Senator Wyden, thank you. Let me just 
follow on that point. Enron--excuse me. Arthur Andersen was 
paid $52 million in the most recent year by the corporation, I 
believe. Was it $25 million for auditing fees and $27 million 
for consulting fees?
    Mr. Powers. I believe that is approximately correct.
    Senator Dorgan. So, this is a corporation that was 
receiving over $50 million from Enron for services, accounting 
and audit services and consulting services, and when you, 
empowered by the Board of Directors as a Board member, initiate 
an inquiry, that firm said to you in effect, we will not give 
you much cooperation, we will not allow you to have unfettered 
access to our records. That is what you are telling us?
    Mr. Powers. As I said earlier, the negotiations dragged 
out, and when Enron finally discharged them, their lawyer 
called and said they would not cooperate further.
    Senator Dorgan. Prior to their being discharged, they were 
not forthcoming and cooperative with you?
    Mr. Powers. They sort of negotiated with us, and they 
showed us some documents, but it dragged on.
    Senator Dorgan. This is an important question. The reason I 
am asking the question is, the CEO of Arthur Andersen is all 
over the news saying, look, we have nothing but respect for 
this process, we have tried to be available, and forthcoming 
and so on. In fact, I believe that they have not been very 
satisfied with your report. Has Arthur Andersen not spoken of 
your report in a way that is not entirely complementary?
    Mr. Powers. I have read that, yes.
    Senator Dorgan. And so that company now, Arthur Andersen, 
which made a substantial amount of money from Enron, I am just 
trying to understand, you are saying that company did not 
cooperate very well with you in terms of giving you access, or 
getting you access to the information and records you needed, 
is that correct?
    Mr. Powers. That is correct.
    Senator Dorgan. Well, let me say that I agree with Senator 
Wyden, I do not have the foggiest idea why in that circumstance 
that Board of Directors could not look at their audit firm and 
their consulting firm and say, please cooperate, and the firm 
ought to be responding by saying, our records are yours, here 
they are, so that we can understand what happened. That is 
unfathomable to me, that you would have had difficulty trying 
to pull records out of that company, but we will get into that 
at some later point in other hearings.
    Mr. Powers. Mr. Chairman, could I--when I read that 
testimony, I do think--Mr. Berardino and I do disagree about 
the facts, and I did write him a letter telling him what I 
understood the facts to be. He has not responded. We would be 
happy to provide the Committee with a copy of that letter.
    Senator Dorgan. Would you provide the Committee a copy? He 
is certainly entitled to his opinion. I am not suggesting he 
does not have a right to say whatever he wants to say about 
your report, but I am very surprised they were not cooperative 
with you. That is what surprises me.
    [The information referred to follows:]

                                               Enron Corp.,
                                      Austin, TX, February 6, 2002.
Mr. Joseph F. Berardino,
Managing Partner and Chief Executive Officer,
Andersen Worldwide,
Chicago, Illinois.
                                            Re: Enron Corp.

Dear Mr. Berardino:

    In our respective testimony before Congress on Tuesday, you and I 
gave different accounts of the nature of Andersen's cooperation with 
the Special Investigative Committee of Enron's Board of Directors, 
which I chaired. The transcript of your testimony indicates that you 
said, ``The committee asked to speak with some of our people. We were 
in the process of working out interviews when Enron fired us. We never 
heard from the committee again.'' You are also quoted as saying, ``They 
didn't make an inquiry. We offered to help. We were very available. We 
begged them to talk to us.''
    It appears from your testimony that you may not have been made 
aware of all of the facts. Here are the facts on which I based my 
    In December, my Committee's counsel (Wilmer, Cutler & Pickering) 
contacted your counsel, Michael Carroll at Davis Polk & Wardwell, 
seeking access to Andersen's work papers relating to the transactions 
we were investigating. We also asked to interview Andersen personnel 
who had provided accounting services with respect to those 
transactions. Your counsel and ours had a number of conversations, 
without any resolution at that point.
    Early in January, as the Special Committee's work was nearing 
completion, Bill McLucas of Wilmer Cutler had a follow-up conversation 
with Mr. Carroll on the same subject. Mr. McLucas asked for access to 
work papers and to Andersen personnel, and confirmed this in a letter 
dated January 4, 2002. He attached a list of the particular 
transactions of interest to our Committee. Mr. Carroll told Mr. McLucas 
that he should arrange to review the work papers with his associate, 
Timothy Harkness.
    On January 10, 2002, Mr. Harkness told David Cohen, another 
attorney from Wilmer Cutler, that some of Andersen's work papers would 
be made available for our review, beginning Monday, January 14, 2002. 
Mr. Harkness also told Mr. Cohen that he would be able to make copies 
of documents that were of interest to the Special Committee in its 
    On the morning of January 14, Mr. Cohen and several accountants 
working with the Special Committee began reviewing the materials made 
available by Andersen and identifying documents that the Special 
Committee wanted copied.
    At the end of that day, when Mr. Cohen asked to have the identified 
documents copied, he was told by another of your attorneys, Jill 
Mahonchak, that she was ``not authorized'' to make copies of any of 
Andersen's work papers for the Special Committee. Mr. Cohen then spoke 
with Mr. Harkness, who confirmed that your counsel was not authorized 
to make copies of Andersen's documents for the Special Committee.
    That evening, Mr. Cohen sent a letter to Mr. Harkness and Ms. 
Mahonchak reminding them that the Special Committee had been promised 
that it could obtain copies of Andersen's work papers. Mr. Cohen wrote: 
``We had understood that Andersen wanted to cooperate fully with 
Enron's Special Investigative Committee. Needless to say, full 
cooperation includes permitting us to obtain copies of select documents 
on a timely basis.''
    Mr. Cohen also noted in his letter to Mr. Harkness and Ms. 
Mahonchak that the materials provided by Andersen for the Special 
Committee's review did not include any ``work papers, supporting 
documentation [or] memorandum relating to Andersen's work regarding 
Enron's 10-Qs for the first, second and third quarters of 2001.'' Mr. 
Cohen specifically requested an opportunity to review those documents. 
No one from Davis Polk or Andersen ever responded to Mr. Cohen's 
letter, and Andersen never allowed the Special Committee to review any 
documents pertaining to work Andersen performed for Enron during 2001.
    On Wednesday, January 16, Mr. McLucas and Mr. Cohen spoke with Mr. 
Carroll. They asked Mr. Carroll whether Andersen would allow the 
Special Committee to obtain copies of documents identified for copying. 
Mr. Carroll said that he would authorize the copying of the documents 
identified by the Special Committee. Mr. McLucas and Mr. Cohen also 
asked Mr. Carroll whether Andersen would allow the Special Committee to 
interview David Duncan, Debra Cash, Patty Grutzmacher and Jennifer 
Stevenson--Andersen personnel who were most directly involved in the 
transactions the Special Committee was investigating. Mr. Carroll 
responded that Andersen wanted to cooperate with the Special Committee 
but he wanted to think about the issue of interviews of personnel. He 
asked that the Special Committee provide a detailed list of topics that 
it hoped to cover in an interview, and that he would then consider 
whether to allow the Special Committee to interview the Andersen 
    The next day, Thursday, January 17, Mr. Cohen made arrangements 
with Ms. Mahonchak and Mr. Harkness to obtain copies of the documents 
identified for copying. Mr. Cohen was informed by another attorney 
working for Andersen that copies would be delivered either late in the 
day on Friday or early Saturday morning. Later that day Enron announced 
that its Board voted to discharge Andersen as the company's auditor.
    Late in the afternoon on Friday, January 18, Ms. Mahonchak called 
Mr. Cohen. She told him that, because Enron had discharged Andersen, 
Andersen had decided that it would no longer cooperate with the Special 
Committee. She also said that although copies of the documents 
identified by the Special Committee had been made, they would not be 
provided to the Special Committee. The Special Committee's counsel had 
no further communications with counsel for Andersen.
    Based on these facts, we stated in our Report, ``[Andersen] 
permitted the Committee to review some, but not all, of its workpapers 
relating to Enron. It did not provide copies of those workpapers or 
allow the Committee to interview knowledgeable Andersen personnel.'' 
(Report at p. 34.) That seems to me to be a fair characterization of 
the facts, and was the basis for the testimony I gave on Tuesday.
        Sincerely yours,
                                       William Powers, Jr.,
                Member of the Enron Board of Directors and Chairman
                            of the Special Investigative Committee.

    Senator Dorgan. Let me ask a couple of questions in 
addition. You obviously took this report to the Board of 
Directors, and you are now a Board member, even if it is an 
interim basis. I want to know what you spoke about as a Board 
of Directors, because this is obviously a closed meeting, but 
minutes are taken. When you took this report to the Board of 
Directors, tell me, did you tell the Board of Directors, 
because they would have wanted to know, that Mr. Lay was 
unaware of the structure of these partnerships, or did you tell 
them that you thought Mr. Lay understood what was going on, and 
just was complicit in trying to make it happen in order to 
create an architecture of partnerships that were able to 
inflate profits and keep debt off the books. What is it that 
you told the Board about your impression of Mr. Lay's activity 
    Mr. Powers. Well, I gave the Board an oral presentation 
that was substantially what my testimony was here today, and 
emphasized the point, and it was a point I tried to emphasize 
in my opening statement today. There is a lot of discussion at 
the Board of little details of who knew this, who knew that. As 
I said, everyone was aware that they were using their own stock 
to hedge these transactions, so I told the Board, not verbatim, 
but I think very substantially what I told the Committee today.
    Senator Dorgan. So if I were a Board member in that Board 
meeting and said, Mr. Powers, you have done now a three month 
investigation, rather exhaustive in this limited area, did Mr. 
Lay know what was going on with all of this, and your answer 
    Mr. Powers. Well, I think he knew some things and he did 
not know other things. First, he should know more of what is 
going on. He was not fulfilling his responsibilities as CEO. He 
understood that they were hedging with their own stock. He 
understood that they had approved and created these 
partnerships with their own Chief Financial Officer. We were 
limited as to what we could ascertain, and as I said earlier, I 
do not in any way think this is a full report. We tried not to 
go beyond what the evidence showed, and one of the difficulties 
in ascertaining exactly what Lay knew is Skilling in his 
report, in his interview with us, denied much knowledge of 
these things at all, so as a consequence, did not have any 
recollection of any conversations with Lay.
    Senator Dorgan. So a Board member in that meeting would 
say, Mr. Powers, you have done this extensive investigation, 
what did Mr. Skilling know about what was going on, did he know 
what was happening, and what is your answer?
    Mr. Powers. As I said, I think there is substantial 
evidence Mr. Skilling was involved. There are the minutes of 
the Finance Committee meeting going over his responsibilities 
that we think he did not fulfill, and with respect to the 
Raptor transactions, he says he kept Skilling involved. Ryan 
Cerick in his interview says when the Raptor restructuring had 
been completed, Skilling called him to congratulate him 
especially. I am not listing it all, but there is other 
substantial evidence that Skilling was more involved than his 
interview with us indicated.
    Senator Dorgan. Just a couple of additional questions. As 
you know, the employees were locked into their 401(k)'s because 
of the change in the plan administrator. As the stock 
collapsed, they were unable to sell even as officers and 
directors were selling stock and making money, so the result 
was some at the top got very, very wealthy, became very wealthy 
as a result of this, and others lost their life savings locked 
into a situation they could not change.
    Have the members of the Board of Directors discussed at all 
in recent months any kind of opportunity or plan to try to 
remedy that for the employees? I do not even know whether it is 
possible, but clearly the Board must feel, as the American 
people do, that it is--and as the President has indicated--
fundamentally unfair for the folks at the bottom to be locked 
in and unable to sell stock even as it was collapsing, while 
the folks at the top were selling stock at a decent price and 
cashing out to the tune of tens of millions of dollars. Has the 
Board addressed that in terms of the fundamental unfairness to 
the employees?
    Mr. Powers. I think the Board has discussed the plight of 
the employees, not--to my knowledge and with one exception, and 
I do not mean to trivialize it, I do think there was a 
discussion at the Board of--I do not know whether the Board 
will get fees or not, but if they do, they would donate them to 
the employees, and I am just trying to be accurate in my 
testimony here. I do not mean to trivialize that as a solution 
to the terrible tragedy that has befallen the employees and the 
    Senator Dorgan. That also is a topic for a future hearing.
    Let me finally ask you, because you were employed by the 
Board of Directors, and because we have information about the 
stock sales by members of the Board of Directors over some 
period of time, one wonders whether even on the Board of 
Directors there were winks and nods about what was happening in 
the company, with Board members knowing full well what was 
going on, but thinking this was too good a ride to get off.
    You were employed by the Board to do the investigation. 
Need there be independent corroboration of this investigation, 
because this, after all, is a Board of Directors product, and 
then tell me, if you would, did you feel and do you feel 
subjectively that there were members of the Board that knew 
exactly what was going on here and thought it was really a 
pretty wonderful thing for themselves personally?
    Mr. Powers. In answer to the second question, not to my 
knowledge, but I was not on the Board at the time when those 
events would have been happening.
    On the question as to whether it needs to be corroborated, 
absolutely. We were charged with trying to bring to light as 
best we could what had happened in these transactions, and I 
think we have done it. I think it is a start. I hope the 
Committee will find it helpful, but yes, it is the Board's. The 
Board commissioned it. We did not have subpoena power. We did 
not have the ability to compel evidence, and other bodies in 
Congress and at the SEC and at the Justice Department need to 
corroborate and investigate.
    Senator Dorgan. It is also the case you did not investigate 
the Board, is that correct?
    Mr. Powers. We were very critical of the Board's role in 
this. We say the Board failed in its oversight 
    Senator Dorgan. I understand that, but I was talking more 
about Board members, and whether Board members knew of the debt 
that was in place with these special purpose entities and so 
on, and whether, as I indicated to you, it became such a 
wonderful ride that they really did not want to get off because 
it was personally enriching to them.
    Mr. Powers. Well, I do think the Board was aware they were 
hedging with their own stock. They were aware that they created 
a situation where they were doing business with their own Chief 
Financial Officer. The Board was aware of those, and we 
chastised the Board for that, but there are other things we did 
not look into, and they need to be looked into.
    Senator Dorgan. Senator Wyden.
    Senator Wyden. One last area I wanted to talk to you about, 
Mr. Powers, and that is the Chewco special purpose entity, and 
the reason it is important is that this is the clearest 
evidence to date, essentially, of something that was actually 
    As we have been talking about this afternoon, Enron needed 
the independent investor to kick in at least 3 percent of the 
partnership's equity, but there is certainly evidence that 
Enron cheated on the 3 percent requirement, because Enron 
provided the investor with a loan guarantee of about $5\1/2\ 
million, then everything comes to light, and the process begins 
that causes the company to unravel.
    My first question to you is, what is your sense of why this 
remained secret for four years? I mean, this is a very 
important fact in all of this. Do you have any sense of why 
this did not come to light for so many years?
    Mr. Powers. Well, I have a sense. We do not know for sure. 
The people who were involved in the transaction, who were 
involved in Chewco, had a self-interest in having Chewco 
continue. They were making profits off of it.
    Senator Wyden. Well, who unearthed which documents, and 
what produced this effort to start finding them? I mean, it 
just is right at the heart of all of this, that you have 
something that certainly is the clearest evidence thus far of 
illegal conduct, and it sort of takes four years for it to come 
to light. What can you tell us about how these documents were 
unearthed, and what caused people to start looking?
    Mr. Powers. Chewco was unwound at some point, but I want to 
be accurate on this.
    Senator Wyden. Another way you might address it, Mr. 
Powers, is where did you find these documents?
    Mr. Powers. My understanding was a media report about 
Chewco, and the Board then had internal accounting go back and 
dig through the Chewco documents and they found the reserve 
guarantees of these loans, of the Big River and Little River 
loans, and that was found internally, and that correction was 
    Senator Wyden. Now, the Chewco partnership closed on 
December 30, 1997, and if it had not closed by the end of 1997, 
$700 million in debt would have appeared on the Enron balance 
sheet, increasing Enron's debt by approximately 10 percent.
    Mr. Powers. Yes.
    Senator Wyden. You also have given us information 
indicating that Enron was having problems finding outside 
partners. Given those facts, as I have tied them together, do 
you think it is plausible that people inside of Enron believed 
that they would clean up this transaction in 1998 and somehow 
this fraudulent transaction would have been in the company's 
    Mr. Powers. Well, the people we talked to understood that 
when it was first set up it did not meet the 3 percent. It was 
set up quickly, and then they would try to, as you quite 
rightly put it, clean it up. That is when the loans from 
Barclays came in that were supposed to be investments, and we 
were unable to ascertain why that mistake was made, whether it 
was sloppiness, or self-interestedness, or what, because we 
were not able to interview the people that were involved in 
that part of the transaction.
    Senator Wyden. Now, only one other question on Chewco. It 
was created and approved at the November 5th meeting and, 
according to the meeting notes, you were present. Was the loan 
guarantee discussed at that meeting?
    Mr. Powers. I was not present at that meeting.
    Senator Wyden. I was under the impression, according to the 
meeting notes--excuse me. I am sorry. That was Mr. Lay. I 
apologize. Who then could have had the authority for that loan 
    Mr. Powers. For the loan guarantee? I am not sure whether 
that would be the Board. I guess the Board would have to have 
the authority to do that.
    Senator Wyden. Would Arthur Andersen have known about the 
loan guarantee?
    Mr. Powers. We were not able to ascertain that, whether 
they knew about that loan guarantee.
    Senator Wyden. Do any of your colleagues know who at Enron 
would have had the authority to initiate that loan guarantee?
    Mr. Powers. The loan guarantee in the Board minutes is a 
different loan guarantee. It is not the loan guarantee that 
backed the so-called equity investments and made them nonequity 
investments. It is a different loan guarantee.
    Senator Wyden. What we are trying to get out, though, is an 
important area, and that is that it appears that this Chewco 
information that is so critical seems to be buried somewhere in 
the Enron files, and we are wondering if you could give us a 
little bit more information so that we could figure out a way 
to go about getting it.
    Mr. Powers. All the documents that we have, we have 
produced to the SEC and to the Committee, and our staff would 
be willing to give what help necessary to sort through that.
    Senator Wyden. I would only ask, Mr. Chairman, that we 
continue to work with Mr. Powers and his staff on this, because 
I think the question of how these Chewco documents were 
unearthed, how it was that they remained secret for four years, 
when this Chewco partnership was approved, the November 5, 
1997, meeting, clearly we need more information about what was 
discussed at that meeting and what the circumstances were by 
which the loan guarantee was approved, and we are going to ask 
you some additional questions about that, Mr. Powers.
    Senator Dorgan. Mr. Powers, Chewco is essential to this 
because Chewco is a small little rock on the rail that threw 
the locomotive off the track. If you track this down, you are 
talking about a relatively small amount of money that 
eventually led to the requirement that a portion of this be put 
back on the books and led to a recalculation of profits or 
losses, and it is central to this.
    Can you tell us when the recalculation was required, 
because they said, somebody said, oops, the 3 percent was not--
was that Arthur Andersen going to the corporation, or someone 
in the corporation that felt they had to go to Arthur Andersen? 
How did that happen?
    Mr. Powers. It is my understanding it was internal 
accounting, that internal accounting, once they were asked by 
the Board to look into it, found the mistake, and then went to 
Andersen with that information.
    Senator Dorgan. Was that prior to Vinson & Elkins taking a 
look at the books as a result of the request by Mr. Lay?
    Mr. Powers. That was in September, and this restatement was 
in October.
    Senator Dorgan. So Vinson & Elkins, at the request of the 
CEO, evaluated what they could and found nothing wrong, 
apparently, is that correct?
    Mr. Powers. This was back in the Sharon Watkins' letter. My 
understanding is they went to Andersen--I did not participate 
in that part of the report, as I explained, but my 
understanding is, they went to Andersen and asked if the 
accounting was OK.
    Senator Dorgan. The Watkins' letter said to Mr. Lay there 
is a problem here with potential accounting hoaxes, so on and 
so forth, and it ought to be looked into, but we specifically 
request Vinson & Elkins not be involved in the evaluation. That 
is what Watkins was saying to Mr. Lay.
    Mr. Lay subsequently asked the law firm to look into it. I 
am just trying to understand the sequence of how this Chewco 
issue came up and how it was redetermined with respect to the 3 
percent required to be put back on the books.
    Mr. Powers. To my knowledge, there was not a connection 
between those, that is correct, that these were independently 
caused events.
    Senator Dorgan. You see, what we have got is, we have got a 
corporation with a Board of Directors, we have got an 
accounting firm, we have got law firms, and the architecture of 
partnerships that seem to have bent and twisted the rules, 
created profits that did not exist, placed debt off the books 
that should not have been placed on the books, and it is a case 
of kind of, see no evil, hear no evil, and we are trying to 
figure out the wrong doing and each of them says, well, it was 
not us.
    You did an investigation on a very limited piece here. I 
think it is helpful to the Congress to have the results of your 
investigation, but as you said when you started today, it is 
very limited, and much remains to be known, and I assume as a 
current member of the Board of Directors you very much want the 
rest of the information unearthed, because if you do not know 
who the investors are, the hundreds and hundreds and hundreds 
of other partnerships, how do you get a handle on all of this, 
and how do you make sure that you have got the rot out of the 
apple here?
    Mr. Powers. Well, as I told Senator Hutchison, my firm 
desires to resign from the Board and go back and give my full 
attention to the law school, but we and the staff certainly 
will help in any way we can with the materials we have to help 
the Committee move forward with its very important 
    Senator Dorgan. Well, nobody on the Committee is going to 
resign any time soon. We are going to continue pushing very 
hard for the investigation. We wish you well as you go back to 
the law school. As I said, I think your report contributes to 
an understanding. It is limited, and has a narrower view than 
we would hope, but nonetheless is a contribution, and we 
appreciate your willingness to testify today.
    If you would like, you can for the record identify those 
who have accompanied you today.
    Mr. Powers. Yes, thank you. These are from Wilmer, Cutler, 
and Pickering: Joe Brenner; Chuck Davidow; and Bill McLucas.
    Senator Dorgan. First of all, we thank you for the time 
today. We would like to receive the information we requested, 
the 50 partners and other pieces of information you indicated 
you would provide to us. We would like also to be able to 
consult with you as we proceed. If there might be additional 
information you have collected, that would be helpful to this 
    Mr. Powers. We would be delighted to be helpful in any way 
we can.
    Senator Dorgan. The Committee is adjourned.
    [Whereupon, at 2:10 p.m., the Committee adjourned.]