Joint Venture: A 1997 Enron Meeting Belies Officers' Claims They Were in the Dark --- Minutes Show Them Hearing Of Novel Partnerships That Inflated Earnings --- Present: Lay, Skilling, Fastow
The Wall Street Journal, 02/01/2002

Ex-Enron CEO Agrees to Testify Before Panel Energy: Appearance by Skilling called critical by chairman of subcommittee looking into firm's downfall.
Los Angeles Times, 02/01/2002

At Lay hearings, lawmakers out to lift 'shroud of secrecy'
Houston Chronicle, 02/01/2002

Enron Says It Can't Supply Data; Hill Probers Requested Partnership Information
The Washington Post, 02/01/2002

Senator Says Enron Refuses To Cooperate
The New York Times, 02/01/2002

Probe likely to blame former execs
Skilling, Fastow, auditors to be cited in report
Houston Chronicle, 01/31/2002

Few of Lay Family's Real-Estate Assets Are on the Market, Listing Records Show
The Wall Street Journal, 02/01/2002

Enron Report Ties the Company's Ruin To Executives Who Formed Partnerships
The Wall Street Journal, 02/01/2002

Executive Privilege
Enron's Top Dogs Still Flying Luxury Jets
ABCNews.com, 02/01/2002

Enron exec concedes he gave poor advice
Student fund loses most of investment
Associated Press, 02/01/2002

Mighty J.P. Morgan in the Hot Seat Banking: Charges of collusion with Enron and its recent hefty losses raise questions about firm's judgment.
Los Angeles Times, 02/01/2002

Enron Bondholders Blame Brokers
The Wall Street Journal, 02/01/2002

FERC to focus on Enron's role in Calif. energy crisis
Bush appointed 2 Lay choices to commission
Houston Chronicle, 02/01/2002

Bush to Unveil Proposals for Changing Pension Law
The Wall Street Journal, 02/01/2002

Who Were the Friends of Enron?: Michael Lewis
Bloomberg, 01/31/2002

Houston, we have a problem
The city where deregulation is king is in Enron denial - and won't let go of its wildcatting ways.
Salon.com, 02/01/2002

Texas law firm working to weather Enron storm
Vinson & Elkins, one of state's largest firms, faces hard questions on its work for company
Austin American-Statesman, 02/01/2002

New Prosecutor Is an `Iron Fist In a Velvet Glove'
The Wall Street Journal, 02/01/2002

Inside, Outside Enron, Audit Panel Is Scrutinized --- Links to Company Of Certain Members Are Called Too Cozy
The Wall Street Journal, 02/01/2002

UT dean too close to Enron inquiry
Editorial Board
Austin American-Statesman, 01/31/2002

Watchdog Group Wants Investigation on Harvard Official
The New York Times, 02/01/2002

Former Executive, Now in Washington, Denies Impropriety at His Unit
The New York Times, 02/01/2002

Accountants Won't Fight Consulting Ban
The Washington Post, 02/01/2002

TV Ad Assails Dole for Enron Fundraiser; In Election Year, Candidates Across Country Could Face Similar Criticism
The Washington Post, 02/01/2002

In Commercial, Elizabeth Dole Is Chastised For Enron Ties
The New York Times, 02/01/2002

Enron Won Some and Lost Some in White House Energy Report
The New York Times, 02/01/2002

Despite Recession, Perks for Top Executives Grow Pay: Hidden benefits mushroom as employees' retirement plans shrink.
Los Angeles Times, 02/01/2002

Scribbler's Ethics
The Wall Street Journal, 02/01/2002

Enron's Influence
The Washington Post, 02/01/2002

Paper Giants As a Voice For Ideas
The New York Times, 02/01/2002

__________________________________________________________________

Joint Venture: A 1997 Enron Meeting Belies Officers' Claims They Were in the Dark --- Minutes Show Them Hearing Of Novel Partnerships That Inflated Earnings --- Present: Lay, Skilling, Fastow
By John R. Emshwiller and Rebecca Smith
Staff Reporters of The Wall Street Journal

02/01/2002
The Wall Street Journal
A1
(Copyright (c) 2002, Dow Jones & Company, Inc.)

HOUSTON -- On Nov. 5, 1997, the top echelon of Enron Corp. assembled for a meeting that would help put the energy-trading giant on a fateful and ultimately disastrous course.
On that day, Enron's now-infamous outside partnership arrangements took a turn from the straightforward and mundane to the deceptive and possibly illegal. The seven-member executive committee of the company's board approved a management proposal to provide several hundred million dollars in loan guarantees for a new partnership named for the Star Wars character Chewbacca.
While Enron had done business with previous partnerships, Chewco Investments was different. Unlike others where Enron had an ownership stake, Chewco was supposed to be completely independent. But it would be run and partly owned by an Enron executive, a young rising star named Michael Kopper.
Enron Chairman Kenneth Lay arrived a little late, according to minutes of the meeting obtained by The Wall Street Journal. He came in while Andrew Fastow, then senior vice president of finance, outlined a transaction that would allow Chewco to buy, for $383 million, part of Enron's stake in another limited partnership known as JEDI. The deal kept JEDI in the Enron family, but off its books. That's because under accounting rules, Chewco provided enough independent ownership of JEDI to let Enron treat it as separate.
However, with Enron financial guarantees and an Enron official at the helm, there were questions from the beginning of how independent Chewco really was. Chewco thus set the pattern for a series of transactions that would massively inflate Enron's earnings, while hiding billions in debt from shareholders and creditors.
Four years later, on Nov. 8 last year, Enron acknowledged in a federal filing that it had overstated earnings by nearly $600 million since 1997. About two-thirds of that, it told the Securities and Exchange Commission, was because Chewco and JEDI had improperly been treated as separate entities able to do income-producing deals with Enron. The disclosure sent a signal that Enron hadn't been playing straight, and what had been an exodus of investors and trading partners turned into a stampede. Within a month, Enron sought bankruptcy-law protection.
Federal investigators and private litigators are now intently trying to learn who knew what about Chewco, and when. Top former officials have distanced themselves from it. In October, after the Journal first disclosed Chewco's existence, Mr. Lay privately told other Enron officials that he had never heard of the partnership, according to one company executive. His wife, Linda Lay, told NBC recently that her husband had been kept in the dark about a lot of the company's doings. Mr. Lay, who resigned from Enron last month, couldn't be reached for comment and his attorney didn't return calls.
Jeffrey Skilling, who resigned suddenly as Enron's chief executive last summer, said in press interviews late in December that he knew few details about the partnership. Yesterday, a spokeswoman for Mr. Skilling said, "We aren't going to comment on leaks, counter-leaks, spin or speculation." An attorney for Mr. Kopper declined to comment. An attorney for Mr. Fastow said only that his client didn't have any financial interest in Chewco.
The meeting's minutes and other recently obtained documents show plenty of people at Enron knew about Chewco. Messrs. Lay, Skilling and Fastow were part of the 1997 executive-committee meeting. So were several board members. One -- Herbert "Pug" Winokur Jr., chairman of Capricorn Holdings Inc. in Greenwich, Conn. -- felt comfortable enough with Chewco that he approved its creation from an airport while boarding a flight.
W. Neil Eggleston, an attorney for Mr. Winokur and other outside directors, says the executive committee was told that "Chewco was a special-purpose vehicle not affiliated with the company. The board never waived the conflict-of-interest policy for Mr. Kopper nor was the board told that Mr. Kopper was involved with Chewco." The meeting minutes indicate that Mr. Kopper was in attendance, though the document misspells his name. The minutes don't show whether he was introduced or took part.
During the presentation about Chewco, the meeting minutes say, Mr. Fastow "reviewed the economics of the project, the financing arrangements and the corporate structure." Among the benefits the partnership was supposed to bring was "positive income impact to Enron," according to a handout appended to the minutes. The handout included diagrams of the complex financial structure.
Chewco isn't an issue just for Enron. Joseph Berardino, chief executive of longtime Enron auditor Arthur Andersen LLP, told Congress in December that his firm never would have let Enron treat Chewco and JEDI as arm's-length, separate entities had it known the entire truth about the entities' financing arrangements. At the time Chewco was being formed, Enron officials told Barclays PLC, a lender involved in the deal, that Andersen had reviewed the transaction's structure and approved it, according to someone familiar with the discussions.
A Barclays spokesman declines to comment. Andersen says Mr. Berardino, who is scheduled to testify again next week before a House committee, stands by his statement that his firm didn't know all the relevant facts about Chewco four years ago.
Chewco altered a financial tool long used by the energy industry. Enron had at times relied on off-balance-sheet partnerships and similar entities, as had many competitors. Traditional "off-balance-sheet financing is the technique that has been used to build the independent power industry in the United States," says Didi Lacher, a New York executive of the German financial firm Helaba. With such entities, companies can share the cost and risk of developing, say, a well or pipeline. By having the partnership borrow the money, the company can also keep the debt off its own balance sheet.
This financing is "nonrecourse," meaning the sponsoring company isn't on the hook for the debt. But Enron kept off its balance sheet some debt in which it had to cover any shortfalls, because of the partnerships' arrangements. Over time, Enron accumulated billions of dollars of potential liability, little of it publicly evident.
To do outside partnerships, some basic accounting guidelines have to be followed. The company has to relinquish control of any assets put into the partnership. It can't have side deals that oblige it to repurchase or redeem the assets during the partnerships' lives, typically five to 10 years. Since 1996, a partnership also has had to attract outside equity equal to at least 3% of its total capital in order to be considered separate from the sponsoring company. Enron's partnerships appear to have met these standards for many years, but eventually Enron started to look at a higher-octane partnership.
Enron under Mr. Lay assembled a team of bright young executives intent on building a global energy power. Led by Mr. Skilling, a former McKinsey & Co. consultant, the core of the team started working together at Enron Capital and Trade Resources, which handled energy trading and marketing. His lieutenants included Mr. Fastow, a former Continental Bank finance specialist, and Richard Causey, a former Andersen official.
They figured that for Enron to grow quickly, it couldn't be weighed down with debt. Too much debt would threaten the company's credit rating and make its financing costs higher.
Mr. Skilling and his subordinates placed an emphasis on rapid-fire trading and deal-making, rather than on long-term investments in power plants and other "hard" assets. The traditional partnership approach was too cumbersome and confining to achieve this. Enron would have to negotiate for months with partners, banks and other outsiders before getting a deal going. "Enron didn't like being told no," says one former senior Enron executive. So Mr. Skilling and Mr. Fastow "found a way to avoid the discussion altogether."
The solution: bring the partnerships in house, without appearing to do so, say people involved in setting up the structures.
In 1995, according to people familiar with the matter, Mr. Fastow began approaching investment banks with a novel proposal. He wanted them to help him recruit investors for partnerships that would do business with Enron. But the partnerships would be partly owned and run by Enron executives. Donaldson, Lufkin & Jenrette, for one, turned him down, figuring the potential conflicts of interest were too great.
Mr. Fastow and other Enron officials continued their discussions with various banks to no avail. All the while, pressure was building. By 1997, company executives would later acknowledge, debt levels were getting worrisomely high. The company was also having a tough time meeting its earnings projections.
That's when Chewco was presented to the board in the November 1997 meeting. Having met resistance from investment banks, Enron officials turned to commercial banks to lend money to Chewco as well as to two small entities, also connected to Mr. Kopper. These two put the crucial 3% of outside equity into Chewco that allowed it to be treated as separate from Enron.
After Chewco was set up, Enron's profit performance began to improve and its expansion pace intensified. Mr. Skilling and his team ascended the ranks. By 1998, he was Enron's chief operating officer, Mr. Fastow was chief financial officer and Mr. Causey was chief accounting officer.
Chewco became a template. In June 1999, the board held a special meeting to hear Messrs. Skilling and Fastow outline plans for a new partnership known as LJM Cayman LP. It was designed to resolve "certain challenges" in protecting the value of a growing portfolio of volatile telecommunications assets, according to an excerpt from the meeting's minutes. The LJM name came from the initials of Mr. Fastow's wife and two children.
Four months later, the Enron executives proposed to the board an even more ambitious partnership, dubbed LJM2 Co-Investment LP, to serve as a repository for other risky bets made by the company.
Both LJMs were managed and partly owned by Mr. Fastow. In an SEC filing, Enron recently estimated he made more than $30 million from his participation in the entities. At least several million dollars of this was management fees -- a generous sum given that, in one presentation, Mr. Fastow said he worked just three hours a week on partnership matters.
A spokesman for Mr. Fastow declines to comment on how much he made from the partnerships or on LJM generally. In the past, representatives of the former CFO have pointed to Enron statements that its board and top management reviewed and approved both the creation and operation of the LJM partnerships.
Some Enron insiders say that whatever Mr. Fastow earned from the LJM partnerships was a pittance compared with the benefits they provided the company. As Enron's growth exploded in the late 1990s, worries mounted over debt levels, and the company needed help producing cash flow and earnings. Increasingly, Enron came to rely on the partnerships to take debt and troubled assets off its books and produce transactions that could be reported as profits. How much Mr. Fastow made from the LJMs was of little concern to top management, says one former Enron executive, because the CFO was the one person who could consistently pull "their nuts out of the fire with some fancy transactions."
By the year 2000, the LJM partnerships were providing more than 40% of Enron's reported pretax income of about $1.4 billion, according to a recent SEC filing by the company.
All told, the LJM partnerships raised about $400 million from outside investors and eventually did billions of dollars of transactions with Enron. Substructures of the LJM latticework proliferated with the creation of other entities. In a May 1, 2000, presentation to the finance committee of Enron's board, management described how an LJM offshoot called Project Raptor would "hedge the profit & loss volatility of Enron investments," according to internal documents from that meeting.
As part of the project, another entity called Talon was to be created with seed capital of $400 million and an initial capacity to provide "approximately $200 million of P&L protection" to Enron, according to one document. LJM2 would be the outside investor in Talon and "be entitled to a 30% annualized return plus fees," it said.
At the finance-committee meeting, its minutes show, Mr. Causey said Andersen "had spent considerable time analyzing the Talon structure and the governance structure of LJM2 and was comfortable with the proposed transaction." The committee approved the Raptor-Talon plan.
Mr. Causey's attorney, J.C. Nickens, says that his client believes the treatment of the partnerships "was an appropriate interpretation of the accounting rules as they existed then and as they still exist today."
Though the minutes said there was "discussion" of the Raptor arrangement, neither those minutes nor similar recountings of other board gatherings indicate that directors seemed particularly concerned about what was happening under the LJM umbrella. They might well have been. By last fall, public concern over the transactions had plunged Enron into crisis. Now, investigators are trying to make sense of hundreds of other Enron-related entities with names like Braveheart, Rawhide and Bobcat. The big question: Which, if any, may contain LJM-like problems?
---
John R. Wilke contributed to this article.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Financial Desk
THE NATION THE FALL OF ENRON Ex-Enron CEO Agrees to Testify Before Panel Energy: Appearance by Skilling called critical by chairman of subcommittee looking into firm's downfall.
EDMUND SANDERS; RICHARD SIMON
TIMES STAFF WRITERS

02/01/2002
Los Angeles Times
Home Edition
A-34
Copyright 2002 / The Times Mirror Company

WASHINGTON -- Jeffrey K. Skilling, who unexpectedly quit as Enron Corp. chief executive in August, has agreed to testify next week before Congress, a Senate subcommittee chairman said Thursday.
Congressional investigators are eager to hear from Skilling, who has denied any wrongdoing in the events leading to the energy company's Chapter 11 bankruptcy filing Dec. 2.
But another Enron executive, Sherron S. Watkins, wrote to Enron Chairman Kenneth L. Lay in August that Skilling had been warned about the company's problems by other executives, including former Vice Chairman J. Clifford Baxter, who died last week in an apparent suicide.
"Skilling is critical," said Sen. Byron L. Dorgan (D-N.D.), who chairs the Senate Commerce Committee's subcommittee on consumer affairs.
The committee also has asked for the testimony of fired Enron Chief Financial Officer Andrew S. Fastow, who allegedly set up many of the off-the-books partnerships that were instrumental in the company's collapse. Fastow has not responded to the committee, Dorgan said.
A spokeswoman for Skilling confirmed that he had agreed to testify voluntarily and would do so without a grant of immunity.
"He wants to be open and forthcoming with all committees investigating this matter," Judy Leon said.
Exactly when and where Skilling will testify next week is unclear. He is listed as a witness at a House Energy and Commerce Committee hearing Thursday. Dorgan's committee and others among the dozen congressional panels investigating the Enron collapse also are seeking his testimony.
"There are competing invitations, and that is complicating the scheduling," Leon said.
Lay, who replaced Skilling as chief executive and was ousted from that position last week, is scheduled to testify before Dorgan's committee Monday.
Dorgan said both men are likely to say Enron's collapse was due to circumstances beyond their control, but that his panel was prepared to counter such claims with internal documents showing that Enron's board of directors knew about the partnerships.
"It's sufficient to say that the board of directors discussed on various occasions the creation of partnerships, the structure of the business deals," Dorgan said.
In other developments, Rep. George Miller (D-Martinez) called on House Speaker J. Dennis Hastert (R-Ill.) to be the "gatekeeper" in determining whether immunity is granted to witnesses in the Enron investigation and what documents are made public.
Complaining about leaks of documents that damaged other cases, Miller wrote Hastert: "The failure to honor confidentiality, the untimely release of information or the inappropriate granting of immunity all have great potential to compromise and undermine [potential] criminal prosecutions of Enron and [accounting firm] Arthur Andersen."
Sen. Barbara Boxer (D-Calif.) called on the Federal Energy Regulatory Commission to provide her with a list of all meetings and phone calls that took place between Enron executives and FERC commissioners.
"Every day more and more alarming information is revealed concerning Enron's role in prolonging the California electricity crisis," she said in a letter to FERC Chairman Patrick H. Wood III.
The FERC said this week that it would investigate allegations that Enron used its market clout to artificially inflate long-term electricity prices on the West Coast. On Thursday, at a FERC-sponsored conference in New York on power supplies in the Northeast, Wood told Reuters news service that its inquiry had begun.
In a letter to Wood on Thursday, Gov. Gray Davis urged FERC to expedite the inquiry and expand it to include other energy marketers.
"California has a special interest in getting to the bottom of such charges, since this state bore the brunt of the marketers' price gouging," Davis wrote.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

At Lay hearings, lawmakers out to lift 'shroud of secrecy'
By JULIE MASON
Copyright 2002 Houston Chronicle Washington Bureau
Feb. 1, 2002, 12:21AM
WASHINGTON -- Lawmakers signaled Thursday that their questioning of former Enron Corp. Chairman Ken Lay on Capitol Hill next week is likely to be confrontational when he delivers his first public explanation of the company's collapse.
Congressional investigators want to know how Enron executives were able to cash out millions of dollars in company stock while employees saw their retirement savings wiped out.
The so-called "lockdown," which prevented employees from selling stock, and Enron's use of partnerships to shield its debt also are among issues lawmakers want to pursue.
In negotiating Lay's Monday appearances before the Senate Commerce and the House Financial Services committees, his attorneys did not seek immunity or any restrictions on what he could say, lawmakers and Lay's attorney said Thursday.
"The shroud of secrecy that has surrounded so much of what this corporation has done shall not be allowed to stand," said Sen. Byron Dorgan, D-N.D., a member of the Senate Commerce Committee, where Lay is to testify first.
Lawmakers are complaining that Enron is not cooperating with requests for information.
"Every day it becomes more clear that this corporation resorted to a variety of legal, regulatory and accounting contortions to keep investors and the American public in the dark," said Sen. Ron Wyden, D-Ore., also a member of the Senate committee.
Dorgan said the committee has repeatedly asked Enron to provide information about the estimated 3,000 related partnerships the company had on its books.
"To date, the corporation has provided no information to the committee about these partnerships," Dorgan said. "We have sent a second letter to the corporation asking for that information, and again they are failing to cooperate."
Bob Bennett, attorney for Enron in Washington, said Dorgan is mistaken.
"I am terribly disappointed he would say that because we have been fully cooperative with them," Bennett said. "There have been some documents they asked for that we did not have dealing with these partnerships, nor would we be expected to have them."
The disputed documents, according to Bennett, involve independent partnerships and records that Enron does not have.
Enron's Dec. 2 bankruptcy was the largest in corporate history. The collapse of the company cost thousands of employees their jobs and wiped out most of their retirement accounts, much of which were tied up in Enron stock.
Lawmakers want to know when Lay became aware of the company's financial problems, and whether executives hid Enron's true financial picture from employees and investors.
"We know for example that bankruptcy didn't treat everyone alike, we know there are some who made millions while others lost their life savings," Dorgan said. "We also know that this corporation created off-the-books partnerships in a very aggressive way, thousands of them, with strange-sounding names but even stranger architecture in terms of how they were created."
Wyden compared the conduct of Enron executives to captains on a rapidly-sinking ship.
"They locked the workers down there in the boiler room," Wyden said.
The House and Senate hearings set for Monday are among at least 10 congressional investigations under way into the collapse of the one-time energy giant.
In addition to Lay, witnesses before the House committee Monday will include Arthur Andersen CEO Joseph Berardino and Harvey Pitt, chairman of the Securities and Exchange Commission.
Since Enron's troubles first garnered national attention months ago, Lay, who resigned as chairman last week, has remained publicly silent as various investigations unfolded into possible malfeasance at the company.
Last week, Lay's wife, Linda, discussed the couple's troubles on a television morning show.
Dorgan said the Senate committee has a tentative agreement with Enron's former chief executive officer, Jeff Skilling, to testify at a later date.
The committee also has tried to arrange for testimony from Andrew Fastow, former chief financial for Enron, with no success.
"We, in my judgment, will have to hear from Mr. Fastow, the question is how," Dorgan said. "At this point we have had no response at all from registered letters we've sent."
Skilling and Fastow, central figures in the free fall at Enron, are both scheduled to testify next week before the House Energy and Commerce Committee's subcommittee on oversight and investigation.
Dorgan said that more than 40 boxes of documents previously submitted by Enron to the committee contain notes from meetings of the Enron board of directors.
The Washington Post on Thursday reported that Enron's board received detailed briefings and signed off on the use of related partnerships, dating back at least four years.
Dorgan declined to provide significant details about the documents his committee received.
"It's sufficient to say that the board of directors discussed, on various occasions, the creation of partnerships, the structure of the business deals. But I think you will hear more about that in the hearings," Dorgan said.
The controversial partnerships are a key element in the investigation of Enron's collapse because the company used the vehicles to shield its debt and appear more profitable.
President Bush, whose administration has come under scrutiny for its close ties to Lay and Enron, made an indirect reference to the controversy Thursday.
Speaking of the need for a "responsibility culture," he said companies must be honest in their financial reporting.
"Let's make sure when you account for losses and profits that you put it all on your books so everybody understands," Bush said in Atlanta.
In addition to questions about the partnerships, Wyden said lawmakers will have questions about Enron's foray into California energy markets, and particularly whether Enron manipulated markets on the West Coast.
"The common culprit in my view has been secrecy and a lack of cooperation from this company," Wyden said. "It is now high time for Congress to flip on the light and get to the bottom of this situation."
Chronicle reporter Bennett Roth contributed to this story.

Financial
Enron Says It Can't Supply Data; Hill Probers Requested Partnership Information
Kathleen Day
Washington Post Staff Writer

02/01/2002
The Washington Post
FINAL
E01
Copyright 2002, The Washington Post Co. All Rights Reserved

An attorney for Enron Corp. said yesterday that the company cannot provide Congress with the names of the investors in the controversial partnerships the company used to move millions of dollars in debt off its books and whose losses triggered the company's fall into bankruptcy.
"You have to go to the entities to get that information," Robert Bennett, a Washington lawyer representing Enron, said of the partnerships. "We do not have control over those documents. They are separate entities."
Bennett made his statement after Sen. Byron L. Dorgan (D-N.D.) held a news conference criticizing Enron for failing to provide congressional investigators on the Senate Commerce Committee with the names of investors and other information about the partnerships. The committee is holding hearings Monday at which former Enron chairman Kenneth L. Lay is expected to give his first public account of the company's collapse. Lay was not granted immunity from prosecution in exchange for his testimony, officials said.
"I know that Enron has some records about these entities or that would be malfeasance," Dorgan said. "Essentially they are just stalling."
Dorgan said he thinks Enron created more than 3,000 partnerships, known as special-purpose entities. Written minutes from meetings of the company's board of directors suggest that the partnerships were a key part of Enron's growth strategy and show that they were regularly reviewed by the board.
The partnerships are a major focus of investigators trying fathom what led to Enron's Dec. 2 bankruptcy filing, which came less than a month after Enron disclosed that since 1997 financial statements audited by the big accounting firm Arthur Andersen had overstated Enron's profits by almost $600 million and understated its debts by more than $1 billion.
A dozen congressional committees, as well as the Justice Department and the Securities and Exchange Commission, are probing Enron's demise, which cost investors and employees billions of dollars. A focus of the inquiries is whether Enron hid debt and inflated its profits by using the private partnerships run by its chief financial officer, Andrew Fastow.
Dorgan said that as of yesterday evening, Fastow has failed to respond to repeated requests to testify before the senator's subcommittee. He said that Jeffrey K. Skilling, Enron's former chief executive, has said he will appear, but not on Monday.
Fastow and Skilling are scheduled to appear before the House Energy and Commerce subcommittee on oversight and investigations next Thursday. Two other former Enron executives and one board member are also expected to testify. The subcommittee has subpoenaed another former executive, Michael Kopper. Kopper handled financial transactions at Enron and headed at least two off-the-books partnerships.
Skilling resigned in August. Fastow was ousted in October. When it was then disclosed that Fastow made $30 million running partnerships with names such as LJM, Raptor and Jedi, Lay announced that the board was setting up a committee to investigate.
Enron board member William C. Powers Jr. chairs that special committee and is expected to testify Monday before the House Financial Services Committee. The Powers special committee is about to release a report on its findings.
Bennett has said that while Enron's board of directors was aware that special-purpose entities were being set up, there was "a great deal of information regarding their operation and execution that was unknown to the board of directors."
Asked about the report yesterday, Bennett said he doesn't know when it will come out or what will be in it.
In December, Dorgan's subcommittee sent a letter to Enron requesting "the number of partnerships, the investors in the partnerships and a range of information about these 'off the books' partnerships," Dorgan said. "To date the corporation has provided no information to the committee about these partnerships."
In response, Bennett said, "I think that's grossly unfair, and I'm sorry the senator would say that. I wish the senator had called me. I can only assume he's terribly misinformed. We're cooperating fully with this committee and the dozen others that have contacted us." But, he said, the company can't produce documents it has no control over.
Dorgan called that explanation "implausible."
As to whether board members knew the names of investors in the partnerships, W. Neil Eggleston, an attorney for the outside directors, referred questions to the company.
The names of the investors in one partnership, LJM2 Capital Management LP, were disclosed in a court filing by Alpine Investment Partners, the lead plaintiff in a suit against the partnership, Bloomberg News reported. About 90 employees of Merrill Lynch invested a total of $16 million in the partnership. Merrill had been hired by Enron to raise money for the fund. Other investors listed in the document include units of American International Group, J.P. Morgan Chase & Co., Citigroup, Travelers Insurance Co., the Arkansas Teachers Retirement System, and the John D. and Catherine T. MacArthur Foundation.
Meanwhile, a group of students and alumni has asked Harvard University to review its ties to Enron and questioned whether Enron board member Herbert Winokur broke insider-trading laws as a member of the board that oversees Harvard's investments. A report by the group questions whether Harvard made as much as $50 million through investments managed by Highfields Capital at a time when Enron stock began falling. "Mr. Winokur had no involvement in Highfields Capital, and any suggestion that he tipped the fund to short-sell Enron stock is just plain wrong," Eggleston said.

http://www.washingtonpost.com
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Business/Financial Desk; Section C
ENRON'S MANY STRANDS: THE INVESTIGATION
Senator Says Enron Refuses To Cooperate
By RICHARD A. OPPEL Jr.

02/01/2002
The New York Times
Page 1, Column 2
c. 2002 New York Times Company

WASHINGTON, Jan. 31 -- Enron has refused to turn over to a Senate panel records of controversial partnerships that are crucial to understanding the company's downfall, the panel's chairman said today.
The chairman, Senator Byron L. Dorgan, said that despite repeated requests, Enron continued to refuse to turn over records of 3,000 partnerships. Investigators say Enron used the arrangements to bolster the company's financial statements while hiding hundreds of millions of dollars in losses.
''They just simply have not cooperated,'' Mr. Dorgan said, adding that ''the shroud of secrecy that surrounds so much of what this corporation has done will not be allowed to stand.'' But he did not say whether the committee was considering a subpoena.
Mr. Dorgan, a North Dakota Democrat who is chairman of the consumer affairs subcommittee of the Senate Commerce Committee, said lawyers for Kenneth L. Lay, Enron's former chairman and chief executive, assured his staff on Wednesday that Mr. Lay would appear on Monday to testify before Congress. His lawyers have not sought immunity for the testimony, Mr. Dorgan said.
Mr. Dorgan also said another former Enron chief executive, Jeffrey K. Skilling, had agreed to testify in coming weeks. But he said the company's former chief financial officer, Andrew S. Fastow, who Enron says made more than $30 million from his dealings with the partnerships, has not responded to repeated registered letters asking him to testify. A spokesman for Mr. Fastow declined comment today.
Late today, another Congressional committee investigating Enron's downfall, the House Energy and Commerce Committee, said both Mr. Skilling and Mr. Fastow would testify next Thursday, along with Enron's chief accounting officer, Richard A. Causey; its chief risk officer, Richard B. Buy; and the board of directors' audit committee chairman, Robert K. Jaedicke. A former Enron executive who was involved in the partnerships, Michael Kopper, has also been subpoenaed to appear.
A lawyer for Enron, Robert S. Bennett, disputed Mr. Dorgan's characterization of the company's cooperation, saying the senator had been ''terribly misinformed.''
''We have been fully cooperative with that committee,'' Mr. Bennett said. ''There are some documents that the committee would like to get that we have no access to and no control over, and I believe that may be what is raising this issue. But he is getting bad information.''
At the Senate hearing on Monday morning, Mr. Lay, who was ousted from his job by Enron's creditors last week, is expected to testify that important details of the partnerships and investments were kept from him and the board.
Many investigators doubt his claims of ignorance, and Mr. Lay may be pressed about why he sold millions of dollars of Enron stock last year even as he promoted the value of the shares to Wall Street and his own employees. Minutes of Enron board meetings also show that Mr. Lay was present when the partnerships were discussed. Mr. Lay's lawyer, Earl J. Silbert, declined comment today, but in the past he has said that Mr. Lay was disposing of stock last year to pay down loans outside the company and that the sales did not reflect any doubts about Enron's future.
Today, Mr. Dorgan said investigators had received 41 boxes of materials from Enron, which he declined to characterize. But he did say it was clear that members of the company's board had a fair degree of knowledge about the deals.
Some people involved in the Congressional investigations had thought Mr. Lay was unlikely to testify before first reviewing a long-awaited report by a special committee of Enron directors into the company's deals with the partnerships.
People close to the company said the report was expected to be finished sometime over the weekend. Before being released publicly, the report would have to be approved by the special committee and then have to be reviewed by the full board.
The report is likely to draw distinctions about how much various people at Enron, including board members, Mr. Lay and other executives, knew concerning the partnerships, and how much responsibility various officials bear, a person close to the matter said. The report may also say board committees had differing levels of information about the deals, this person said.
In an interview today, Mr. Dorgan said he intended to spend a lot of time during the hearing delving into details about the partnerships. But he said it was ''pretty hard to limit inquiries in circumstances like this.''
''I expect there will be attention to virtually all of the areas: 401(k) plans, insider trading, partnership construction, a whole series of things.''
Enron, he added, has said that some partnership information does not technically belong to the company and that as a result it does not have all that information. But, Mr. Dorgan said, ''in many cases, they own 97 percent of the partnerships,'' so they should be able to get it.
William C. Powers Jr., the dean of the University of Texas School of Law, who is chairman of the Enron special committee preparing the report, declined to discuss the timing of the report's release or to give details. He would not even disclose whether he would be testifying before Congress next week, even though he is scheduled to do so.
Mr. Powers said the work of the committee he heads ''is not precluding any other investigation from going forward with investigation, charges, punishment, whatever.'' The report, he said, will stand on its own, and ''government agencies can build on that if they find it useful.''
People at the law school said Mr. Powers was outraged at a suggestion published today in The Washington Post that he would be taking part in a concerted defense of Enron in his testimony before Congress. Mr. Powers has contended from the beginning of his investigation that his role is to produce an impartial report.
Mr. Powers has come under fire from advocacy groups and from the local newspaper, The Austin American-Statesman, over accusations that his impartiality is compromised by the close ties between the University of Texas, and Enron and the law firms that have represented the company, especially Vinson & Elkins.
The critics have said that the appearance of a conflict of interest is so great that Mr. Powers should not have taken on the assignment.
''Dean Powers is a nice guy and a great professor, but unfortunately, looking at the facts, he has multiple apparent conflicts that, rightly or wrongly, cast a shadow on this report,'' said Cristen Feldman, a lawyer for Texans for Public Justice, a group that tracks campaign contributions in the state.
In other Enron-related developments today, Representative George Miller, Democrat of California, asked that no witness in the House's various Enron hearings be given immunity without approval from Speaker J. Dennis Hastert, a Republican.
Separately, the General Accounting Office, which is preparing to sue the White House to obtain records of meetings of executives at Enron and other energy companies with administration officials working on Vice President Dick Cheney's energy task force last spring, said it had hired the law firm of Sidley, Austin, Brown & Wood.
In addition, Senators Max Baucus, a Montana Democrat who is the chairman of the Finance Committee, and Charles E. Grassley of Iowa, the committee's senior Republican, sent letters to the United States Export-Import Bank, the Overseas Private Investment Corporation and the Trade and Development Agency requesting information on what help the federal agencies had given Enron. The committee is preparing for hearings into the company later.
The chairman of an accounting ethics board, meanwhile, reaffirmed the board's decision to disband in light of the sketchy proposals by the Securities and Exchange Commission to restructure disciplinary rules. The chairman, Charles A. Bowsher, had announced that the Public Oversight Board would resign as a group partly in protest of the proposals by Harvey L. Pitt, the commission's chairman.

--------------------

Governor Seeks Inquiry
SACRAMENTO, Jan. 31 (AP) -- Gov. Gray Davis of California and Senator Barbara Boxer are asking regulators to investigate possible price manipulation by Enron during the state's energy crisis.
Mr. Davis sent a letter today to the Federal Energy Regulatory Commission after the release of a memo from Enron officials to the White House that outlines discussions between executives and the administration's energy task force headed by Vice President Cheney.
In the memo, Mr. Lay urged Mr. Cheney to reject price caps on wholesale electricity that Mr. Davis and a host of other state officials wanted.

Photos: Senator Byron L. Dorgan, Democrat of North Dakota, above left, with Senator Ron Wyden of Oregon, said yesterday that Enron had not cooperated in handing over partnership documents. Mr. Dorgan also said Andrew S. Fastow, left, a former Enron executive, had not responded to requests to testify. (Stephen Crowley/The New York Times)(pg. C1); Jeffrey K. Skilling, a former chief executive, is to testify in hearings. (Paul Hosefros/The New York Times); William C. Powers Jr., the University of Texas law school dean, leads an Enron committee preparing a report on the company's partnerships. (Frank Curry for The New York Times)(pg. C4)
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Probe likely to blame former execs
Skilling, Fastow, auditors to be cited in report
By TOM FOWLER
Copyright 2002 Houston Chronicle
Jan. 31, 2002, 11:14PM
Enron Corp.'s internal probe of partnerships that helped bring the company down will likely focus the blame on former executives Jeff Skilling and Andy Fastow and the company's auditors, say sources familiar with the investigation.
The report, expected to be released this weekend, will probably say the two and the accounting firm of Arthur Andersen failed to give Enron's board of directors adequate information on the nature of the partnerships.
Though Enron has acknowledged the board approved the formation of the partnerships and many of the deals, officials say the report will claim vital details were withheld.
The leader of the investigation, William Powers, dean of the University of Texas School of Law, is expected to testify before the House Energy and Commerce Committee Tuesday.
One source critical of the board said the directors were trying to deflect the blame.
"It's like blaming a roofer for cracks in the foundation of your house," the source said.
Enron's internal investigation began in late October shortly after the Securities and Exchange Commission started a formal investigation of off-balance-sheet partnerships formed by Fastow, then the chief financial officer. The partnerships enlisted outside investors to buy Enron assets as a means of helping the company artificially keep its debt level low and earnings high.
Mistakes in the reporting of some transactions with two partnerships, LJM-Cayman and LJM2 Co-Investment, forced the company to restate 4 1/2 years of earnings, including a reduction in reported profit by $586 million and add $2.5 billion in debt to its books.
In November, the internal committee determined that Fastow and other employees had profited from investments in the partnerships. Those employees were fired.
The report will be the first official word from the committee since then. At the insistence of creditors, it will be posted on Web sites of Enron and the U.S. bankruptcy court in New York.
Enron officials declined comment on the report, as did representatives for Fastow and Skilling.
An Andersen spokesman said Enron officials simply made some bad business decisions and are trying to blame the auditors.
"The notion that the leaders on the board were not aware of these issues is absolutely implausible," said Andersen spokesman Patrick Dorton. "These were sophisticated people with sophisticated business advisers."
Patrick McGurn with Institutional Shareholders Services, a company that advises shareholders on corporate governance issues, said Enron's board may have a valid argument if it can show it didn't know enough details to assess the risk involved.
"There's a question as to who had the ability to see the big picture, if the board was so compartmentalized that they could only know one part of it at a time," McGurn said.
It's not unusual for boards to see only summaries of very complicated deals and issues, McGurn said.
"But even if all of this is true, it still means either the board wasn't diligent enough, it willingly went along with something that was wrong, or they were just stupid," he said.
It's not clear if the report will also criticize Enron's longtime law firm, Vinson & Elkins. The firm did not help set up the LJM partnerships, but was asked to look into concerns raised by Enron executive Sherron Watkins in a now well-known October 2001 memo to Lay and the board.
In an Oct. 15 letter to Enron general counsel James Derrick, V&E's Max Hendrick addressed some of those concerns, including the potential for conflicts of interest in Fastow's dual roles as Enron CFO and chief partner in the LJM partnerships, and the board's waiver of its code of ethics in meetings on June 28, 1999, and Oct. 11, 1999, to allow him to run the partnerships.
The letter concluded that -- based on its interviews -- no outside counsel or auditors were needed to investigate the issues further. Hendrick did say, however, that "bad cosmetics" on the LJM partnerships and its investments in certain Enron technology and communications assets, coupled with the poor financial performance of those assets, could lead to a "serious risk of adverse publicity and litigation."
The day after the letter was written, Enron began to unwind those investments with LJM.
The fact that the code of ethics was waived to allow Fastow to run LJM is further indication that the board should have been more vigilant, said McGurn.
McGurn and other observers are already questioning the impartiality of the investigation, given that many board members who approved parts of LJM are involved. But the presence of William McLucas, the former director of the Securities and Exchange Commission's division of enforcement, on the committee as general counsel will lend it more credibility, said one source.
"Lucas is a notorious hard-ass," said the source, who asked not to be identified. "So I can't imagine he'll go too soft on anyone."

Few of Lay Family's Real-Estate Assets Are on the Market, Listing Records Show
By Gary McWilliams
Staff Reporter of The Wall Street Journal

02/01/2002
The Wall Street Journal
A8
(Copyright (c) 2002, Dow Jones & Company, Inc.)

Earlier this week, Linda P. Lay, the wife of former Enron Corp. Chairman Kenneth L. Lay, told a national television audience that nearly everything the couple owns is for sale as they struggle with a personal financial crisis.
But few of the couple's vast real-estate holdings are on the market, according to Multiple Listing Service records.
Altogether, Mr. and Mrs. Lay own real estate valued at more than $30 million in Texas and Colorado, according to local tax records. They own 18 properties in Houston, Galveston, Texas, and Aspen, Colo., according to real-estate records. But only two of the properties, vacation homes in the resort town of Aspen, are being offered for sale.
On NBC's "Today," Mrs. Lay described the couple's plight in the wake of the Enron bankruptcy as a fight for liquidity because most of their wealth was tied up in Enron stock, now nearly worthless. "Other than the home we live in, everything we own is for sale," she said.
The comments stirred a torrent of criticism in Houston, where about 4,000 Enron employees have seen their jobs and stock holdings evaporate. Belo Corp.'s Houston television station, KHOU, reported that the couple's Houston and Galveston properties didn't show any sign of being for sale.
The family's Houston-based investment office didn't return a call requesting clarification. According to tax and real-estate records, the Lays live in a Houston penthouse valued at $7.1 million and continue to hold a home near Aspen's riverfront valued at $4.1 million, as well as property valued at $2.1 million. Two other homes, valued at more than $6.1 million each, were listed with an Aspen real-estate firm on Nov. 12, two weeks before Enron filed for bankruptcy. Mr. Lay also sold a third of his stock in Compaq Computer Corp. at the end of October, two months before resigning from its board.
However, Mr. Lay has retained significant stock holdings in Compaq, Eli Lilly & Co. and other companies where he once served as a director. Those shares are currently valued at more than $10 million.
Still, along with Enron, the Lays have seen some investments sour. Through private partnerships, they are the largest individual investors in a struggling Houston online company that has cut its work force four times in the past year.
The Lays invested between $18 million and $20 million out of the more than $150 million that Questia raised since its inception in 1998, according to people close to the firm.
Questia sells access to online books to college students for $20 a month. Investors say it has fallen far short of its original goal of recruiting 10% of the 14 million U.S. college students to sign up for its service.
Last month, Questia cut its work force to just 28 employees from 300 a year ago. A spokesman said recently the job cuts would enable the company to continue operations while it seeks new investors. While Mr. Lay has resigned his seats on the boards of Compaq, Eli Lilly and i2 Technologies, he remains on the board of Questia, according to the company.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Economy
Enron Report Ties the Company's Ruin To Executives Who Formed Partnerships
A Wall Street Journal News Roundup

02/01/2002
The Wall Street Journal
A2
(Copyright (c) 2002, Dow Jones & Company, Inc.)

A much-anticipated report on an internal investigation into the collapse of energy company Enron Corp. is expected to point fingers at former and current Enron executives who were behind the questionable partnerships that led to the company's ruin, congressional aides said.
The report, which may be released as early as this weekend, also is expected to outline the failure of internal controls at the company, the aides said.
The report is already being denounced by some defense lawyers and others caught in the widening probe of Enron's collapse. They are raising questions about conflicts of interest, and they fear the report will deflect blame from Enron's board onto former Enron executives or Arthur Andersen LLP, its former auditor.
In an interview yesterday, William Powers Jr. -- the University of Texas law school dean who joined Enron's board in October and heads a committee of outside directors that is conducting the investigation -- declined to comment on the report. "We will file the report when it's ready and then we will comment on it," he said. Mr. Powers is scheduled to testify at a congressional hearing into the Enron collapse Tuesday.
Mr. Powers, chairman of the special committee, had ties to Enron executives and its law firm, Vinson & Elkins, and helped raise millions of dollars from them for the University of Texas, the defense lawyers and other said. Mr. Powers serves on the university Capital Campaign Committee, and Enron has given $3 million to the university, and more than $250,000 to the law school, since Mr. Powers became dean in 1998. In addition, Vinson & Elkins endowed a chair at the law school.
Critics of the expected report also point out that other Enron directors on the special committee approved the transactions that they are now reviewing. The Wall Street Journal reported Jan. 2 that the board explicitly approved the structure of the partnerships now under scrutiny.
The company announced the formation of the special committee in the fall, just as the Securities and Exchange Commission initiated an investigation into partnerships used by Enron to move debt off its books.
The special committee's other two members are Raymond Troubh, a New York financial consultant named to Enron's board in late November; and Herbert S. Winokur, a director since 1985 and chairman and CEO of Capricorn Holdings Inc., a private investment company. Mr. Winokur also was chairman of the board's finance committee, which recommended that the board suspend the company's ethics code so former company treasurer, Andrew Fastow, could run a partnership.
The committee retained William McLucas, a former SEC enforcement chief who left after 22 years to join the Washington, D.C., law firm of Wilmer, Cutler & Pickering, to advise the committee. Mr. McLucas, 51, was known as a no-nonsense securities cop in the eight years he served as the SEC's top law-enforcement officer.
Enron has said its dealings with the Fastow partnerships were legal and properly disclosed to investors. According to Enron filings with the SEC, the company did deals involving billions of dollars of assets and Enron stock with entities related to the Fastow partnerships. Internal partnership documents indicate that Mr. Fastow and possibly others made millions of dollars from the partnerships.
The committee is expected to present the report to Enron's full board of directors, then to the official committee of unsecured creditors in Enron's bankruptcy-court proceeding, according to someone familiar with the process. It will then be filed publicly in federal bankruptcy court in New York.
Asked when Enron planned to file the report with the court, Martin Bienenstock of Weil, Gotshal & Manges LLP, Enron's lead bankruptcy lawyer, said, "We hope next week."

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Executive Privilege
Enron's Top Dogs Still Flying Luxury Jets

By Brian Ross  <http://abcnews.go.com/sections/2020/2020/ross_brian_bio.html>

Jan. 31 - Enron executives and lawyers appear to be going bankrupt in style, traveling to bankruptcy court hearings in New York in the company's two remaining private jets.

An Enron spokesperson has confirmed a total of eight corporate jet trips to New York and Washington since the bankruptcy, saying the flights were more efficient than commercial travel.
A round-trip commercial flight, Houston to New York, could be as little as $365 in coach. According to aviation executives, the same trip on an Enron jet would cost tens of thousands of dollars.
The Enron executives seen leaving the airport Wednesday used the corporate jet to attend the funeral of J. Clifford Baxter, a former Enron executive who committed suicide on Jan. 25. Enron says that is the only nonbusiness trip since the bankruptcy.
"Of course I have sympathy for the Baxter family, but for them to use the corporate jets to fly the total corporate entity to any function at this point again seems arrogant," said Rod Jordan, a former employee and chairman of the Severed Enron Employees Coalition.
Former Employees Outraged
Laid-off Enron employees, who stood in line today for $1,000 checks from a group collecting donations and returned political contributions, were outraged to hear the luxury jets were still in the air.
"This is atrocious," said former Enron employee Cindy Cicchetti. "What's wrong with coach? That's what I fly."
The luxury private jets were part of the Enron culture created by its former chairman and CEO, Kenneth Lay.
Not only did Lay use his $45 million jet for business, but he regularly used it for strictly personal trips for him and his family, at a cost of $334,000 in the year 2000 alone.
Months before the bankruptcy, Lay defended the personal trips. When asked what kind of message it sends to the rest of the company, he responded, "Well, I think it gives my senior people something to aspire to."
Enron says Lay's favorite jet has already been sold, and that the remaining two jets are for sale.
---

Enron exec concedes he gave poor advice
Student fund loses most of investment
Associated Press
Feb. 1, 2002, 12:43AM
RICHMOND, Va. -- A top Enron Corp. executive has admitted he gave poor advice to students at his alma mater who lost nearly $12,000 in University of Richmond endowment money invested in Enron stock.
Jeffrey McMahon, who was promoted to president and chief operating officer at Enron this week, said he hadn't foreseen the company's collapse. In an interview with the university's newspaper, however, he acknowledged that he had long been a critic of Enron's use of secretive partnerships, a practice that contributed to the company's downfall.
McMahon, who graduated from the university in 1982, visited the school Sept. 20 and Oct. 18, meeting with students and giving enthusiastic accounts of his company's prospects even as its stock was slumping.
On Nov. 2, a student group that manages a small portion of the university's endowment fund bought $12,771 worth of Enron stock. At the time, Enron cost $11.61 a share. In late November, Enron's stock crashed, and when the group sold their investment shares were trading at 83 cents. They got back just $913.
"The students said he was just so enthusiastic about the company," accounting professor Joe Hoyle told the newspaper, The Collegian. "Why would a guy who had a whole lot of knowledge of Enron's finances go to his alma mater and be so enthusiastic ... when you can just keep your mouth shut?"
Student fund manager Devin Weisleder told the newspaper, "After listening to him for an hour, you want to go out and drop 10 grand to buy the stock."
In his copyright interview with The Collegian, McMahon said he was unaware the investment was made on his recommendation, but conceded, "In hindsight, that probably wasn't good advice."
"The stock suffered a precipitous fall that no one could have expected," he said. "I was running an operating division at the time, responsible for paper and steel. I had little knowledge of the financials of the company," he was quoted as saying.
McMahon was mentioned in an internal memo, written in August by Sherron Smith Watkins and made public earlier this month, critical of Enron's secretive partnerships.
"I expressed concerns about partnerships in 1999," McMahon told the newspaper. "(Watkins) was referring (in her memo) to conversations I had internally relating to those concerns and possible conflicts of interest."
Enron filed for bankruptcy in December and laid off thousands of workers. The filing came after weeks of revelations that executives had concocted complicated partnerships that let Enron keep $500 million in debt off its books. Enron shares spiraled to less than a dollar from nearly $80 a year ago, obliterating employees' retirement funds loaded with the stock.

Business; Business Desk
Mighty J.P. Morgan in the Hot Seat Banking: Charges of collusion with Enron and its recent hefty losses raise questions about firm's judgment.
E. SCOTT RECKARD
TIMES STAFF WRITER

02/01/2002
Los Angeles Times
Home Edition
C-1
Copyright 2002 / The Times Mirror Company

In the rubble of recent financial collapses, one prestigious institution seems especially vulnerable: J.P. Morgan Chase & Co., the nation's second-largest bank.
The New York company, a lead lender to Enron Corp., Kmart Corp. and telecommunications firm Global Crossing Ltd., is at risk of losing billions in dealings with bankrupt firms, as well as losing heavily in Argentina's economic meltdown.
J.P. Morgan also lost $1.1 billion last year on its stakes in businesses, including many ailing technology companies, and is accused by insurers of helping Enron conceal vast losses. Morgan strongly disputes the charge, but the allegation, coupled with the hefty losses, raises questions about the judgment of an institution that traces its roots back more than 200 years.
The bank's woes, accompanied by sizable losses on loans at many other financial giants, also reveal chinks in a banking industry generally regarded as a pillar for the nation's recovery from an economic slowdown and from Sept. 11.
J.P. Morgan fares badly in comparison with big competitors such as Citigroup Inc., the largest U.S. banking concern, and Bank of America Inc., the third-largest. Despite their huge losses in Argentina, Enron and other corporate collapses, Citigroup earned $4 billion and BofA posted a profit of $2 billion in the fourth quarter, bolstered in part by robust consumer lending.
Morgan, by contrast, lost $332million in the fourth quarter, compared with a $708-million profit a year earlier. For the year, the company still earned $1.6 billion.
Wall Street's skittishness over projected losses at J.P. Morgan has been apparent in the steady stock sell-off in recent weeks after a "continuing parade of train wrecks," in the words of analyst E. Reilly Tierney at Fox-Pitt Kelton in New York.
The stock, which traded above $40 early in December, hovered near $32 this week before closing Thursday at $34.05, up 99 cents a share, on the New York Stock Exchange.
Some analysts remain bullish on Morgan, saying the institution is fundamentally sound and the financial setbacks are only temporary. And by some industry measures, J.P. Morgan's financials look sturdy. A key ratio of nonperforming assets to total assets, for example, was just 0.87% as of Dec. 31, well below the 2% figure regarded as a sign of potential trouble.
Investors' concerns surfaced in December after Enron's bankruptcy, when J.P. Morgan, which had a reputation for usually disclosing bad news promptly and completely, suddenly tripled its estimate of its potential Enron losses, to $2.6 billion.
Nearly $1 billion of the total stemmed from insurers' refusals to pay Enron-related claims on unfulfilled energy contracts. The insurers contended in a lawsuit filed in federal court in New York that the losses resulted from J.P. Morgan's setting up "sham" offshore energy trading concerns to do business with Enron.
J.P. Morgan contends its energy trading companies were above board, adding that--unlike Enron--it included the results on its balance sheets.
The bank also says the hefty loan losses from the mammoth bankruptcies are a result of J.P. Morgan's position as the leading arranger of the biggest credit lines to the biggest businesses. These so-called syndicated loans are carved up and shared by dozens of banks.
"We're handling 40% of the syndicated loans, and when companies go down we tend to be exposed," said J.P. Morgan spokeswoman Kristin Lemkau.
But other banks in the syndicates typically take on responsibility for more than 90% of the amounts lent. Though J.P. Morgan arranged $1.6 billion in credit lines for Kmart, for example, it had just $117 million in unsecured loans when the retailer filed for bankruptcy last month. Likewise, though J.P. Morgan had helped arrange $2.25 billion in loans for Global Crossing, it's now owed less than $100 million by the telecom firm, according to people close to the situation. And while J.P. Morgan still has a $500-million exposure to Argentina, Citigroup and FleetBoston have far more.
Indeed, only about 10% of J.P. Morgan's earnings come from lending these days, compared with 50% a decade ago, Lemkau said, meaning its comparative credit risk exposure actually has declined dramatically.
Still, there's no denying the bank's missteps, which include an 8% stake in an Argentine bank accused of fraud, and loans to a European cable TV company that has threatened to default on $17.5 billion in debt.
Prospects looked far brighter at the end of 2000, when J.P. Morgan Chase & Co. emerged in its current manifestation via the colossal merger of Chase Manhattan Corp. and J.P. Morgan & Co.
After deregulation tore down walls separating banks, brokerages and insurers, the idea was to compete better with Citigroup--itself formed in the merger of Citicorp and Travelers Group--by selling more services to clients. The newly formed giant hoped especially to persuade companies with bank loans to use J.P. Morgan's investment banking services, which typically are more profitable than commercial lending.
But the technology meltdown, the recession and Sept. 11 combined to create the worst environment in years for stock offerings, mergers and other staples of investment banking.
The big question now, Tierney said, is whether J.P. Morgan failed to assess credit risks properly at companies because it figured making loans was a sure path to bigger profit on other services.
However, Lemkau said the dollar amount of corporate loans on J.P. Morgan's books has declined for the last three years. "It's a misconception we're lending like a drunken sailor so we can get our hand on more profitable businesses," she said. "It's just not true."
No doubt reflecting the uncertainties facing all financial institutions after Sept. 11 and the Enron meltdown, the range of expert opinions about Morgan is astonishingly wide.
Some analysts, such as Michael Mayo at Prudential Financial, have slapped "sell" ratings on the bank while others, such as Diana P. Yates at A.G. Edwards & Sons Inc., rate it a "strong buy."
Yates characterized concerns over the insurers' allegations of collusion with Enron as "overdone." She also warned against judging J.P. Morgan by its admittedly atrocious last quarter.
"They're taking some hits, but they're a big company with a $41-billion equity base. It's not like they're going out of business," she said.

GRAPHIC: Wall St.'s Verdict; ; CREDIT: Los Angeles Times
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Enron Bondholders Blame Brokers
By Jathon Sapsford
Staff Reporter of The Wall Street Journal

02/01/2002
The Wall Street Journal
C1
(Copyright (c) 2002, Dow Jones & Company, Inc.)

Citigroup Inc. lent money to Enron Corp. in October, when the energy company's finances were sliding. At the same time, the Wall Street giant pitched Enron bonds to clients as a solid investment.
Now, at least one institutional investor who bought the bonds is hopping mad -- and has taken the beef to court.
In a suit filed recently in federal court in New York, Silvercreek Management Inc., a Toronto investment company that bought Enron bonds in October, accuses Citigroup's Salomon Smith Barney unit, as well as Goldman Sachs Group Inc. and Bank of America Corp.'s Banc of America Securities LLC, of promoting Enron securities even when they knew the company was on the brink of collapse.
"The brokers were calling our clients telling them that this was a wonderful opportunity to buy these instruments," says Joe Cotchett, a lawyer representing Silvercreek. "They were giving our client a sell job."
Citigroup, Goldman and Banc of America declined to comment.
The suit is one of the first to put the blame for Enron squarely on Wall Street's role in facilitating Enron's deception. "Enron's investment bankers sold the securities which propped up the pyramid," the suit alleges. "In the process, these firms earned $214 million in underwriting fees alone, and much more for lending, derivatives trading and merger advice."
But the case highlights a broader question. Did Enron's lenders have a duty to their investing clients to disclose the depths of Enron's woes? Some analysts say that investors should probably have known that they were buying securities from financial institutions who were in a position to know that Enron was facing dire straits. Yet Citigroup wouldn't have to disclose its knowledge of Enron's troubles because of lender confidentiality.
"When you're a bank lender, you can hide behind the confidentiality rule," says David Hendler, an analyst at market research firm CreditSights.
In its suit, Silvercreek says the three financial firms were pitching Enron securities to Silvercreek as late as October, including some new bonds that would convert into Enron stock. The Canadian firm, which invested $175 million in Enron bonds in October, says it lost $120 million and is seeking compensation and unspecified damages.
Sure, Enron had been through a rough patch over the summer, the Wall Street sales pitch went, according to Silvercreek's lawyers. But Enron wasn't all that bad off, and the bonds were selling at a sharp discount. That purported pitch was mirrored by some of the research reports the brokerage firms had released during October.
"We reiterate our Buy rating on Enron," an Oct. 19 Salomon Smith Barney report on Enron said, "after untangling part of a complicated story involving their balance sheet."
Enron's story, of course, wasn't nearly so upbeat. Its balance-sheet high jinks caused a sudden loss of confidence, bringing about a liquidity shortage so dire that Enron was forced to draw down an emergency $3 billion credit line on Oct. 25, only a few days after Salomon's report. That move signaled Enron was running short of crucial operating capital.
Citigroup's lending division knew as well as anybody that Enron was facing trouble, since it had been one of the top banks arranging the credit line. Yet the brokerage companies had Enron securities in their firm's inventory to unload, according to the Silvercreek suit.
Enron had sold Wall Street firms about $1.9 billion in convertible bonds that firms such as Citigroup were free to sell to investors by June of 2001, the court papers say. But the sales of these securities weren't going so well, Silvercreek alleges.
So Citigroup's brokers became increasingly aggressive in pushing the Enron bonds on institutional investors, Silvercreek's lawyers say. Citigroup sold Silvercreek its last chunk of Enron securities on Oct. 25 -- the same day that Enron drew down its credit line from Citigroup.
Executives familiar with Citigroup thinking assert that Silvercreek should have known the risks of investing in Enron as well as any other investor. Meanwhile, the lending side knew about the problems at Enron, but the brokerage side didn't. That is in keeping with the so-called Chinese Wall on Wall Street, which seeks to separate businesses to reduce conflicts.
Further complicating the role of Citigroup in the dispute is that on Oct. 25 -- the same day Enron drew down its credit line -- Citigroup met with other bankers to begin discussions on a new, $1 billion Enron credit line.
The new financing, which was announced much later, was firmly secured by collateral in the form of Enron pipeline assets. Yet Citigroup effectively rolled some of its existing unsecured Enron financing into the new secured credit line -- thereby shielding itself from Enron losses shortly after pushing Enron debt on to other investors.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

FERC to focus on Enron's role in Calif. energy crisis
Bush appointed 2 Lay choices to commission
By PATTY REINERT
Copyright 2002 Houston Chronicle Washington Bureau
Feb. 1, 2002, 12:21AM
WASHINGTON -- Federal energy regulators Thursday launched an investigation into whether Houston's embattled Enron Corp. helped prolong last year's electricity crisis in California by unfairly manipulating wholesale power prices.
Federal Energy Regulatory Commission Chairman Pat Wood III, a Texas Republican who was appointed by President Bush last year at the behest of Enron Chairman Ken Lay, confirmed that an inquiry had begun but declined to elaborate on its scope.
FERC spokeswoman Barbara Connors said Wood's decision to look into Enron's activities came at the request of several Western Democratic lawmakers, including Sens. Barbara Boxer and Dianne Feinstein of California, Ron Wyden of Oregon and Maria Cantwell of Washington. California Gov. Gray Davis, a longtime Enron critic, also requested an investigation.
Calls for FERC to look into Enron's business dealings in California came as early as 2000 as power prices soared after the state's failed attempt to deregulate its energy markets. But pressure on federal energy regulators has mounted in the past month amid investigations by numerous congressional committees, the Labor Department, Securities and Exchange Commission and the Justice Department.
Enron officials did not return calls seeking comment on the latest investigation, but the company has denied any wrongdoing in the California energy crisis.
Boxer cited a 30-minute meeting that Lay, who since has left Enron, had with Vice President Dick Cheney on April 17 to discuss the California crisis. The senator said a memo from that meeting offers possible evidence that Enron officials, who were huge financial contributors to the Bush presidential campaign, influenced the administration's energy policies.
The eight-point memo that Lay reportedly gave Cheney during their meeting was published earlier this week by the San Francisco Chronicle.
In it, Lay suggested that the administration "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."
He added that even temporary price caps would be detrimental to power markets.
The day after his meeting with Lay, Cheney said price caps wouldn't solve California's problems.
Boxer called the revelations "quite disturbing" and said they raise questions about whether Enron also may have tried to influence FERC directly.
In addition to an investigation of Enron, Boxer requested information on meetings and phone calls between Enron executives and FERC commissioners and staff between August 2000 and June 2001.
The FERC investigation comes one day after the General Accounting Office said it would take the unprecedented step of suing the White House in the next few weeks unless Cheney reconsiders his refusal to turn over information on meetings between Enron and other energy executives and the administration's energy task force.
Meanwhile, in an interview scheduled for broadcast tonight on PBS' Now With Bill Moyers, Lay says that during a meeting at the White House he gave Bush administration officials a list of candidates for seats on the five-member FERC. Of the eight names, Bush appointed two -- Wood and Nora Brownell of Pennsylvania.
"I brought a list, we certainly presented a list. ... As I recall, I signed a letter which in fact had some recommendations as to people that we thought would be good commissioners," Lay said in the interview, which was taped last May but never aired.
White House spokeswoman Anne Womack confirmed Thursday that Lay gave the names to Clay Johnson, Bush's personnel director.
Wood, who served as head of the Texas Public Utility Commission under then-Gov. George W. Bush, is an advocate of market-oriented utility regulation, an approach favored by Lay and other Enron officials.
Bush selected Wood for the FERC job to replace Curt Hebert, who says in tonight's PBS program that he and Lay had long disagreed about issues before the commission. Lay had "asked me to take certain positions, but I've had those conversations with Ken Lay for a long time -- and have disagreed with him for a long time," said Hebert, a former Mississippi legislator.
Enron, once the world's largest energy trader, plunged into bankruptcy Dec. 2 after admitting it had overstated its profits by $586 million since 1997.
Lay is scheduled to testify before Congress next week as part of numerous inquiries launched in the wake of Enron's collapse. Information yielded by congressional investigators so far has rekindled the ire of officials in Western states who have long claimed Enron was at least partly to blame for the region's energy woes almost two years ago.
"If there is any doubt in your mind about whether an investigation is warranted, the latest revelations should answer that question," Davis wrote to Wood in a letter released Thursday. "Clearly, an investigation is needed."
Davis, a Democrat, first called on FERC to investigate allegations of market manipulation by Enron and other power generators and traders in the summer of 2000.
By fall of that year, wholesale power prices in California had risen tenfold and continued at high levels through the following spring as angry customers began to suffer through blackouts.
The price jump was blamed on the state's failed attempt at deregulating electricity markets.
FERC eventually voted to impose price caps on electricity sold in California. That move, along with the state's signing long-term contracts with power companies to lock in prices and milder weather that spring, ended the crisis.
Blaming Enron and other marketers for the crisis, the state of California has sought $9 billion in refunds for alleged overcharges. That case is pending before a FERC administrative judge; no decision is expected for several months.

Economy
Bush to Unveil Proposals for Changing Pension Law
By Jeanne Cummings and Kathy Chen
Staff Reporters of The Wall Street Journal

02/01/2002
The Wall Street Journal
A2
(Copyright (c) 2002, Dow Jones & Company, Inc.)

WASHINGTON -- Workers would have more flexibility to diversify retirement accounts, senior executives would be held to the same blackout periods on stock sales as rank-and-file employees, and workers could receive more independent investment advice under pension proposals to be unveiled by President Bush today.
Based on the recommendations of a cabinet task force, Mr. Bush is expected to announce those changes and others during an appearance before congressional Republicans at the Greenbrier resort in West Virginia, a senior White House official said.
The proposals stem from a three-week review of pension law commissioned by the president in response to the collapse of Enron Corp. As the Houston energy-trading company spiraled toward its Dec. 2 bankruptcy, workers' retirement savings that were bottled up in frozen 401(k) accounts evaporated with the shrinking stock price. Some senior executives, whose holdings weren't under the same restrictions, sold off millions of dollars in stock and cashed in deferred compensation accounts.
The White House study, conducted by Treasury Secretary Paul O'Neill, Labor Secretary Elaine Chao, and Commerce Secretary Donald Evans, was designed to provide greater protection for workers in the future and to give the president some political cover in the scandal that involves one of his largest financial backers.
The proposal, which would require legislation or regulatory action before taking effect, doesn't go as far as some bills supported by consumer and labor organizations. But some provisions are likely to meet resistance from businesses.
To give employees greater flexibility to diversify their portfolios, employers would be required to allow workers to sell employer-company stock after they have participated in their 401(k) plans for three years. Many employers currently require workers to hold on to company shares, especially those that are given by the employer as a "match" to employee contributions, for many years, or even until retirement. Employers enjoy tax benefits for issuing company stock to retirement accounts, and the practice is also cheaper than making cash retirement contributions. But, in the case of a bankruptcy such as Enron's, the restrictions can wipe out employee nest eggs, advocates of change argue.
The president's package wouldn't limit the amount of employer-company stock that could be held in 401(k) plans. Such caps have been proposed in legislation, including a bill introduced by Democratic Sens. Barbara Boxer of California and Jon Corzine of New Jersey that is supported by consumer and labor groups.
Calling for increased access to investment advice, Mr. Bush embraced a bill sponsored by Rep. John Boehner (R., Ohio) and passed by the House last year. The White House now will push for action in the Senate.
The Boehner bill would encourage employers to provide more investment advice to their workers by shielding them from lawsuits and fiduciary responsibility for investment decisions made based on advice given by other parties. But the bill also would allow pension-plan managers to provide such advice, a move which consumer groups say would result in a dangerous conflict of interest.
The National Association of Manufacturers, which is leading a coalition to oppose major pension changes, and other industry groups have voiced support for Mr. Boehner's bill.
Mr. Bush's proposals also would raise the stakes for employers when they impose "blackout periods" on stock trading for pension plans. Companies routinely impose such periods when they are changing plan administrators, for instance.
In addition to requiring senior executives to face the same blackout periods as lower-level workers, Mr. Bush is calling for a 30-day notice before a blackout begins. He also will recommend that employers be held responsible for what happens to workers' investments during the periods when their stock is frozen. Under current regulations, employers are protected from that liability.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Who Were the Friends of Enron?: Michael Lewis
2002-01-31 16:25 (New York)

    Berkeley, California, Jan. 31 (Bloomberg) -- The only people who are going to explain what happened at Enron Corp., and why, are the people who worked there. So I'm delighted to report the trickle of notes and letters from Old Enronians has become a torrent. My inbox runneth over.
     This week's pile of cards and letters offers several different kinds of information. The first is the sort of colorful detail that will be useful to whoever eventually makes the crummy TV movie about the energy trader's collapse.
     It's fun to know, for instance, that Enron's chief risk officer had a picture of the Titanic on the wall of his office, and that Enron's chief accountant drove a Ferrari. It's even more fun to know there was plenty of sexual scandal in the halls at Enron, to go along with the financial one. Office affairs are common at any big company, but Enron's steamy Texas culture seems to have created a particularly juicy hothouse.

Book Fodder

     The next category of information is the deeper understanding that will be useful to whoever writes the respectable best-selling book about Enron.
     For the first time since the scandal broke, for example, I've read a satisfying explanation for Enron's many disastrous investments in foreign assets.
     As this correspondent put it, the main motive for paying ridiculously big sums for Indian power plants and Brazilian pipelines and so on was not foreign market information, or access to foreign politicians, but the need to be able to cover a short position.
     In its attempt to create the same sort of trading markets in developing countries as it had in the U.S., Enron exposed itself to a new kind of market risk.
     It was one thing to be caught short in U.S. natural gas, in which you could hedge your position on a well-established futures exchange. It was another to be caught short Indian electricity. Owning the underlying physical assets ensured that would never happen. (But also ensured Enron would be constitutionally long all new markets.)

Friends and FOEs

     The final category of information is the sort of corporate intrigue that will be gold to the investigative reporters newly assigned to the Enron beat.
     For example, there was, according to one former Enron employee, a group of individual investors known as the Friends of Enron.
     These people, ironically known as FOEs, were offered the following deal: Agree to put your name on a million dollar investment in a private offshore partnership stuffed to the gills with junky assets, and Enron would lend 95 percent of the money and guarantee you at least a 15 percent annual return. In other words, put up fifty grand and Enron would ensure you received 150 grand at the end of the year.
     So, who was offered this deal? My Enron correspondent contends the list of people on it will read "like a Who's Who.''
     Bloomberg News this week revealed that some individuals who put money into Enron partnerships run by former Chief Financial Officer Andrew Fastow were executives at Merrill Lynch & Co.
     This is interesting -- and not merely because of the blatant conflict of interest in employees of a firm taking huge sums of money from Enron when it is the role of their firm, in part, to serve as a detached observer of Enron. The conceit that Wall Street firms evaluate U.S. companies honestly was dropped long ago. (Merrill is a passive minority investor in Bloomberg LP, the parent of Bloomberg News, and has said the investments didn't represent a conflict of interest.)

Looking the Other Way

     No, what's astonishing is that the people who were offered these deals by Enron didn't acknowledge what they said about a company that last year ranked as the seventh largest in the U.S. by sales. A lot of well placed people knew such a giant company was rotten and yet no one said anything about it, or altered his behavior in any way towards the company.
    Or almost no one. A couple of local Houston institutional investors who declined similar sweet deals could see clearly enough what it meant.
     Danny Bowers, the chief investment officer of the Houston Fireman's Relief and Retirement Fund, has said "there was a pretty blatant conflict of interest. It was kind of a stinky deal.''
     David Long, who runs the Houston Municipal Employees Pension Fund, told Bloomberg News that, "We had a lot of discussion about potential conflicts of interest. You had the CFO of Enron, who's an employee of Enron, acting as general partner of a partnership which for the most part could be construed to be adversarial to Enron.''

Need Not to Know

     So why didn't any respectable person respond the same way to Enron's offer of free money?
     One of the curious aspects of the Enron scandal is the way the world configured itself so that it didn't need to know the truth about the company. There was a need, both financial and psychological, not to know.
     Now we know the partnership structure was an open secret on Wall Street. There was a lot of money to be made on the short side by a Wall Street person if he leaked Enron's moral infrastructure to, say, the Wall Street Journal. But, at least as far as we know, no one at Merrill did this.
     So, who else was offered a sweet deal by Enron and yet failed to be shocked or alarmed? Anyone currently residing in Washington? I await your cards and letters.

-- Michael Lewis in Berkeley, California, at mlewis1@bloomberg.net through the New York newsroom (212) 318-2320/ Editor: Rooney

Houston, we have a problem
The city where deregulation is king is in Enron denial - and won't let go of its wildcatting ways.
- - - - - - - - - - - -
By Katharine Mieszkowski, Salon.com
Feb. 1, 2002 | HOUSTON -- In a skyscraper just across the street from Enron's sparkly new downtown headquarters, Pamela Lovett explains why the biggest bankruptcy in history isn't something to get all worked up about. "This is not the first company to declare bankruptcy," she says. "Personally, I have very high regard for Ken Lay."
Lovett is the head of economic development for the Greater Houston Partnership, a local business group with 135 CEO members, which Lay was the chairman of in 1994. Her job is wooing big companies to come set up shop in the laissez-faire, pro-business Promised Land of Houston.
She lowers her voice to remind me reverently that in this country we assume the accused are "innocent until proven otherwise," and when it comes to Enron "a lot of things are being tried by speculation." But the civics lesson is interrupted when Lovett's colleague David McCollum comes bursting in to announce that the FBI has just occupied Enron's headquarters, based on reports that employees were still shredding documents there a few days earlier.
"We're just having so much fun now!" McCollum jokes before popping back out, leaving Lovett to continue to argue that in spite of the Enron collapse things here in Houston are just fine, thanks.
Congress is holding hearings, criminal investigations are under way and class action suits are bubbling over, but in Houston, civic leaders don't want to jump to any untoward conclusions. Despite all the sob stories generated by thousands of local laid-off Enron workers and retirees, Mayor Lee Brown has been careful not to cast blame. When Ken Lay resigned as the CEO of Enron, the mayor said in a statement: "Only those who are working all day, every day on this situation are in a position to know all the details." Oh, and by the way, Lay sponsored a $50,000 fundraiser for Brown's election last year.
The Houston City Council isn't exactly warming up the tar-and-feathers either. Instead, it's busy awarding a $198,000 consulting contract to Arthur Andersen, a company now feverishly attempting to escape its own immolation after its failure to competently audit Enron's books. "That disgusted me," says Amy Oberg, a former Enron employee who lost retirement savings in her 401K as well as her job. "The fact that the city went and did that in the middle of the federal investigation just blows my mind. For the people here who were hurt by Enron, that was a slap in the face."
Greetings from Houston, the city that tries too hard. Houston is a city that is proudly unapologetic about its status as an icon of anything-goes deregulation. Nowhere will you find a place more consciously devoted to living the free-market version of the American dream. But there's an insecurity lurking beneath the pride, an inferiority complex bred in part by the spectacular flameouts and huge busts that are a natural consequence of living with as few rules as possible. It is, as one resident notes, a place where "people come to make money, and then they go someplace else. Nobody retires in Houston."
Enron's fall from grace is but the most recent disaster to bring out the contradictions inherent in the Houston way. Even as many Houstonians feel a lingering sense of betrayal and disappointment and no shortage of embarrassment, they are still unwilling to ask themselves: Why did Enron happen here in Houston? And can anything be done to prevent the next catastrophe?
Probably not. Because to do anything substantive would be a betrayal of Houston's founding myth -- the idea that the city is a place where a guy can come to make a lot of money without being held back by a bunch of party-pooping naysayers and regulators. It's a myth that fits neatly into the explicit deregulation platform so heavily promoted by Ken Lay and Enron, and it's not something that Houstonians will give up on easily.
"There will be no reform in Houston," predicts Dr. Alvin Tarlov, a physician and policy advisor at the Baker Institute for Public Policy in Houston.
There never is.
"This is a city where you can make your fortune and not have people looking over your shoulder saying: 'You can't do that,'" says Houston native Carlos Hernandez, with evident pride, adding quickly: "Enron was taking that to the extreme. That's just criminal."
But from the beginning, Houston's wide-open ethos has been an invitation to criminals. "Houston is a city that started as a land scam. It's still a wildcatters town," says Jim Hightower, the Texas writer and wisecracker. Back in the 1820s the city's roguish developers sold scrip for 5 or 10 cents an acre that didn't actually convey property rights to any land. It was a scam that makes pushing stock that's not based on real revenues look pretty tame.
To this day, locals eschew government oversight so much that many suburbanites here don't even live under any city government. They inhabit unincorporated districts run by the residents, in a barely governed super-sprawl of cheap housing. Here's how it works: A developer buys a piece of the endless raw prairie land outside city limits. He puts a trailer on it and has his construction foreman move in. Then, an only-in-Texas "election" is held. The sole voter -- the construction foreman -- votes in favor of developing the property, and voila! -- a new district is created complete with tax-exempt bond status.
When the new 'burb is built and inhabited, the developer turns it over to the citizens, who repay the debt from the bonds with property taxes. There are some 400 of these unincorporated districts in the Greater Houston area, and you only really hear about them when the City of Houston cherry-picks a wealthy one, annexing it to assume its lucrative tax base -- usually against vehement "Don't tread on me!" protests from the residents.
In the unincorporated areas and the city proper that together make up the sprawling greater Houston area, population 4.5 million, lies a case study in what is wrought by living according to the commandment "There shall be no zoning." Sublime, helter-skelter juxtapositions are everywhere. Right next to an eight-lane freeway, a Discount tire store huddles near a traveling carnival; children spin themselves silly on blinking rides that rival NASA's anti-gravity chambers, under the vacant gaze of an overly made-up model looming down from a billboard advertising an all-night porn store. And don't miss the 20-story office building right across the street from a neighborhood of brand-new monster houses, with no niceties like landscaping buffering the commercial district from the residential one. Neighborhood deed restrictions impose some conformity, but those rules end at the property lines -- then, hallelujah! Anything goes! There were a few years there in the early '90s when the Houston City Council did impose zoning, albeit after the fact, but by 1994 the citizens had voted to repeal this brazen act of government intervention.
"Strip malls and strip clubs. There's a Gap on every corner next to a Starbucks," says Tracy Delmer, a speech pathologist who has lived here all her life. "It's all about trying to make your strip mall prettier than the other strip mall down the street."
The flip side to freedom from nasty government oversight is some of the worst air pollution in the country. Some 2.5 percent of the world's total refining capacity lies in the greater Houston area, and Houston's high ozone readings are rivaled only by Los Angeles. The state, in true Texas laissez-faire style, has been notoriously lax on environmental regulation, allowing old petrochemical plants to be grandfathered in when introducing new, watered down environmental rules, which just means that those old, polluting plants never seem to die off.
"That's Texas. If the federal government forces Texas to do it, they do it," says Jim Blackburn, a Houston environmental lawyer. "But otherwise, it's all up for grabs."
Is it any wonder that few people seem to come here just for fun? "People don't say 'I went to Houston last summer,'" says Delmer, "like they say 'I went to Seattle.'"
"All over the country, if people hear they're being transferred to Houston they want to commit suicide," says Amy Jaffe, a local energy policy advisor, who still finds the distaste outsiders have for Houston puzzling. It's not as if Houston is some kind of cultural wasteland, she notes, enumerating a laundry list of Houston's sophisticated worldly charms, from the opera to the ballet to the symphony.
All of which, it should be noted, are funded almost entirely by private sources.
Nationally, Enron's demise is stirring debate on a huge range of issues, from campaign finance reform to accounting rules to the very ascendancy of the idea of deregulation.
But not here in Houston.
"None of us blame President Bush or free-market capitalism for Enron's collapse," says Raymund Eich, a local patent agent, who believes that liberals are using the Enron bankruptcy as an excuse to smear both. Only Dallas and Washington gave more money to Bush's 2000 campaign than Houston, and Enron is well known to be Bush's single biggest corporate backer, but Eich doesn't think the government owes anything to hard-hit Enron employees or investors, noting that "Houstonians are more self-reliant than people in other places."
Take Houston accountants -- a phrase that in February 2002 sounds like the punchline to a very bad joke waiting to happen. Here's a group who would like very much to remain self-reliant, even as they fear that their days of self-regulation may be numbered, thanks to Andersen's bad behavior. Over lunch -- beef stew on noodles -- the members of the Houston Chapter of the Texas Society of Certified Public Accountants at their annual business meeting at the J.K. Marriott dish about Andersen's role in the Enron debacle.
"I think someone should pay," says Ann-Marie Curtin, a CPA at Prime Asset Management, a Houston property company. "There's no way that there wasn't a significant amount of illegal activity going on."
But new rules to help prevent such nefarious activities? They won't hear of it. Patrick L. Durio, president-elect of the local group and the chairman of the -- voluntary! -- ethics committee of the Texas Society of CPAs, says: "Government regulation is not the answer. I don't want to see the government setting accounting standards," noting that the industry has been self-regulating for 100 years. "And I don't think that politicians should be getting involved in it."
In Houston, they probably won't. Because no matter how big Enron's corporate implosion appears on the national scale, such colossal busts are hardly unusual in Houston history. In fact, Enron is a mere blip compared to the city-wide bust that occurred in the mid-'80s. Houston is always trying to shake the perception that it's just an urban pit stop for roughnecks who rip natural resources out of the ground on the way to getting really, really rich. Because many Houstonians remember what happened when those roughnecks and their moneymen ran the town right into the ground.
"Imagine a city where everybody had gone to Las Vegas for the weekend and lost everything they owned," says Jaffe.
In the mid-'80s, the city lost a quarter of a million jobs in the oil and real estate bust. "There were a lot of people who went from owning lots of real estate in West Houston and driving a Porsche to having to take a job selling aluminum siding. Everybody was a kazillionaire," says Jaffe, "and all of a sudden, everybody was bankrupt over the course of, like, three years." Banks just couldn't keep up with all the foreclosures on the suburban houses stocked with '80s amenities -- the backyard swimming pool, the built-in wet bar and the Jacuzzi.
The bust inspired a favorite Houston bumper-sticker, begging God for a second chance, for another oil boom: "God, if you bring it again, we won't screw it up this time."
Things were so depressed circa 1986 that a volunteer civic organization called Houston Proud formed to try to cheer up the beleaguered populace. The Houston Proud theme song was a relentlessly upbeat ditty that tried too hard. Sample lyric: "We're Houston Proud! Proud of the things we've done together!" Commercials aired on local TV pairing the song with chipper images of smiling Houstonians to market Houston to its own people, as if to plead, "Please don't lose faith. Just don't move away."
And maybe that's where the inferiority complex comes from: This is a city that knows what it feels like to fall flat on your face, to go from driving a Porsche to selling aluminum siding. Or maybe a city where the free-market conquers all knows it's inevitably a little rough around the edges.
Congratulations, Houston! You've just been named "The Fattest City in America" by Men's Fitness magazine for the second year in a row. To respond to the salvo, Mayor Brown recently launched a campaign to inspire Houstonians to slim down, by starting with his own waistline. If you can't rule by policy, why not govern by example?
The taxes are so low here that the city government needs a public referendum to do anything beyond barely keeping the surface streets functional. Behind the scenes, it's businesspeople, both informally and through the Greater Houston Partnership, who push civic projects and sweetheart deals along, from downtown revitalization to building new stadiums. In Houston, the business agenda is the civic agenda.
"The shadow government decided where the football stadium is going to be, how much public money was going to be put into it, and where the money would come from," explains Tarlov. Ken Lay led the approval process of the new baseball stadium, which now bears the name of his disgraced company.
The sign that says Enron Field, which the now-bankrupt company pledged to pay $100 million for, is the most vivid symbol that Enron's shame is also a big black eye for Houston. But neither Enron Field nor the Compaq Center -- Compaq cut 8,500 jobs last spring and may still be absorbed by Hewlett-Packard -- has soured local politicians on the naming game. Right now, the City Council is considering selling off different rooms of the new convention center for corporate branding.
Houston has struggled since the catastrophic oil bust of the '80s to change its wildcatting ways. And like an investor who learned her lesson the hard way when her 401K turned out to be composed 80 percent of Enron stock, Houston has shed its overdependence on the energy industry, with some success. The city now boasts that while 82 percent of all economic activity in the early '80s was energy-related, now it's about 49 percent. That still means it's a town whose fortunes are tied to the price of oil, just less so.
But even with big local employers Compaq and Continental on the ropes, Enron evaporating and the price of oil down from $30 a barrel in early 2000 to $18 a barrel today, the city has lost only 5,700 seasonably adjusted jobs, according to the University of Houston's Institute for Regional Forecasting. That means while the country has shed about 1 percent of its job base in the recession, even with Enron's fall, Houston has lost only a quarter percent of its base. Houston may be down, but it is still ahead of the rest of the country.
But the collapse of Enron means something more here than the loss of jobs or money or even face. Lay was the archetypal Good Houston Businessman: a young man from somewhere else who comes to town, makes a lot of money and showers it back on the community, while building his good name. He was widely thought to be a promising candidate for mayor when Brown's term expires on term limits next year, prompting comparisons to Houston's great-granddaddy of civic business leaders, Jesse "Mr. Houston" Jones.
And before its collapse, Enron represented Houston's best idea of itself -- an innovative, technocratic, deregulation innovator that might be a bit on the arrogant and greedy side but was also philanthropic and civic-minded, a company transforming itself out of the oil and gas business into a new economy conglomerate that even sold broadband services. Enron was the New Houston.
Not even the city's official civic pride cheerleaders can entirely brush off Enron. Lynn Nutt, chair of Houston Proud, confides: "The self-esteem here in Houston is very depleted."
But in a city that's always trying to prove itself, there's no time for navel-gazing about whether Enron's collapse means that there's something inherent in Houston's culture that breeds such colossal screwups. The Houston way isn't to wallow and whine. It's to declare -- all together now! -- your pride in your city, while leaving the congressional investigators, the FBI and the courts to sort out that Enron mess. In bike-riding, eco-friendly, granola-eating Portland, Ore., they may be singing the "Enron Blues," but here in Houston, headquarters for the largest bankruptcy in history, they're still Houston Proud!
Just in time for all the Enron fuss, there's a new Houston Proud "Rally Song" by local songwriter Phil Blackman: "Houston is the Place to Be." It's a twangy Texas two-step blues number with a country twist.
"I've been up, I've been down,
Searchin' for a place to be
I've been around, the world you see
But Houston is the place for me."
Ah, the good-natured earnestness, the protesting-too-much! It's enough to make the heart skip a beat for Houston, or maybe just make you want to skip town.
salon.com

Texas law firm working to weather Enron storm
Vinson & Elkins, one of state's largest firms, faces hard questions on its work for company
By Bruce Hight
American-Statesman Staff
Friday, February 1, 2002
For now, at least, Vinson & Elkins LLP, the big Houston law firm that represented Enron Corp., sits quietly in the eye of the hurricane of outrage that stormed the city after the collapse of the energy giant into bankruptcy and scandal.
But the investigations have only begun.
So far, the firm says, it has not lost any clients and even continues to represent Enron on some matters, although it says Enron owes the firm $5 million for past services.
And while Vinson & Elkins faces questions about its role in the creation and operation of the partnerships that contributed to Enron's failure, the firm - one of the largest in the state - has not been directly implicated in Enron's collapse.
That's a marked contrast to Arthur Andersen LLP, which was fired as Enron's auditor last month and has fired one of its own top partners. It has also acknowledged destroying Enron-related records and admitted this week that it has lost clients. Some analysts have suggested that Andersen might be so heavily damaged that it will have to seek a merger with another accounting firm.
Harry Reasoner, who was Vinson & Elkins' managing partner until the end of last year, said the law firm is not free to comment in detail about its work for Enron because of attorney-client privilege.
"It is particularly frustrating because we're confident that when the full facts come out that it will be clear that we have conducted ourselves in a manner that is both professional and is required by our ethical obligations," he said.
One aspect of the firm's work for Enron already has raised eyebrows: At Enron's request, it investigated internal warnings last fall of possible wrongdoing involving some of the partnerships that eventually led to the company's bankruptcy, despite a warning that Vinson & Elkins had previously provided some legal advice pertaining to the partnerships.
Outside legal experts agree that it's too soon to tell whether the firm acted legally and ethically. But that doesn't mean it has nothing to worry about, they added.
"Even if Vinson & Elkins is determined to have no legal liability in this matter, its reputation has been tarnished," said Milton "Mitt" Regan, who teaches a course on professional responsibility and corporate lawyers at Georgetown University Law Center in Washington.
One issue, Regan said, is just what role Vinson & Elkins played in the creation of the partnerships that were used by Enron to move debt off its own books, which apparently benefited some Enron executives and helped lead to bankruptcy.
"We will need to know whether Vinson & Elkins was confined to the narrow task of opining on the legality of business proposals that others developed, or whether it took a more expansive role as a member of the team that developed business strategies," Regan said in an e-mail interview.
John Dzienkowski, a University of Texas law professor who also teaches professional responsibility, said even if Vinson & Elkins did nothing wrong, the firm probably won't avoid legal action against it.
"Given their deep pockets and high profile, they're likely to be targets of plaintiffs looking for remedies," he said.
Just last August, another prominent Texas law firm, Locke Liddell & Sapp LLP, paid $8.5 million to settle a lawsuit brought against it by investors of Brian Russell Stearns, who was convicted of running a phony investment scam. And in April 2000, the same firm agreed to pay $22 million to settle a lawsuit brought by investors in Austin Forex International, a failed foreign currency firm run by former UT football star Russell Erxleben.
Investors claimed that Locke Liddell helped Stearns and Erxleben defraud them. Locke Liddell denied any wrongdoing but said it settled to avoid lengthy and expensive litigation - a decision that Vinson & Elkins may face eventually, said Dzienkowski.
Still, he said, Vinson & Elkins' professional reputation is so strong that he doubts it will suffer permanent harm.
To make sure, Vinson & Elkins has hired some of the top names in the legal profession to defend it. One is Joe Jamail, a renowned Houston trial lawyer better known for battling firms such as Vinson & Elkins than helping them. But Jamail already has persuaded plaintiffs' lawyers in two lawsuits against Enron to drop Vinson & Elkins as a defendant.
Another top gun hired by Vinson & Elkins is John Villa, of the top Washington firm of Williams & Connolly LLP. He specializes in defending prominent law firms.
Reasoner said Villa is overseeing Vinson & Elkins' cooperation with the various investigations: "I don't believe in our lawyers representing themselves when they're called on to testify as witnesses."
Founded in 1917, Vinson & Elkins is the second-largest law firm in Texas, according to a survey last year by a trade publication, Texas Lawyer. It has 860 lawyers, including 110 in its Austin office, making it one of the city's largest law firms. (Don Wood, partner in charge of the Austin office, said none of the Austin lawyers were assigned to Enron.) It also has offices in other cities, including Dallas, Washington, London, Moscow and Singapore.
Its revenues last year were about $455 million.
"Enron was only 7-plus percent of our revenue," Reasoner said. "That's significant, but I mean, it's not material to us economically in the sense of harming us. And of course people are upset by reading unpleasant publicity. But I don't think anyone is concerned that it will affect us in the long run."
Vinson & Elkins is the kind of firm people have in mind when they talk about "establishment" or "white shoe" lawyers, those representing banks, major corporations, insurers and wealthy individuals.
It is well-connected, politically and otherwise. Al Gonzales, general counsel to President Bush and a former Texas Supreme Court justice, is a former Vinson & Elkins partner. And some of Enron's 200-plus in-house lawyers used to work at Vinson & Elkins, including the company's general counsel, James Derrick.
(Another major Houston law firm that has done work for Enron, Bracewell & Patterson, has severed all ties with the company. Two of its partners, Marc Racicot, chairman of the Republican National Committee, and Greg Abbott, a candidate for Texas attorney general, have been criticized for their links to a firm working for Enron.)
Vinson & Elkins recruits some of the top law school graduates in the country - first-year associates start at $110,000 - and the firm, as well as Enron, has contributed to the UT Law School foundation. Reasoner serves on the foundation's board, as did Derrick until October.
Those connections have attracted some criticism of the Law School dean, William Powers, after he was elected last year to the Enron board and named chairman of a special committee to investigate the company's finances. Powers has denied any conflict.
The most obvious cloud on Vinson & Elkins' Enron dealings at this point appears to be the investigation it undertook last fall, at Enron's request, regarding warnings from an Enron executive that the company could "implode in a wave of accounting scandals."
The executive, Sherron Watkins, also advised former Enron Chairman Ken Lay not to use Vinson & Elkins for the investigation because it had provided legal advice in the past to some of the entities whose actions she was questioning.
Most of her concerns, however, centered on the accounting of the transactions between the partnerships and Enron, warning that although they had the blessing of Arthur Andersen, "none of that will protect Enron if these transactions are ever disclosed in the bright light of day."
But Enron nevertheless selected Vinson & Elkins, which on Oct. 15 sent a seven-page letter to company executives that reported no apparent law-breaking and advised that there was no need to hire independent counsel or auditors.
However, it warned that some of the transactions in question had "bad cosmetics," with "a serious risk of adverse publicity and litigation."
Reasoner said that Watkins' warnings did have an effect; Enron afterward acknowledged the problems and reported publicly its major financial losses.
And he hints that Vinson & Elkins did more than suggested by its report: "The notion that this was a whitewash or that the company didn't deal with it - I'm not free to say what our oral advice is or why they did what they did, but they certainly did deal with it."
And, Reasoner said, the firm "was not asked to examine our own legal work" in the investigation.
Others will, however, including Congress and the Securities and Exchange Commission.
You may contact Bruce Hight at bhight@statesman.com or (512) 445-3977.

New Prosecutor Is an `Iron Fist In a Velvet Glove'
By Jerry Markon
Staff Reporter of The Wall Street Journal

02/01/2002
The Wall Street Journal
B1
(Copyright (c) 2002, Dow Jones & Company, Inc.)

When James Comey was a federal prosecutor in Richmond, Va., he riled up the area's three federal judges in a way that prosecutors rarely do. In a highly unusual joint opinion, the judges criticized Mr. Comey's pet project to crack down on gun crimes by prosecuting them in federal courts, where sentencing was tougher, rather than state courts.
"It's a total intrusion on the sovereign state of Virginia," Richard Williams, one of the judges, says in an interview. At the same time, he adds: "I have a very high regard for Jim Comey. . . . He did an outstanding job."
Such sentiment is often heard about Mr. Comey, who is expected to be confirmed soon by the Senate as the new U.S. attorney in Manhattan. Imposing at 6-foot-8 and reputed for his tenacity, Mr. Comey -- who's been involved in highly charged cases from terrorism to an earlier Enron Corp. case -- seems the classic tough-as-nails prosecutor. But as one Richmond defense lawyer, Steven Benjamin, puts it, Mr. Comey is "an iron fist in a velvet glove. He's extremely pleasant, but if you challenge him, you go to war. He will not yield an inch on something that matters to him."
Allan Applbaum, a former New York federal prosecutor who worked with Mr. Comey in the early 1990s, notes: "He has this combination of strength and boyish charm that really does disarm people."
Mr. Comey, 41 years old, will need these qualities in his new job, which he began on an interim basis last month. With its focus on Wall Street crime, the Mafia and, in recent years, terrorism, Manhattan's federal prosecutor is traditionally the most visible of the country's 93 U.S. attorneys.
But since Sept. 11, the Bush administration has centralized terrorism investigations in Washington, saying the events required a coordinated national response. It's a significant change: Since the first World Trade Center attack in 1993, most major terrorism cases had been handled in New York. Now, key terrorism cases are being filed in Mr. Comey's old district in Virginia.
A native of Yonkers, N.Y., Mr. Comey won the attention of Attorney General John Ashcroft and President Bush with accomplishments such as his quick indictment last year of 14 men in the 1996 terrorist bombing of military barracks in Saudi Arabia, which killed 19 American airmen. FBI officials had been frustrated at the slow pace of the government's investigation, and requested that the case be transferred to Mr. Comey, who was then in Richmond.
As an assistant U.S. attorney in Manhattan during the early 1990s, Mr. Comey won guilty pleas from two former executives of Enron's oil-trading subsidiary to charges of conspiring to defraud the parent company through a series of phony oil- trading contracts. He also oversaw the hunt for fugitive Marc Rich, who was later pardoned by President Clinton.
Mr. Comey recalls a 1992 trip to a mountaintop hotel in Zurich, Switzerland, expecting to meet Mr. Rich and his lawyers to arrange the fugitive's surrender. But Mr. Rich's side argued instead that the racketeering and tax-evasion charges he faced had no merit, and Switzerland had already refused the U.S.'s extradition request.
"It was a bit frustrating. We felt we had wasted an enormous amount of time," Mr. Comey says. "The chocolates were lovely though."
Mr. Comey had more success with his gun-crime program in Virginia starting in the mid-'90s. Facing concerns that Project Exile was anti-black because most gun crimes involve blacks, he met with the critical federal judges and community leaders to emphasize that the program would help victims. He eventually won widespread support for the program, which helped cut the murder rate in Richmond by half. At least 12 other cities, including Baltimore and Oakland, Calif., have started their own version of Project Exile.
Mr. Comey calls his new position "a dream job," and seems confident that the New York office's central role in prosecuting high-profile cases will be maintained. "There's always a healthy tension between an aggressive, independent U.S. attorney's office and headquarters [in Washington], but I don't see any kind of sea change," he says.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Inside, Outside Enron, Audit Panel Is Scrutinized --- Links to Company Of Certain Members Are Called Too Cozy
By Joann S. Lublin
Staff Reporter of The Wall Street Journal

02/01/2002
The Wall Street Journal
C1
(Copyright (c) 2002, Dow Jones & Company, Inc.)

When the board audit committee of Enron Corp. gathered for a regular meeting at its Houston headquarters a year ago, the session should have been anything but routine.
After all, Enron management wanted a blessing for every transaction during 2000 between the energy-trading company and two partnerships run by then-Chief Financial Officer Andrew Fastow. The controversial partnerships kept significant debt off the books, pumped up profits -- and earned Mr. Fastow more than $30 million.
Yet committee members, all of them outside directors, didn't challenge a single transaction, according to knowledgeable people and excerpts of the Feb. 12 meeting's minutes. Their indifference wasn't a complete surprise. The full board twice had taken the rare step of suspending the corporate-ethics code, so Mr. Fastow could head the partnerships.
Subsequent disclosure of losses related to the partnerships hastened Enron's collapse. Now, amid finger-pointing at top management and the company's outside auditors at Arthur Andersen LLP, the audit committee is under harsh scrutiny from a slew of civil, criminal and congressional investigations -- and the board itself.
A special board committee looking into the debacle is expected to partly blame the six-member audit panel in a report to be issued as early as this weekend. The report will cite slick presentations by sophisticated financial people along with lethargy on the part of audit-committee members, says an individual close to the situation. The panel discovered significant defects in procedures for monitoring financial results and controls, the individual adds.
Critics who contend Enron's audit panel fell short cite several key reasons: Several members held cozy ties with the company, they say. The panel's chairman -- Robert K. Jaedicke, retired accounting professor and former dean of Stanford University's business school -- preferred a relatively passive role. And Andersen auditors apparently weren't persuaded that they should be answerable to the audit committee as their client. "It's the worst audit committee I have ever seen," asserts John Nash, president emeritus of the National Association of Corporate Directors.
"This audit committee worked pretty well based on the information it was provided," retorts W. Neil Eggleston, counsel for Enron's outside directors and a partner at Howrey Simon Arnold & White in Washington. Andersen signed off on accounting practices and didn't alert members about "any impropriety or irregularity" until November, Mr. Eggleston adds. Audit-committee members either declined to comment about their role or didn't return calls.
An Andersen spokesman, asked to respond to Mr. Eggleston's critique, said the notion that "the audit committee or senior management wasn't aware of the risks of the business decisions they were making is entirely implausible." Regarding criticism of its auditing work, Andersen says Enron withheld crucial information and misled the auditors about the partnerships; Enron fired Andersen last month.
At first glance, Enron's pivotal audit panel, made up of prominent executives, looks well-qualified. But in reality, governance specialists contend, the committee's makeup is far from ideal.
For one thing, half its members live abroad -- an uncommon practice at audit panels, which meet often and require a keen grasp of business practices here. As an American citizen, Hong Kong billionaire property developer Ronnie Chan may understand U.S. business. But he has the worst recent attendance record of any Enron director. He missed more than 25% of board and committee meetings during 1996, 1997 and 2000, according to proxy statements. (In 1998 and 1999 he missed fewer meetings, though the percentage wasn't reported because it was less than 25%.)
Corporate-governance experts doubt some other audit-committee members are truly independent. Lord John Wakeham joined the board in 1994, four years after the then-British energy secretary approved plans for Enron to build a power plant in the United Kingdom. Since 1996, proxy statements show, he has earned $72,000 a year advising its European unit -- more than his $50,000 annual stipend for being a director. In a statement last week, Lord Wakeham's office said it "would clearly be wrong of him" to make any comments about his position at Enron while the matter is being investigated.
John Mendelsohn is president of University of Texas M.D. Anderson Cancer Center, which has received nearly $1.6 million in donations from Enron and related entities since 1985, the year his predecessor Charles A. LeMaistre became an Enron director. Dr. Mendelsohn has said the center doesn't depend heavily on Enron philanthropy.
Dr. Jaedicke, who is 73 years old, is the most important -- and, to corporate governance experts, perhaps most problematic -- member of Enron's audit panel. The unpretentious retired academic commands respect for his meticulous thoroughness. But he has led the Enron audit panel since he obtained his board seat in 1985. Big-business boards typically switch committee heads every three to five years to maintain distance from management.
Dr. Jaedicke feels his lengthy tenure never crimped his outside perspective, Mr. Eggleston says. But some question whether Dr. Jaedicke's long service to Enron may have contributed to his approach.
He took a relatively passive role, for example, when the board first waived the ethics code in mid-1999. To form a private partnership called LJM Cayman LP, Mr. Fastow needed a special board ruling that his activities wouldn't violate policies intended to protect against executives being involved in activities that might pose a conflict of interest or harm Enron.
The audit committee's charter, disclosed in the latest proxy statement, describes its responsibility for overseeing ethics-code compliance. Yet the panel took no action about suspending the code before the full board met; nor did Dr. Jaedicke propose an audit-committee review during that board meeting, Mr. Eggleston reports.
"The audit committee should have made the code suspension part of their work, especially since the partnership would involve the CFO," says Charles Elson, director of the Center for Corporate Governance at the University of Delaware's business school. And Dr. Jaedicke, as the committee's chairman, "should have been upset over the proposed waiver of the code."
To the contrary, according to excerpted minutes from Enron's board meeting on June 28, 1999, it was Dr. Jaedicke who seconded the motion suspending the ethics code when directors approved a resolution that Mr. Fastow's partnership participation "will not adversely affect the interests of the Company."
He saw the partnership as a "one-off, isolated transaction. It didn't look like there was much risk at that time," Mr. Eggleston explains. In addition, the lawyer continues, committee members "believed that Arthur Andersen was involved in blessing the LJM partnerships."
Also raising eyebrows is the audit committee's lack of involvement in deciding which law firm would conduct the nearly two-month probe into a letter warning of questionable accounting last August by Enron Vice President Sherron Watkins. Her letter raised alarms about the unorthodox partnerships and their potential danger to Enron's finances and public image.
At numerous companies, the audit-committee chairman decides which law firm should probe a serious whistle-blowing complaint. "That's the only way you maintain the integrity of the company," says Roderick M. Hills, a former Securities and Exchange Commission chairman who has led more than six audit committees.
Instead, at Enron, management made the decision to retain Houston law firm Vinson & Elkins to explore concerns described in the letter Ms. Watkins sent and discussed with then-chairman Kenneth Lay. Her letter cautioned against using Vinson & Elkins as investigators because it had issued legal opinions endorsing some of the partnerships.
Dr. Jaedicke didn't learn about the Watkins letter or the outside lawyers' inquiry until it ended, when Vinson & Elkins briefed him about the finding, Mr. Eggleston says. He maintains this didn't bother Dr. Jaedicke because he knew corporate policy required that in-house attorneys review employee complaints from any level and decide whether to seek outside legal help. Critics say that the Vinson & Elkins Oct. 15 report in effect ignored the accounting problems, by concluding that Enron's practice of forming special-purpose entities to keep debt off its books was "creative and aggressive" but wasn't "inappropriate from a technical standpoint."
Enron's auditors also knew about the Watkins allegations long before the audit committee did. An Aug. 21 Andersen memo summarizes a conversation in which the whistle-blowing executive, a former Andersen auditor, shared her concerns about Enron's questionable accounting with an Andersen audit partner not assigned there. The partner passed along what he termed "a very troublesome scenario" to several Enron auditors at Andersen and to the firm's lawyers. Andersen says it also informed Enron management.
By Oct. 9, Andersen analysts had determined there was "a red alert: a heightened risk of financial-statement fraud" at Enron, according to an Andersen e-mail. The Andersen spokesman says the financial-statement test described in the e-mail was conducted on an "experimental basis" using software later found to be flawed and doesn't know what actions auditors took to address the "red alert."
Again, however, Enron's audit committee didn't immediately learn of this. Not until Nov. 2, when the company's financial condition had seriously deteriorated, did Andersen tell the Enron board of "possible illegal acts within the company" concerning one partnership, Andersen Chief Executive Joseph Berardino told lawmakers. Six days later, the complex partnerships caused Enron to restate nearly $600 million in earnings reported over five years.
Some suspect Andersen auditors failed to keep Enron's audit committee well-informed because they saw their main responsibility as serving the company's management, and not the full board or the audit committee. "It's usually the comptroller that recommends to the audit committee who the auditors should be," a former Enron official observes. Andersen auditors worked "with the company day by day. They saw the audit committee once a quarter."
Yet at some companies audit-panel chairmen aggressively try to reverse that misconception, thereby protecting auditors against management mischief. "You're there to make sure [auditors] report to you" and that only directors can fire them, Mr. Hills says. So, he occasionally spends all day at auditors' offices making sure they consider conservative accounting methods. "Enron is emblematic of a culture in corporate life that needs to be rooted out," he maintains.
---
Christopher Cooper, Peter Wonacott, Matt Pottinger and Jonathan Karp contributed to this article.
---
Journal Link: What should investors know about "impairment" charges appearing on some company balance sheets? Learn more about this and other complex accounting issues in Numbers Game, a new online-only weekly column, in the Online Journal at WSJ.com/JournalLinks.
--- Who's Who on Enron's Audit Committee

Name and Title: Robert K. Jaedicke; Chairman of the audit committee;
Professor emeritus of accounting, Stanford University
Prior or Related Roles: Former dean, Stanford University's Graduate
School of Business
Other Enron Links: He has headed committee since 1985; critics say
such long tenure impedes independence.

Name and Title: Ronnie C. Chan; Chairman of Hang Lung Group, Hong
Kong property conglomerate
Prior or Related Roles: Also a director of Motorola and Standard
Chartered
Other Enron Links: He missed more than 25% of board and committee
meetings in 1996, 1997 and 2000.

Name and Title: John Mendelsohn; President, M.D. Anderson Cancer
Center, University of Texas
Prior or Related Roles: Also a director of ImClone Systems
Other Enron Links: Enron or related entities have donated $1,564,928
to M.D. Anderson since 1985.

Name and Title: Paulo V. Ferraz Pereira; Brazilian investment banker
and executive vice president of Grupo Bozano
Prior or Related Roles: Former head Banco Bozano Simonsen; former
president and CEO State Bank of Rio de Janeiro
Other Enron Links: He won his Enron directorship through a personal
relationship there.

Name and Title: Lord John Wakeham*; Member, U.K. House of Lords and
prominent Conservative politician
Prior or Related Roles: Former leader House of Commons and House of
Lords
Other Enron Links: He has earned $72,000 a year as a consultant for
Enron's European unit since fall 1996.

Name and Title: Wendy Gramm; Director, Regulatory Studies Program,
Mercatus Center, George Mason Univ.
Prior or Related Roles: Former chairman Commodity Futures Trading
Commission
Other Enron Links: Enron has given Mercatus Center $50,000 since 1996.

*Yesterday, he temporarily resigned as head of U.K.'s Press
Complaints Commission due to Enron investigations

Source: WSJ reporting and Enron proxy statements

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

UT dean too close to Enron inquiry
Editorial Board
Austin American-Statesman
Thursday, January 31, 2002
University of Texas Law School Dean William Powers Jr. has been described as a man with an unswerving moral compass.
There is no reason to believe otherwise. But frankly, the dean's moral compass is not the issue in the debate over whether he should lead Enron's internal investigation of what went wrong with the Houston-based energy trader.
Public trust is the issue.
Powers is a member of the Enron board. His law school has close ties to Enron and its money. The dean is probing partnerships that hid the company's losses. As lead investigator, Powers will issue a report on the nature of those transactions.
The goal of the investigation -- to get to the bottom of Enron's financial scandal -- clearly is compromised with Powers at the helm. Powers should step down from that role to ensure that there can be no questioning or doubt about the objectivity of the inquiry. Enron, a publicly traded company, owes its shareholders an investigation. Investors, out-of-work employees and others are entitled to a comprehensive probe that steers clear of conflicts -- even perceived ones.
That is why the Enron board should hire a third party with no ties to the company for the job.
The larger principle at stake in the board's investigation is public confidence. U.S. Attorney General John Ashcroft as well as Texas Attorney General John Cornyn set an example by recusing themselves from investigating Enron, which contributed heavily to both. Ashcroft lost his U.S. Senate seat last year in his native Missouri. Ashcroft and Cornyn wisely understood that the issue was not whether they could conduct fair investigations, but whether the public would trust their investigations given their financial ties to Enron and its former CEO, Ken Lay.
That is the issue at the heart of the debate over Powers. Unfortunately, the Enron board doesn't seem to get it. It downplays ties between Enron and UT, including the close connection between Powers and top Enron executive James Derrick Jr.
Derrick is a major fund-raiser for the UT law school and, until recently, was a member of its Law School Foundation that supplements Powers' UT salary. He resigned after Powers joined the Enron board.
After Enron made the last installment of its $250,000 pledge to the UT law school last year, Powers sent Derrick a handwritten note, "Thank you for all you do for us!"
The Enron-UT-Powers connections go deeper. Houston-based Vinson & Elkins, with offices in Austin, is a generous donor to the law school. Enron is one of the firm's major clients.
We wanted to discuss these issues with Powers. But we were referred to Karen Denne, an Enron public relations representative in Houston.
Denne said the board doesn't see anything wrong with Powers heading the investigation. It appointed him to the board last fall for that very purpose, she said. The company had begun its financial free fall when Powers joined the board in October.
"The board specifically brought Dean Powers on board to head up this special investigation so we would have a comprehensive, independent review and investigation of the partnerships in question."
Denne added that the board concluded, "Powers' credentials and reputation in the legal field outweigh any perceived legal conflict."
It's not the board's view that matters most. It's the public's, and the public is not likely to trust a report produced by someone with Powers' connections to Enron. Then there are the real people who got hurt -- former Enron employees, teachers and others who saw their pensions and life savings evaporate as Enron stock crashed. They are even less likely to trust an inquiry by Powers.
Those are legitimate doubts. They already are clouding Powers' investigation and will surely taint his findings -- however reliable they might otherwise be.
Texas' economy will feel aftershocks from Enron's fall. The public deserves an accounting it can trust from an impartial outsider. Powers should step aside.

Business/Financial Desk; Section C
ENRON'S MANY STRANDS: COLLEGE REACTION
Watchdog Group Wants Investigation on Harvard Official
By NEELA BANERJEE and REED ABELSON

02/01/2002
The New York Times
Page 4, Column 2
c. 2002 New York Times Company

A group of Harvard students and alumni called yesterday for the university to investigate whether a member of its governing body might have given insider information to an investment fund that manages part of Harvard's endowment, permitting it to profit from the fall in Enron's stock price late last year.
The group acknowledged that it had no evidence.
The focus of the group, HarvardWatch, is Herbert S. Winokur Jr., a longtime Enron director who is also a member of the Harvard Corporation, which runs the university.
Mr. Winokur has no direct ties to the fund. Mr. Winokur is chairman of the finance committee on Enron's board.
In a statement issued last night, the university said: ''Mr. Winokur is a valued member of the Harvard Corporation. The university is reviewing the situation for any developments that have a genuine bearing on Harvard.''
HarvardWatch, a relatively new organization, said that Highfields Capital Management, an investment manager with ties to Harvard, profited by acquiring options last year betting that Enron's stock would fall.
The group estimated that the positions would have yielded $50 million to $120 million in profit.
Highfields declined to comment on the assertions. But W. Neil Eggleston, a lawyer who is representing Enron's outside directors, said: ''Mr. Winokur has a long history of personal and financial commitment to Harvard, and he has no plans to walk away from the institution. Mr. Winokur had no involvement with Highfields Capital and any suggestion that he tipped the fund to short sell Enron stock is just plain wrong.''
HarvardWatch wants an inquiry into any contact between Mr. Winokur, a Harvard alumnus, and Highfields.
''We by no means have evidence of insider communications, but we feel the situation certainly warrants investigation,'' said Molly McOwen of HarvardWatch. ''Why did Highfields have the confidence to sell the stock when no one else did?''
Highfields was skeptical about Enron's performance far earlier than most money managers.
Mr. Winokur did not sell any of his own shares in Enron last year, records show.
Mr. Winokur is a director of the Harvard Management Company, which oversees the university's endowment.
HarvardWatch said it was also pursuing potential conflicts concerning other ties with Enron.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Business/Financial Desk; Section C
ENRON'S MANY STRANDS: THE ARMY SECRETARY
Former Executive, Now in Washington, Denies Impropriety at His Unit
By JAMES DAO

02/01/2002
The New York Times
Page 5, Column 1
c. 2002 New York Times Company

WASHINGTON, Jan. 31 -- Thomas E. White, the secretary of the Army, vigorously defended today the business practices of a major Enron division that he helped manage until early last year, rejecting in an interview assertions by former employees that there was improper accounting at the unit.
Mr. White and Enron officials said that the division, Enron Energy Services, was getting out of the business of providing energy services to military bases before Mr. White was named Army secretary last spring. As a result, Mr. White said, he has not needed to disqualify himself from any decisions relating to Enron after he took office in May.
Several former employees of Enron Energy Services have said that while Mr. White was vice chairman of the unit, it overstated its profits by hundreds of millions of dollars, using shoddy accounting practices to create illusory earnings. Those assertions have come under scrutiny by several committees on Capitol Hill investigating Enron's collapse.
Mr. White denied the ex-employees' accusations. ''As far as I am concerned, Enron Energy Services was a great business,'' he said in an interview that ranged widely across military issues and the Enron matter. ''We built it from nothing. There were no accounting irregularities that I was aware of.''
Questions about Enron Energy Services became public last week with news reports of an e-mail message sent last year by a former employee, Margaret Ceconi, to Kenneth L. Lay, Enron's chairman at the time. Ms. Ceconi, a former sales manager, said that Enron Energy Services had hidden losses on contracts worth more than $500 million.
''This is common knowledge among all the E.E.S. employees, and is actually joked about,'' she said in the message, dated Aug. 29, 2001. Since Enron's bankruptcy filing in December, Enron Energy Services has laid off most of its 1,000 employees and walked away from many of its contracts. Those include a $25 million contract to provide services to Fort Hamilton in New York that Enron won when Mr. White, a retired Army brigadier general, was a company executive.
The Army is in negotiations with Enron Energy Services over its default on the Fort Hamilton contract.
Other former employees have said that the division used aggressive projections and accounting to overstate earnings during Mr. White's tenure. The employees said that they did not know whether Mr. White or Lou L. Pai, the unit's chairman at the time, were aware of this.
On Wednesday, the House Energy and Commerce Committee sent a letter to Mr. Lay asking him to explain what Enron did in response to Ms. Ceconi's e-mail message.
Senator Carl Levin, a Michigan Democrat who is chairman of the investigations subcommittee of the Senate Governmental Affairs Committee, also raised questions about Mr. White's financial ties to Enron in a letter to the Office of Government Ethics. Mr. Levin's office said today that he had not received a response from the ethics office.
In the interview today, Mr. White dismissed Ms. Ceconi's claims of improprieties, and he argued that most of her e-mail message was devoted to complaints about how the company had treated her. Her personal complaints seemed valid, he said, though he suggested that the management team that succeeded him was responsible for her problems.
''I think she has a case from what I know about it and what I've read about it that her employment at Enron was not properly handled,'' Mr. White said. ''She was recruited into a specific area of the business, and the new leadership team at Enron Energy Service decided to head the business in a new direction. Unfortunately, she got caught in the middle of it.''
In the e-mail message, Ms. Ceconi said she was recruited to leave her job at GE Capital by Enron Energy Services with promises of a compensation package worth as much $1 million a year. Instead, she was laid off in less than a year as the company began to crumble. Ms. Ceconi did not return calls for comment.
While Mr. White was at Enron Energy Services, the company created a unit called Enron Federal Solutions that aggressively pursued contracts with the Pentagon to provide energy services at military bases. Congress had authorized the privatization of utility services at bases in 1997, and the following year the secretary of defense, William S. Cohen, ordered the armed services to try to privatize electric, natural gas and other utilities at all bases by 2003.
A spokeswoman for Enron Energy Services said that by March 2001, before Mr. White was nominated to be Army secretary, the division had already decided to stop bidding on military contracts. At the time, the company had bid on five contracts to provide services to about a dozen bases, including some Army bases.
When Mr. White took office, he strongly endorsed the Army's energy privatization policy. Some consumer groups, including Public Citizen, have raised questions about possible conflict of interest.
In a letter last week to Representative Henry A. Waxman of California, the ranking Democrat on the House Committee on Government Reform, Mr. White said he had been in contact with 13 different Enron employees, including Mr. Lay, on 29 occasions since taking office. But Mr. White said that all of those contacts had been personal in nature.
Today, Mr. White said that no decisions regarding Enron had come to his office. ''I have taken no action at any point or at any time that would benefit Enron corporations in any way with utilities privatization or any other endeavor,'' he said.
According to government disclosure filings, Mr. White's final salary at Enron was $5.5 million. To comply with ethics rules, he was compelled to sell 405,710 shares of Enron last year at prices ranging from $50 to $12.85 a share, well below the stock's peak. Still, he received $12 million.
''I guess I would say that there is a terrible tragedy that has unfolded there,'' Mr. White said today. ''I have many friends, as well as myself, who have suffered losses.''

Photo: Thomas E. White, the secretary of the Army and a former Enron executive, has defended his conduct at the failed company. (Paul Hosefros/The New York Times)
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Financial
Accountants Won't Fight Consulting Ban
Jackie Spinner
Washington Post Staff Writer

02/01/2002
The Washington Post
FINAL
E01
Copyright 2002, The Washington Post Co. All Rights Reserved

Arthur Andersen, KPMG and the American Institute of Certified Public Accountants said yesterday that they will drop their opposition to a ban on accounting firms providing certain consulting services.
That sharp reversal of the position they took two years ago was viewed by lawmakers as an effort to head off new restrictions that Congress is considering in the wake of the Enron collapse and other corporate accounting blowups.
Meanwhile, PricewaterhouseCoopers announced plans to split off its $6.7 billion management-consulting business into a separate public entity, an attempt to reassure the public of the independence of the firm's audits.
At the same time, one of PricewaterhouseCoopers auditing clients, Walt Disney Co., said it would no longer use PwC for consulting projects because of the debate over auditor independence.
And New York State Comptroller H. Carl McCall also called for a ban on auditors providing consulting services in most cases. McCall oversees the state pension fund, which lost millions on Enron stock.
The federal government gave the accounting industry the valuable franchise of auditing companies that sell shares to the public after the stock market crash of 1929. The auditors are supposed to be independent watchdogs and do their best to make sure investors can trust corporate financial statements.
Over the years, accounting firms have done increasing amounts of consulting work for their clients. Former Securities and Exchange Commission chairman Arthur Levitt Jr. feared that auditors would be reluctant to get tough with clients and risk losing lucrative consulting work.
In 2000, Levitt tried to ban auditors from providing information technology and consulting services, and from conducting internal audits for their clients.
KPMG, Deloitte & Touche, Arthur Andersen and the AICPA opposed that effort, threatening to go to court to block the SEC. Ultimately, they got lawmakers to pressure Levitt to back off.
Now, however, the Enron scandal and other corporate accounting blowups have cost investors billions of dollars and created a new political climate for reform.
Stephen G. Butler, chief executive of KPMG, said he hoped that by lifting its opposition, the industry could steer the regulatory debate away from auditor independence and the services limitations Levitt had wanted, which he called "a red herring" for the profession.
Barry Melancon, the AICPA president who was also a fierce critic of Levitt's efforts, said he believes that limiting the type of services that an audit firm can perform would not have prevented the Enron meltdown. But Melancon said industry representatives recognize that the auditor independence issue is "front and center."
"We need the profession to address it," he said. "If we didn't address these two issues, people would be saying that we are trying to deflect. We are saying we are stepping up to the plate first."
Andersen, which has been criticized for its handling of Enron's audits, also decided yesterday to drop its opposition to the scope-of-services restrictions. "Andersen went voluntarily before Congress in December and made a commitment that it would look at its practices and that it would be making changes," said Andersen spokesman Charlie Leonard. "We are pleased to say the direction the industry is moving toward is something Andersen supports."
Deloitte & Touche, the other major accounting firm that had opposed Levitt's ban, did not follow Andersen and KPMG yesterday. A spokeswoman for Deloitte & Touche said in a statement that the firm would not "accept or reject any single proposal whether we agree with it or not, because the effectiveness of a complete set of reforms is what ultimately needs to be assessed."
PricewaterhouseCoopers and Ernst & Young did not oppose the SEC two years ago and said they would maintain that position.
PricewaterhouseCoopers announced two years ago that it planned to spin off several businesses, including its consulting business. PwC officials said yesterday that they decided to speed up their plans for an initial public offering for PwC Consulting because of the current concerns about auditor independence. PwC's IPO plans were first reported in the Wall Street Journal.
Lawmakers said it's unclear whether these various moves by accounting firms will be sufficient to head off legislative actions. "I'm delighted by their conversion, but too little, too late," said Rep. John D. Dingell (D-Mich.), the ranking Democrat on the House Committee on Energy and Commerce.
"The culture has changed," said Sen. Ron Wyden (D-Ore.). "Congress has got to get the consumer protections into a statute. It doesn't count unless you get it into a federal statute."
In the Senate, Christopher J. Dodd (D-Conn.) and Jon S. Corzine (D-N.J.) have proposed legislation that would prohibit firms from providing audit and consulting services to the same client.
"We've got a serious public confidence issue that needs to be addressed," he said.
Dodd called the industry's action a "positive development." But noting that the accounting industry was not united in this action, he said it "also highlights the need for uniformity in the industry.
Rep. Richard H. Baker (R-La.), chairman of the House Financial Services subcommittee on capital markets, said that Congress would be aggressive about pursuing reforms but that legislation may not be needed to change many things.
"We're dealing with a culture, not just an accounting rule change," Baker said.
Barbara Roper, director of investor protection for the Consumer Federation of America, said the industry has agreed to stop fighting only "the most minimally accepted reform."
"It shouldn't shift the focus away from broader issues of auditor independence," Roper said. "Leaving aside the pension issue, auditor independence is the central focus of Enron. It's the only thing that explains why Andersen would sign off on books they knew were misleading."

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Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

A Section
TV Ad Assails Dole for Enron Fundraiser; In Election Year, Candidates Across Country Could Face Similar Criticism
Thomas B. Edsall
Washington Post Staff Writer

02/01/2002
The Washington Post
FINAL
A07
Copyright 2002, The Washington Post Co. All Rights Reserved

It was, says Elizabeth Dole's Senate campaign, just an afterthought.
In the wake of the Sept. 11 terrorist attacks, the North Carolina Republican suspended campaign activities. But she kept a Sept. 20 speaking engagement to a Christian women's gathering in Houston. Then, in what aides called a "last-minute decision," she agreed to let Kenneth L. Lay, then Enron Corp.'s chairman, host a fundraising lunch for her at a Houston hotel.
It proved a costly decision. North Carolina Democrats today begin airing a TV ad attacking Dole for the Enron event, making her the first prominent politician to be targeted by a well-financed effort for having connections to the bankrupt energy company.
She is unlikely to be the last.
In Colorado, Connecticut, Texas and other states, the Enron scandal has seeped into state and congressional races, forcing Republicans to defend even modest brushes with the company now under widespread investigation. The targets include the president's brother, Gov. Jeb Bush of Florida, where the state pension fund lost $325 million when Enron stock plummeted last fall.
It is unclear whether the criticisms will stick, let alone influence voters nine months from now. Even some Democratic strategists urge caution, noting that many Democrats also have accepted Enron money. But with polls showing high presidential approval ratings -- along with greater voter confidence in Republicans than in Democrats on an array of issues -- some Democrats see the unfolding Enron saga as their best hope for a surge in the November elections.
"Enron has the potential to shape the entire political environment for 2002, impact other issues and reduce confidence in the Bush administration and Republicans," three well-known Democratic advisers wrote in a recent memo to members of Congress. "The more people hear, the more corrosive it becomes," wrote James Carville, Stanley Greenberg and Robert Shrum.
North Carolina may provide the first test. Dole, a former Cabinet member and one-time presidential contender, is strongly favored to win the GOP nomination to succeed retiring Sen. Jesse Helms (R). Democrats haven't settled on a nominee, but they have eagerly criticized Dole for collecting $20,000 at Lay's luncheon.
Dole has given $5,000 of that amount -- which came directly from Lay or his relatives -- to a special fund for displaced Enron employees. But that hasn't stopped a barrage of news stories and critical editorials.
Now comes the Democratic TV ad, to air in three North Carolina cities over 12 days. It says Dole attended "a secret fundraiser" hosted by Lay. It quotes a Winston-Salem Journal editorial that said, "while Dole's campaign was publicly stating it had put its activities on hold, it was conducting fundraisers at the house of a scoundrel."
In a section not cited in the ad, the editorial also said, "The state Democratic Party, which has looked silly trying to find mud to throw at Dole, has uncovered a whole puddle." The Houston fundraiser "shows that Dole is one more politician into whom Lay appears to have sunk his financial claws."
Democrats note Dole's campaign hired Washington-based consultant Edward Gillespie, a key Enron link to Republican House leaders and the White House. Campaign sources said Gillespie's Enron lobbying did not overlap with his work for Dole and he was not involved in the Houston fundraiser.
In Florida, Gov. Jeb Bush is trying to get out in front of his potential Enron problem. The governor, who is seeking reelection this fall, has joined others in calling for an investigation of the state employee pension fund's $325 million loss in Enron stock. Much of the stock was bought after Oct. 22, when the U.S. Securities and Exchange Commission warned it was investigating the company.
Bush is one of three board members who oversee the fund. He joined Florida Attorney General Robert A. "Bob" Butterworth (D) in calling for an inquiry focusing on Alliance Capital Management LP, the New York firm that made the Enron purchases.
Through Alliance, the pension fund paid $9 to $82 a share for Enron stock, which it sold for 28 cents a share on Nov. 30, according to Florida news accounts. While newspapers have noted the governor's role in overseeing the pension fund, Democrats are moving cautiously.
Florida Democratic Chairman Bob Poe said, "Right now, I don't see where [Bush] had control of Alliance Capital. Maybe someone shows me how he should be responsible, but right now, I don't see that."
Poe was more critical of Bush's decision to attend a January fundraiser for the Florida GOP at the Houston home of Richard D. Kinder, who was president of Enron until 1996.
"It's a tremendous lapse of judgment," Poe said. "For the people who lost their life savings and for the participants of the Florida pension fund that lost $300 million, this seems incredibly insensitive."
In Connecticut, the Manchester Journal Inquirer reported that Enron spent $297,150 from 1999 to 2001 for legal and lobbying services. Most of the money went to a firm employing Michael J. Martone, a former top aide to Gov. John G. Rowland (R). Martone lobbied the state to fund a fuel-cell project proposed by Enron and the Connecticut Resource Recovery Association.
In Texas, Enron's collapse has touched scores of politicians. Gov. Rick Perry (R) has declined to return roughly $200,000 in Enron-related contributions. The money includes $25,000 that Lay donated the day after Perry appointed Lay's choice, former Enron official Max Yzaguirre, to the Public Utility Commission. Yzaguirre later resigned.
In Colorado, Democratic Senate challenger Tom Strickland accused Sen. Wayne Allard (R) of contributing to Enron's collapse by opposing prompt enactment of a proposed rule change governing accounting firms.
"Allard asked for the rules to be delayed, which in effect caused the rules to be killed, which killed any chance of preventing the Enron debacle," Strickland campaign manager Brian Hardwick told the Denver Post.
Allard campaign manager Dick Wadhams told the newspaper that the senator sought "a delay so that Congress could spend more time considering the measure. The request was made by senators of both political parties."

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Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Business/Financial Desk; Section C
ENRON'S MANY STRANDS: THE POLITICS
In Commercial, Elizabeth Dole Is Chastised For Enron Ties
By ALISON MITCHELL

02/01/2002
The New York Times
Page 5, Column 6
c. 2002 New York Times Company

WASHINGTON, Jan. 31 -- In their first effort to turn the Enron collapse into an overt campaign issue, Democrats today unveiled a commercial attacking Elizabeth Dole, one of the Republicans' best-known Senate hopefuls, for attending a fund-raiser given by Kenneth L. Lay, the former chairman of Enron.
The 30-second spot, sponsored by the North Carolina Democratic Party with financial assistance from the Washington-based Democratic Senatorial Campaign Committee, takes to task Mrs. Dole, the former presidential candidate who is the prohibitive favorite in the Republican primary for the North Carolina Senate seat being vacated by Jesse Helms. The Democrats have not yet chosen their Senate candidate.
In the advertisement, an announcer intones that Mrs. Dole said she had put her campaign on hold in the wake of the Sept. 11 terrorist attacks but then nine days later flew to ''a secret fund-raiser'' given by Mr. Lay. ''Tell Elizabeth Dole we expect the truth,'' the announcer says.
Mary Brown Brewer, a spokeswoman for Mrs. Dole, called it ''sad that the Democrats have already resorted to personal attack ads.'' Ms. Brewer added, ''It's this kind of bitter partisanship and reckless negativity that voters are tired of.''
The commercial -- unusual at a time when both parties are still holding primary contests in North Carolina -- comes as Democrats have begun trying to use the Enron collapse to portray the Bush administration and Congressional Republicans as tied to wealthy special interests.
Ms. Brewer took issue with the Democrats' advertisement. She said Mrs. Dole flew to Houston in late September to speak to a Christian women's group, then went to the fund-raiser. She said that it was not secret and that Mrs. Dole would give all contributions from Enron, its executives or its employees to a fund for Enron employees. She said that about $5,000 raised at the Houston event came from Enron.
Until now, Democrats had largely used Enron as a metaphor and as a way of raising doubts about Republican policies.
''I think we are slowly Enronizing the economy, Enronizing the budget,'' Senator Tom Daschle, the majority leader, said this month, speaking about the reappearance of federal deficits.
In a Jan. 28 memo to Democrats, three prominent Democratic strategists, Stan Greenberg, James Carville and Bob Shrum, said the Enron collapse ''has the potential to shape the entire political environment for 2002, impact other issues and reduce confidence in the Bush administration and the Republicans.''
They wrote that polls showed that the more people heard about the company, ''the more corrosive it becomes.''
''This is an issue where Democrats ought to talk about right and wrong, greed and responsibility,'' they wrote.
More than a dozen Congressional investigations into Enron are under way. But Democrats have been cautious until now about being too overtly political and have focused on policy. Some party strategists say they do not want to overplay their hand.
This week, after the memo surfaced, Mr. Daschle said, ''The last thing we should do is politicize the scandal.''
But the Democratic Senatorial Campaign Committee is closely tied to Mr. Daschle and is in charge of preserving and increasing the Democrat's fragile majority.
James M. Jordan, the executive director of the Senate Democrat's election committee, argued that the ad ''fundamentally is not about Enron. It's about her campaign's lack of honesty and about politics as usual.''
He said the commercial would run for at least 12 days in major media markets in North Carolina and on cable television in Washington ''so the Doles can watch the ad in their home at the Watergate.''
Mrs. Dole's primary residence is in Washington along with her husband, Bob. Democrats have accused her of being a carpetbagger though she grew up in North Carolina. She recently took title to the North Carolina house where she grew up and her mother still lives.
Three Democrats are also in a primary battle for Mr. Helms's seat: Erskine B. Bowles, a former White House chief of staff; Daniel T. Blue Jr., a state representative; and Elaine F. Marshall, the secretary of state. Republicans in Washington say that if Mr. Bowles wins the primary, they are prepared to use the Clinton administration's own ties to Enron against him.
Enron was a major donor to the Democratic National Committee in the Clinton years. Mr. Lay played golf with Mr. Clinton and stayed overnight in the White House.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Business/Financial Desk; Section C
ENRON'S MANY STRANDS: THE ENERGY TASK FORCE
Enron Won Some and Lost Some in White House Energy Report
By JOSEPH KAHN

02/01/2002
The New York Times
Page 5, Column 1
c. 2002 New York Times Company

Though the General Accounting Office plans to sue the White House to learn how much influence Enron and other energy companies had on the Bush administration's energy policies, one scorecard has been publicly available for months.
In its National Energy Strategy, a 170-page list of recommendations released in May, the Bush administration detailed its views on regulating electricity transmission, using coal and natural gas resources and controlling pollution, all vital to Enron.
The company and its executives were among the largest contributors to President Bush, and company officials including Kenneth L. Lay, the chief executive who resigned last week, had at least five meetings with administration officials to discuss energy. Yet the company's record on shaping the administration approach is mixed.
Energy experts and lobbyists say Enron had reason to celebrate some of the administration's recommendations, especially its efforts to create a nationwide electricity transmission grid. But the energy plan rejected or ignored many other Enron priorities, including the company's hopes of expanding the use of natural gas, controlling emissions of carbon dioxide and stripping states of their control of electricity transmission lines.
''It never looked like an Enron wish list to me,'' said Jonathan Weisgall, Washington representative for MidAmerican Energy Holdings, a utility company that also lobbied to shape the administration's energy policies.
''There were some things they and many other companies wanted that showed up there,'' Mr. Weisgall said. ''On some things Enron wanted the most, they got nothing at all.''
Take electricity transmission. Because Enron specialized in trading supplies of electricity, it pushed for years to create a more open, less-regulated transmission grid that would allow it to buy or sell electricity regardless of where the power was produced.
In interviews last spring with The New York Times and the PBS program ''Frontline,'' Mr. Lay said that removing transmission bottlenecks was critical to the company. ''It's the high-voltage backbone for the electric industries,'' he said. ''It's kind of like a superhighway system for electricity.'' (Fresh excerpts from the interview will be broadcast tonight on the PBS program ''Now With Bill Moyers.'')
An Enron memo drafted before Mr. Lay met Mr. Cheney to discuss energy policy in April expanded on the company's transmission goals. The memo, a copy of which Enron gave The Times last spring, called transmission failures a big reason ''the benefits of competition have yet to be realized and have not yet reached consumers.''
The final energy report reflects some of Enron's positions. The administration said it would urge federal regulators to promote open transmission. It also called for a new, self-regulatory body to oversee transmission grids, as Enron wanted.
Enron also asked the Bush administration to agree to seize private land for construction of more transmission towers. The energy plan endorsed that idea.
But the administration declined to pursue the most aggressive of Enron's recommendations. Enron wanted the states to lose any jurisdiction over transmission and proposed to have federal regulators take full control because they would presumably break up regional monopolies. But the energy plan endorsed no such action.
Representative Henry A. Waxman, the California Democrat whose inquiries prompted the General Accounting Office inquiry last spring, argues that Enron's apparent influence was so sweeping that a thorough investigation was needed into how the administration compiled the energy plan.
Last month, Mr. Waxman identified 17 items in the report that he said benefited Enron. He added that ''numerous policies in the White House energy plan are virtually identical to the positions Enron advocated.''
Yet some energy experts and lobbyists said that most of the items were not specific favors for Enron, but broad policy goals that reflected a consensus of many energy companies, including Enron's competitors. When Enron's policy goals did not enjoy broad support, the company often struck out.
As a natural gas trader, Enron has long promoted the use of natural gas over coal. It has even advocated that the government cap carbon dioxide emissions by power plants as a way of encouraging utilities to switch to cleaner-burning natural gas. Enron also hoped to profit by trading emission rights.
The administration did not deliver for Enron on these counts.
On other issues, Enron's track record was uncertain. During the California energy crisis last year, the administration pleased Enron and other energy traders by taking a strong stand against caps on electricity prices. The administration also selected two candidates backed by Mr. Lay to serve on the Federal Energy Regulatory Commission, which oversees electricity trading.
But after the two Republican commissioners took office, they quickly adopted a plan to impose price controls in California. Some experts argue that this step eased price spikes and denied continued high trading profits to Enron and other companies.
Still, some critics said that even if the substance of the administration's energy policies did not always meet Enron's expectations, they often mirrored longstanding industry goals and neglected the concerns of environmentalists and consumer groups.
''It was the lips of industry to the ear of God,'' said Mark Cooper of the Consumer Federation of America. ''This is an issue about process more than substance.''

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Financial Desk
THE NATION THE FALL OF ENRON Despite Recession, Perks for Top Executives Grow Pay: Hidden benefits mushroom as employees' retirement plans shrink.
LIZ PULLIAM WESTON
TIMES STAFF WRITER

02/01/2002
Los Angeles Times
Home Edition
A-1
Copyright 2002 / The Times Mirror Company

The lavish retirement plans, low-interest loans and other perquisites showered on Enron Corp. managers have put a spotlight on a growing corporate trend--one of ever-richer executive benefits packages whose costs often can be hidden from shareholders.
Compensation experts say companies are increasingly using executives' benefits packages, which already are far more generous than those offered to rank-and-file workers, as a way to quietly beef up total pay for top managers regardless of how their company performs.
Sumptuous paychecks for executives are nothing new. But shareholder activists say weak regulatory requirements, along with a faltering stock market, are leading to unchecked growth in executive retirement plans and other benefits even as lower-ranking workers face losses and cutbacks in their own plans.
"The trend has been [for executives] to be greedier and greedier, even though there's a recession," said Cynthia Richson, director of corporate governance for the State of Wisconsin Investment Board. "All this is designed to keep executives whole while the rank and file loses ground."
As many workers' 401(k) retirement plans shrink, executives at some companies get guaranteed returns on their investments. Other companies pour hundreds of millions into special executive-only retirement accounts. Firms also pay for big insurance policies and offer executives multimillion-dollar loans, complete with below-market interest rates and a company promise to forgive some of the payments.
Unlike salaries, bonuses and stock options--which must be laid out in government filings--the true cost of these benefits is often difficult, if not impossible, for outsiders to determine, said Ken Bertsch, director of corporate governance for TIAA-CREF, the world's largest pension fund manager.
For a variety of accounting and regulatory reasons, companies often are not required to report the price tag for many of their executive benefits to the Securities and Exchange Commission. When benefits are disclosed, their costs can be tucked into footnotes or lumped into a catchall category of "other compensation," said Nell Minow, editor of the Corporate Library, which tracks compensation trends.
The costs of many executive retirement plans are particularly easy to hide, since companies have to reveal few details, compensation experts said.
"The regulatory disclosure rules are so weak, [companies] can get away with one or two ambiguously worded sentences in the middle of a paragraph about the rank-and-file [retirement] plan," Richson said.
These feeble disclosure requirements, combined with poor stock market performance, have spawned a cottage industry in the last year of compensation consultants who are promoting supplemental executive retirement arrangements, benefits experts said. These plans are designed and promoted specifically as a way to enhance compensation that's "off the radar screen of shareholders," Richson and other compensation experts said.
Unlike stock options or bonuses, which are tied to the company's performance, executives benefit from these supplemental retirement plans whether or not the company does well.
Executives can lose these retirement benefits if the company declares bankruptcy, since the plans are not protected by the government-run Pension Benefit Guaranty Corp. But shareholder activists say most executives are at little risk because relatively few companies actually go broke.
Companies say they need to offer ample benefits to attract and retain top-flight managers. In addition, many of the plans designed for rank-and-file workers don't provide enough retirement pay for executives used to living on much higher salaries, compensation consultants said.
Traditional pension plans limit benefits to highly paid executives because the plans can take into account no more than $200,000 of salary when determining benefits. The IRS also requires companies to cap the 401(k) contributions of their highest-paid workers, so many executives are prevented from making the full $11,000 annual contributions the law otherwise allows.
About 60% of the executive retirement plans Mercer surveyed in 1998 made up for the benefits that otherwise would have been lost to IRS rules, said Janet M. Den Uyl, head of executive benefits and compensation for William M. Mercer Inc., a compensation consultant.
The 40% of companies that offer richer plans--either to all their executives or to their top one or two leaders--often are trying to lure talent from other firms or prevent defections, Den Uyl said.
The richest arrangements of all, not surprisingly, are aimed at the companies' top leaders.
"There's more license at the CEO level," Den Uyl said. Most CEOs already have rich compensation packages, "and they're not ready to throw those away" when hired by a new company.
Here are some of the non-salary perks companies have made available to top managers:
* Guaranteed returns on investment. Top executives at Enron could contribute salary and bonuses to so-called deferred compensation accounts with guaranteed minimum annual returns of 12%. Struggling telecom-equipment giant Lucent Technologies Inc. has a similar plan that promises to pay five percentage points more than the 10-year Treasury rate. Currently, that Treasury rate is about 5%, which means Lucent executives in the plan get a 10% return on their investments.
Enron and Lucent are far from alone. About half the companies that offer deferred compensation plans provide a guaranteed minimum return, according to a Mercer study.
* Bigger company matches. The typical company match for a 401(k) defined contribution plan is 50 cents for every dollar the employee contributes, up to 6% of the worker's salary. For a worker who takes full advantage of the company match, the employer's contribution represents 3% of his or her pay, or $1,500 a year for a worker making $50,000.
The company contribution for an executive version of a 401(k) is typically 60% higher. The average company contributes 5%, and nearly half of the companies surveyed contribute even more, the Mercer study found.
The dollar amounts contributed can be substantial. Intel Corp. contributed $1.3 million to the defined contribution accounts of its top five executives in 2000, including nearly $400,000 to the account of Chief Executive Craig R. Barrett, whose salary and bonuses that year totaled $3.4 million. But unlike many other firms, Intel makes such contributions for all of the about 10,000 employees whose ability to contribute to the regular 401(k) is restricted, Intel spokesman Chuck Mulloy said.
* Huge low-cost loans. SEC filings show telecom company Global Crossing Ltd., which filed for bankruptcy protection this week, made an $8-million loan to then-Chief Executive Thomas J. Casey in November 2000 and a $1.8-million loan to President David Walsh in March 2001. Both loans were secured by the executives' homes, but the interest rates they paid--6.01% for Casey, 4.75% for Walsh--were three to four percentage points below prevailing rates on standard home equity loans at the time.
Enron's former chief executive, Kenneth L. Lay, frequently tapped a $7.5-million line of credit he could repay with company stock that Enron had given him or that he had purchased with low-cost company-provided options. His predecessor, Jeffrey K. Skilling, was given a $2-million loan. Enron had offered to forgive the payments if Skilling stayed with the company until Dec. 31, 2001, but he resigned Aug. 14.
* Lavish life insurance. Many workers get some life insurance through their employers--typically $50,000 or one year's pay.
Executives can get much more. About one-quarter of companies in the Mercer study have special executive life insurance programs that typically pay for coverage equal to three to four times the executives' annual pay.
Sometimes the benefit is much higher. In 2000, Cendant Corp., a travel and real estate company, paid $3.7 million in premiums on a $100-million life insurance policy for its chief executive, Henry R. Silverman, 60. Under the arrangement, known as a split-dollar policy, Cendant will recoup its premiums from the life insurance proceeds when Silverman dies, with Silverman's heirs receiving the rest of the money, according to Cendant's latest SEC filing.
* Company-paid taxes. Companies pay a variety of tax bills for certain executives. When benefits are so great that they incur a tax bill from the IRS--as they often do--some executives are given money to pay the tax. Because that cash payment also incurs income tax, companies often add an additional sum to cover the extra tax--a process known as "grossing up."
Lucent Chairman Henry B. Schacht was given $57,325 to pay tax on "certain fringe benefits" in 2000, according to the company's SEC filings. Ray R. Iritani, chief executive of Occidental Petroleum, was reimbursed $486,918 for taxes in 1999--and $95,000 for tax preparation services, SEC filings show.
* Fringe benefits. Other perks, such as the personal use of corporate jets, company-provided chauffeurs and company-paid financial planning, can add tens of thousands of dollars to an executive's total compensation.
The footnotes of Lucent's SEC filings show the company paid $26,351 for personal financial planning advice for Schacht in a year in which he received a $1.1-million paycheck. At Enron, Lay's personal use of a corporate jet in 2000 was worth $334,179.
Shareholder activists note that many of the most lavish arrangements have been uncovered at companies that have since hit hard times--among them Enron, whose compensation philosophy, according to SEC filings, was "to reward executive performance that creates long-term shareholder value."
"At a minimum, it's inconsistent for companies and executives to just keep feasting" when financial performance falters, stock prices drop and other employees face cutbacks, Richson, of the Wisconsin Investment Board, said. "It's bordering on unethical."

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

REVIEW & OUTLOOK (Editorial)
Scribbler's Ethics

02/01/2002
The Wall Street Journal
A18
(Copyright (c) 2002, Dow Jones & Company, Inc.)

With the fall of Enron, public and professional ethics are back in the news, including the mores of journalists and including our own. So maybe it's a good time to rescue ethical behavior from the professional ethicists.
We've come in for criticism lately because one of our contributors, the British conservative writer Roger Scruton, wrote an essay for our European edition while being paid by a Japanese tobacco company. The British Guardian turned up an e-mail in the name of his wife and business partner Sophie to Japan Tobacco proposing an increase in their retainer, in return for placing articles in the "WSJ, the Times, the Telegraph, the Spectator, the Financial Times, the Economist" and so on.
Now, Professor Scruton -- a free-marketeer with well-known views -- was a contributor for us long before he took a dime from Big Tobacco. His point of view is of course precisely why the left-wing Guardian wants to portray him as tainted by filthy lucre. These are the same ethicists who lack the same passion for disclosure when it comes to finding out, for example, whether Ralph Nader is financed by trial lawyers.
Our own view is that the financing of the advocate matters far less than the quality of the advocacy. But our long-time standard is also that such financial ties should be disclosed, so readers can make up their own minds. Mr. Scruton had an obligation to tell us and his readers about his tobacco financing when he was writing about tobacco issues; he didn't, and so he will be taking a holiday from our pages.
Meanwhile, the Internet ethicist, Andrew Sullivan, has been denouncing any journalist who's ever taken a dollar from Enron. This includes our contributor Peggy Noonan, who disclosed last week in her OpinionJournal.com column that she billed Enron $250 an hour for 100 to 200 hours of speech-writing work. In other words, she got paid like any other contract employee, which is called business between consenting adults. The first time she wrote about Enron for us was also when she disclosed her Enron fees, so she has nothing to apologize for.
Certainly not to Mr. Sullivan, who recently wrote a fine piece for this page on the failure of Talk magazine but then without asking re-sold the article to the Times of London, which didn't bother to give us credit. Mr. Sullivan's explanation is that he didn't think we had international publication rights, although The Wall Street Journal Europe is distributed in London. Leaving aside the fine points of copyright law, Mr. Sullivan's behavior may not have been "unethical" but it wasn't very nice.
Which brings us to a larger point this page has often made about conflicts of interest and honesty. Avoiding the first is not the same as the latter; sometimes persnickety rules can become a license for larger dishonesty. So, for example, the U.S. Senate poses as a more honest place because it passes a ban on accepting gifts. But then New Jersey Senator Bob Torricelli is able to evade the ban by claiming that the Italian suits he received from a campaign contributor were from a "friend," a legal loophole.
The same applies to intellectual honesty in journalism. At least Mr. Scruton, whatever his disclosure oversight, took money from people he agrees with. But New York Times columnist Paul Krugman has recently given himself a free ethical pass because he says he disclosed his former Enron ties once he became a columnist.
Mr. Krugman wrote a puff piece on the company for Fortune magazine while he was getting $50,000 as an Enron adviser, but he now denounces politicians and anyone else close to Enron for "crony capitalism." We'll let our readers judge the ethics of that.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Editorial
Enron's Influence

02/01/2002
The Washington Post
FINAL
A24
Copyright 2002, The Washington Post Co. All Rights Reserved

Despite the accurate reporting of The Post about the nature of the phone call I received from Kenneth Lay on Oct. 11 [front page, Jan. 18], Henry Waxman altered the facts in his op-ed column of Jan. 24.
Predictably, his misrepresentation has been repeated on television by his national party chairman. This is how falsehoods enter history.
To repeat information that I volunteered earlier, the two-minute phone call with Mr. Lay was solely about the legislative prospects, not the content, of an economic stimulus bill.
Contrary to Rep. Waxman and Terry McAuliffe, no lobbying occurred. In fact, the provision to make the corporate alternative minimum tax relief retroactive had not even surfaced then, and neither I nor anyone else to my knowledge had even heard of the idea.
MITCHELL E. DANIELS JR.
Director
Office of Management and Budget
Washington

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Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Metropolitan Desk; Section A
FORUM IN NEW YORK: PROTESTERS
Paper Giants As a Voice For Ideas
By ANDREW JACOBS

02/01/2002
The New York Times
Page 19, Column 6
c. 2002 New York Times Company

Looking like an arts and crafts teacher who had been dropped into a Fellini film, David Taylor was struggling to clothe a papier-mache giant and simultaneously direct paint-splattered volunteers when yet another reporter asked the question: Were he and his fellow protesters planning to clash with the police over the next few days? Mr. Taylor, a 24-year-old computer programmer from Oakland, Calif., put down the puppet he was wrestling and tried to stifle his indignation.
''If you want to know what those young crazy radical activists are up to, you've come to the right place,'' he said, glancing around a vast industrial space buzzing with politically minded artisans and packed with their handiwork. ''I'm really getting sick of that question.''
While the police on the streets seemed to be steeling themselves for civic unrest, the atmosphere yesterday morning inside the garage, along the West Side Highway at 57th Street, was anything but martial. The message from Mr. Taylor and two dozen other volunteers was clear: make art, not war.
There was, however, a looming sense of panic as the hours passed and the afternoon debut of this cardboard pageantry neared. There were robber-baron style top hats bearing the words ''WEF: We Are All En-Wrong'' and beachball-sized wine goblets painted like globes that read ''Earth For Sale.'' A blown-up photograph of Kenneth L. Lay, the former chairman and chief executive of Enron, leaned against a pillar, not far from a row of huge pretzels, an apparent reference to the snack food that recently felled President Bush as he watched a football game.
Over the past week, scores of volunteers from across the country have been flocking to the space to glue, paint and stitch together props that will animate the street protests accompanying the World Economic Forum. Two New York organizations, Arts in Action and Time's Up, helped put together the makeshift workshop.
But alongside the levity yesterday afternoon there was an undercurrent of fear. Many of those planning to join the protests said they were worried about the potential for violence at the hands of the police. Others said they were frustrated by journalists' single-minded focus on the potential for Seattle-style disturbances. ''We're not out there to fight with the police,'' said Payal Parekh, 28, an oceanography graduate student from Boston who was helping to organize the puppet making. ''We're trying to get our voices heard but the media is obsessed with security issues.''
Whether or not their fears are real, even those organizing the puppet workshop were not taking any chances. Bill DiPaola of Time's Up tried to find a backup location, just in case something were to go awry. ''You can't be too careful about these things,'' he said.
Still, with the demonstration at the Gap at 54th Street near Fifth Avenue already under way, there were more pressing concerns. Clapping to get the room's attention, someone urged the crowd at the garage to head east and ''help animate the images we created.'' A pickup truck was loaded with props; everyone else took the crosstown bus. Ten minutes later, the truck pulled up to the curb at 54th Street and into the arms of the police. ''I promise there are no rocks or bottles,'' one woman joked to an officer who was visibly suspicious. ''It's just a bunch of goofy puppets.'' After a brief verbal tussle and a few tense moments, the police relented, gave the group five minutes to unload and everyone, it seemed, was happy.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Sarah Palmer
Internal Communications Manager
Enron Public Relations
(713) 853-9843

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