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ENRON'S MANY STRANDS The Report The New York Times, 02/04/2002 ENRON'S MANY STRANDS: ANOTHER INQUIRY Company Hobbled Investigation by Its Law Firm, Report Says The New York Times, 02/04/2002 Internal Probe of Enron Finds Wide-Ranging Abuses --- Unanswered in Board R= eport Are Some Big Questions Regarding Legal Liability The Wall Street Journal, 02/04/2002 ENRON'S MANY STRANDS: NEWS ANALYSIS Talk of Crime Gets Big Push The New York Times, 02/04/2002 THE FALL OF ENRON CFO's Deals Detailed by Enron Probe: Andrew Fastow headed partnerships in w= hich the energy firm's representatives were his own subordinates, panel's r= eport shows. Los Angeles Times, 02/04/2002 How Chewco Brought Down an Empire The Washington Post, 02/04/2002 ENRON'S MANY STRANDS: THE BOOKKEEPING Too Clever by Half: Enron's Doomed 'Triumph of Accounting' The New York Times, 02/04/2002 ENRON'S MANY STRANDS: THE BOARD Shareholder Advocates Press For Actions Against Directors The New York Times, 02/04/2002 ENRON'S MANY STRANDS: LITIGATION Lawyers Say Board Report Has Limited Value for Them The New York Times, 02/04/2002 Internal Probe of Enron Finds Wide-Ranging Abuses --- Former CEO Kenneth La= y Won't Testify This Week At Hearings in Congress The Wall Street Journal, 02/04/2002 ENRON'S MANY STRANDS: THE POLITICS At 11th Hour, Lay Refuses to Testify as Congressional Criticism Grows More = Pointed The New York Times, 02/04/2002 THE FALL OF ENRON Enron's Ex-Chief Won't Testify Hearings: Kenneth L. Lay pulls out of schedu= led appearance before Senate Commerce Committee, evoking harsh reaction fro= m congressional leaders. Los Angeles Times, 02/04/2002 Ex-Chairman of Enron Cancels Hill Testimony; Lawyer Warns Of Accusatory Atm= osphere The Washington Post, 02/04/2002 Lay cancels date with Congress=20 Ex-Enron leader won't testify=20 Houston Chronicle, 02/04/2002 Text of withdrawal letter=20 Houston Chronicle, 02/04/2002 Ex-workers let down as Lay alters his plans=20 Houston Chronicle, 02/04/2002 As Enron Purged Its Ranks, Dissent Was Swept Away The New York Times, 02/04/2002 ENRON'S MANY STRANDS: THE BUZZ World Economic Forum Plays Down the Scandal The New York Times, 02/04/2002 Bentsen heads roundtable session=20 Congressman gathers hearing questions from ex-Enron employees=20 Houston Chronicle, 02/04/2002 Meltdown Is Deja Vu for Some at Enron Energy: Executives who warned about p= ractices had similar experiences at MG Corp. in the 1990s. Los Angeles Times, 02/04/2002 White House Is Expected to Recommend Only a Slight Boost in Funding for SEC The Wall Street Journal, 02/04/2002 Questioning the Books: In Spoof Video, Former CEO Steers Enron To Places No= Firm Has Gone Before The Wall Street Journal, 02/04/2002 O'Neill Wants Stiffer Penalties for CEOs --- Under Proposal, Executives Who= Mislead Holders Couldn't Use Insurance The Wall Street Journal, 02/04/2002 ENRON'S MANY STRANDS: THE AUDITORS FORMER FED CHIEF PICKED TO OVERSEE AUDITOR OF ENRON The New York Times, 02/04/2002 Questioning the Books: Andersen Retains Volcker in Effort to Boost Its Imag= e --- Former Fed Chairman Is Set To Lead Panel to Help Change Audit Practic= es The Wall Street Journal, 02/04/2002 Questioning the Books: Companies Mull Separation of Auditing, Consulting The Wall Street Journal, 02/04/2002 Derivatives Cop Wanted, but Terms Vary The Wall Street Journal, 02/04/2002 Enron's Woes Are Felt by Firms Overseas --- In U.K. and Elsewhere, Accounti= ng Rules Get Newfound Attention The Wall Street Journal, 02/04/2002 Enron's Rise and Fall Gives Some Scholars A Sense of Deja Vu --- Decades Ag= o, a Big Power Trust Likewise Pushed Its Luck -- And Earned a Place in Infa= my The Wall Street Journal, 02/04/2002 BOOM TOWN: Enron's Lessons Can Be Applied To Web Issues The Wall Street Journal, 02/04/2002 ENRON'S MANY STRANDS Hearings This Week The New York Times, 02/04/2002 As If The Enron Story, With a Plot as Thick as Pea Soup It all started with= a deal on carnivals, then snowballed into a carnival of deals. Los Angeles Times, 02/04/2002 _______________________________________________________________ National Desk; Section A ENRON'S MANY STRANDS The Report By DIANA B. HENRIQUES 02/04/2002 The New York Times Page 19, Column 1 c. 2002 New York Times Company The 217-page report of a special investigative committee of the board of th= e Enron Corporation, released late Saturday, provides the first independent= assessment of what went wrong at the company, which filed for bankruptcy i= n early December. Here are the principal findings. DIANA B. HENRIQUES=20 CONFLICTS OF INTEREST -- Senior executives who owed their primary allegianc= e to Enron and its shareholders participated in a number of private partner= ships that did business with Enron. Through the partnerships, these executi= ves, including Andrew S. Fastow, the chief financial officer, and Michael J= . Kopper, who worked with him, were enriched, in the aggregate, by tens of = millions of dollars they should never have received. INADEQUATE DISCLOSURE AND ACCOUNTING ERRORS -- Enron disclosed the existenc= e of one set of partnerships, LJM1 and LJM2, to its shareholders. However, = these disclosures were obtuse, did not communicate the essence of the trans= actions completely or clearly, and failed to convey the substance of what w= as going on between Enron and the partnerships.=20 Certain transactions allowed Enron to manipulate its publicly reported earn= ings, to offset and conceal very large losses and, from September 2000 thro= ugh September 2001, to report profits that were almost $1 billion higher th= an should have been reported.=20 The accounting treatment for some partnerships was clearly wrong, apparentl= y the result of mistakes either in structuring the transactions or in basic= accounting. In other cases, the accounting treatment was likely wrong. As = a result, business entities that should have been included in Enron's finan= cial statements were not disclosed. A set of entities called the Raptor par= tnerships were instrumental in Enron's systematic concealment of its losses= and inflation of its earnings.=20 A FAILURE AT THE TOP -- Procedures that were set up to police the potential= conflicts in the partnerships' dealings with Enron were not rigorous enoug= h and were inadequately monitored by both senior management and the board. = Individually, and collectively, Enron's management failed to carry out its = substantive responsibility for ensuring that the transactions were fair to = Enron -- which in many cases they were not.=20 The captain of the ship, Kenneth L. Lay, functioned almost entirely as a di= rector, and less as a member of management.=20 Jeffrey K. Skilling, although he certainly knew or should have known of the= risks associated with these transactions, he did not monitor them, even af= ter Enron's treasurer, Jeffrey McMahon, told him in March 2000 that he had = serious concerns about Enron's dealings with the LJM partnerships.=20 Richard Causey, Enron's chief accounting officer, presided over a series of= accounting judgments that went well beyond the aggressive and failed to pr= ovide the board with sufficient information about transactions.=20 The board failed to adequately oversee management, especially in its dealin= gs with the problematic partnerships. The board's compensation committee fa= iled to review Mr. Fastow's compensation from the partnerships. Nor did the= board react to warning signs when they occurred.=20 Enron's outside advisers also failed to protect shareholders. The accountin= g firm Arthur Andersen did not fulfill its professional responsibilities in= connection with its audits of Enron's financial statements. Besides making= errors that allowed Enron to conceal business transactions that should hav= e been disclosed, Andersen also failed to alert Enron's audit committee to = the accounting firm's own concerns about the adequacy of Enron's disclosure= of the conflicts involved in these transactions.=20 Vinson & Elkins, Enron's legal counsel, should have brought a stronger, mor= e objective and more critical voice to the disclosure process. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section A ENRON'S MANY STRANDS: ANOTHER INQUIRY Company Hobbled Investigation by Its Law Firm, Report Says By KURT EICHENWALD 02/04/2002 The New York Times Page 19, Column 3 c. 2002 New York Times Company An investigation last year by outside lawyers for Enron into accusations of= improprieties raised in an anonymous employee letter to the chairman was h= ampered by restrictions placed by executives, causing the findings to be ''= largely predetermined,'' according to a report from a committee of Enron's = board.=20 The inquiry into the accusations in the letter, later determined to have be= en written by Sherron S. Watkins, an executive who worked in the company's = finance area, failed to detect many of the problems that subsequently contr= ibuted to the company's collapse, even though the letter described them in = detail. ''Watkins was right about several of the important concerns she raised,'' t= he report stated. ''On certain points, she was right about the problem, but= had the underlying facts wrong. In other areas, particularly her views abo= ut the public perception of the transactions, her predictions were striking= ly accurate. Over all, her letter provided a road map to a number of the tr= oubling issues presented'' by certain partnerships.=20 But the investigation by Enron's lawyers at Vinson & Elkins was inadequate = largely because of restrictions placed by the company on the lawyers' effor= ts from the outset, the report says. The lawyers were told not to review th= e underlying accounting for the partnerships, the very area where Ms. Watki= ns said a problem existed and where the report found its evidence of errors= and potential malfeasance. ''The result of the V.& E. review was largely p= redetermined by the scope and nature of the investigation and the process e= mployed,'' the report says.=20 The investigators wrote that they found the most serious problems ''only af= ter a detailed examination of the relevant transactions and, most important= ly, discussions with our accounting advisers,'' both steps that Enron deter= mined would not be part of Vinson & Elkins's investigation.=20 A representative of Vinson & Elkins, speaking on the condition of anonymity= , said the accusations raised by the letter were strongly examined by the i= nvestigators.=20 ''Sherron Watkins's complaints were taken quite seriously,'' the representa= tive said. 'The exercise of ascertaining the facts was a serious one.''=20 A series of events surrounded the sending of the Watkins letter. Jeffrey K.= Skilling stepped down as chief executive on Aug. 14, after only months in = the job, and was succeeded by his predecessor, Kenneth L. Lay. A week later= , Ms. Watkins sent the anonymous letter to Mr. Lay.=20 Mr. Lay passed the letter to Enron's general counsel, James V. Derrick, who= in turn hired Vinson & Elkins to investigate, even though the law firm had= played a role in some of the transactions challenged by Ms. Watkins.=20 ''Derrick says that he and Lay both recognized that there was a downside to= retaining V.& E. because it had been involved'' in some of the transaction= s under investigation, the report says. ''But they concluded that the inves= tigation should be a preliminary one.''=20 But even in that preliminary investigation, the effort went nowhere, largel= y because the lawyers sought answers almost exclusively from the people at = Enron and its accounting firm, Arthur Andersen, who had been involved in se= tting up the partnership deals.=20 Vinson & Elkins ''spoke only with very senior people at Enron and Andersen,= '' the report says. ''Those people, with few exceptions, had substantial pr= ofessional and personal stakes in the matters under review.'' Photo: Sherron S. Watkins wrote in August to Enron's chairman and said ther= e were improprieties in the company. (James Estrin/The New York Times)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Internal Probe of Enron Finds Wide-Ranging Abuses --- Unanswered in Board R= eport Are Some Big Questions Regarding Legal Liability By Rebecca Smith and John R. Emshwiller Staff Reporters of The Wall Street Journal 02/04/2002 The Wall Street Journal A3 (Copyright © 2002, Dow Jones & Company, Inc.) A highly anticipated report by a special committee of Enron Corp.'s board i= nvestigating the energy trader's collapse portrayed a company riddled with = improper financial transactions and extensive self-dealing by company offic= ials. But the report left unanswered major questions whose resolution could= determine whether the company and its officials will face criminal or civi= l liability.=20 Some of those questions might begin to be addressed this week as Congress h= olds a round of hearings on Enron, once the nation's seventh-largest busine= ss, by revenue, which sought bankruptcy-law protection in early December. K= enneth Lay, Enron's chairman and chief executive for most of the past 15 ye= ars, was slated to testify this morning before the Senate Commerce Committe= e, but yesterday canceled his appearance. Mr. Lay resigned his Enron positi= ons last month. The committee's report essentially focuses on certain off-balance-sheet par= tnerships first disclosed by The Wall Street Journal beginning in October. = Controversial accounting related to the partnerships was the major factor c= ontributing to Enron's collapse. The 211-page report by the three-member sp= ecial board committee and its staff amounts to a scathing indictment of the= way the company did business in recent years. Enron "improperly" implement= ed various transactions "to conceal from the market very large losses" resu= lting from some of its business operations, the report said. Between the th= ird quarter of 2000 and the third quarter of 2001, alone, reported earnings= were "almost $1 billion higher than should have been reported," it added. = The committee said the report was prepared with limitations of time and acc= ess to certain witnesses.=20 Additionally, the report said, several Enron officers and other employees "= were enriched" by tens of millions of dollars that "they never should have = received" as the result of being investors in partnerships that did large b= usiness deals with the company. Among those employees cited by the report w= ere former chief financial officer Andrew Fastow, who allegedly made at lea= st $30 million from heading and partly owning two entities known as the LJM= partnerships; Michael Kopper, a former managing director of an Enron unit,= who supposedly made at least $10 million from the Chewco Investments partn= ership and former treasurer Ben Glisan, whom the committee quoted as acknow= ledging that he received about $1 million within two months of putting $5,8= 00 into one partnership arrangement.=20 A spokesman for Mr. Fastow declined to comment. Neither Mr. Kopper nor Mr. = Glisan could be reached for comment. In the past, both have declined to com= ment.=20 The report also takes a hard shot at Arthur Andersen LLP, noting that in ad= dition to being Enron's external auditor, the Chicago firm was paid $5.7 mi= llion in return for helping design the controversial partnerships that inve= stigators found were fraught with ethical problems from the start. In a sta= tement, the big accounting firm said the report wasn't credible because it = sought to "insulate" Enron officers and directors by "shifting the blame to= others."=20 Enron's main outside law firm, Vinson & Elkins, also comes in for criticism= . Vinson & Elkins "should have brought a stronger, more objective and more = critical voice" to the issue of what Enron needed to disclose publicly abou= t its partnership-related transactions, the report said.=20 A senior Vinson & Elkins partner declined to discuss what advice the firm g= ave to Enron executives, citing attorney-client confidentiality. The lawyer= pointed out that the report notes that Vinson & Elkins, based in Washingto= n, did push Enron to disclose more but the lawyers were overruled by Enron'= s investor-relations department.=20 Still, there's plenty the report doesn't say. It rarely ventures beyond an = examination of the LJM and Chewco partnerships, uncovered by The Wall Stree= t Journal in articles published last fall. Since then, allegations have eme= rged concerning possible fraudulent accounting schemes at several Enron uni= ts including Enron Energy Services and Enron Broadband Services. These aren= 't addressed in the report. The report also didn't answer questions concern= ing who had crucial information about the creation and financing of the Che= wco partnership in 1997. In testimony to Congress in December, Andersen Chi= ef Executive Joseph Berardino said that those 1997 Chewco-related activitie= s involved "possible illegal acts."=20 The provenance of the report also casts a shadow on its handling of issues = concerning the investigating committee itself and its advisers. The chairma= n, William Powers, is dean of the law school at University of Texas, a faci= lity that has ties to Vinson & Elkins. Another member, Herbert "Pug" Winoku= r Jr., was an outside director on Enron's board when many of the transactio= ns now under scrutiny were approved. Raymond Troubh, the final member of th= e committee, has no apparent conflict.=20 As for the advisers, William McLucas, former head enforcement officer for t= he Securities and Exchange Commission, now works for the Washington-based l= aw firm of Wilmer Cutler & Pickering, which is representing Enron in a case= against federal energy regulators that is currently before the U.S. Suprem= e Court. The accounting firm that helped advise the committee, Deloitte & T= ouche, has previously done tax work for Enron, including "certain limited t= ax-related services for Chewco Investments," according to the report.=20 Despite these potential conflicts, the report provides a wealth of detail a= bout specific transactions -- including the nearly two dozen involving the = LJM partnerships created by Mr. Fastow.=20 The theme of the report remains consistent from deal to deal: Officers who = should have been concerned with doing their fiduciary duty to shareholders = instead cooked up Rube Goldberg-like structures to circumvent already weak = accounting rules. Not only did the ventures engage in transactions that vio= lated accounting rules, the report says, but numerous transactions were don= e that "served no apparent business purpose for Enron" and appear ginned up= simply to generate fees for insiders.=20 According to the report, one of the most egregious examples of financial en= gineering concerned LJM partnership subentities known as "Raptor" that were= used to "hedge" or provide offsets to fluctuating values in other Enron in= vestments.=20 Had they been true hedges, says the report, there would have been a true tr= ansfer of risk from Enron to another party, in return for fair compensation= . But that isn't the way Enron did business. Instead, Enron engaged in appa= rently false transactions with related parties, using its own stock, in som= e cases. This provided big bursts of profits for the company while stocks w= ere rising. But it also generated big losses when prices were moving in the= opposite direction. In late 2000 and early 2001, according to the report, = two of the Raptor vehicles had insufficient credit capacity to pay Enron on= its hedges.=20 "As a result, in late March 2001, it appeared Enron would be required to ta= ke a pretax charge against earnings of more than $500 million," the report = says, "to reflect the shortfall in credit capacity" of the Raptor structure= s.=20 Rather than take the lump, Enron chose to "restructure" the Raptor vehicles= by transferring more than $800 million of contracts to the vehicles that e= ntitled the holder to receive still more Enron stock. The report says the t= ransactions don't appear to have been authorized by the board of directors.= =20 This maneuver enabled Enron to put off declaring substantial losses from th= e first quarter of 2001 until the third quarter -- by which point the compa= ny's chief executive had departed. Shortly before Mr. Skilling resigned as = president in August 2001, both he and Mr. Lay told investment analysts that= the company's financial condition had never been stronger.=20 Another troublesome series of transactions detailed in the report concerned= Chewco, a vehicle run by Mr. Kopper, a member of Enron's Global Finance te= am who reported to Mr. Fastow. The committee said it found no evidence that= any waiver from Enron's code of conduct ever was obtained from the board, = prior to Mr. Kopper's involvement.=20 Chewco was created to hold part ownership in another Enron-related investme= nt vehicle. Enron was prohibited from holding this interest directly unless= it wanted to put the related debt back on its balance sheet. But to keep t= he investment "unconsolidated," Chewco had to be separate from Enron, in te= rms of management, and it had to have outside equity equal to at least 3% o= f its total capacity.=20 It failed both tests, the investigators found. The outside equity piece was= provided by two other entities controlled by Mr. Kopper called Little Rive= r Funding LLC and Big River Funding LLC. Mr. Kopper in December 1997 transf= erred his interest in these entities to William Dodson, the report says. Th= e two men, according to the report, are "domestic partners." The nature of = their relationship at the time of the Chewco transactions isn't clear.=20 Mr. Kopper received $2 million in "management and other fees" related to Ch= ewco during a three-year period that ended in December 2000. The committee = said it couldn't identify "what, if anything, Kopper did to justify the pay= ments." All told, Mr. Kopper and Mr. Dodson received more than $12 million = from Enron and Enron-related entities in return for what is believed to hav= e been an initial investment of $125,000.=20 (See related article: "Former CEO Kenneth Lay Won't Testify This Week At He= arings in Congress" -- WSJ Feb. 4, 2002) Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section A ENRON'S MANY STRANDS: NEWS ANALYSIS Talk of Crime Gets Big Push By KURT EICHENWALD 02/04/2002 The New York Times Page 1, Column 5 c. 2002 New York Times Company The report released Saturday evening by a special committee of the Enron Co= rporation's board clearly raises the specter that at the foundation of the = company's downfall was a series of multimillion-dollar crimes, legal expert= s and former prosecutors said yesterday.=20 Until now, much of the investigation into Enron's free fall has been focuse= d on complex transactions that, while suspicious and poorly executed, appea= red to fall within the framework of workaday corporate finance. These inclu= de the now notorious off-balance sheet deals that shifted assets and debt f= rom the company's books and into a byzantine collection of partnerships, ma= ny of them controlled by Enron's former chief financial officer, Andrew S. = Fastow. But with the committee's report, if it proves accurate, investigators into = the company's collapse will seek to pinpoint whether the same kinds of frau= dulent acts that were at the foundation of the savings and loan scandals of= the late 1980's and early 1990's occurred at Enron, too. These include fal= se valuation of assets, bogus deals between related parties, and millions o= f dollars pocketed by participants along the way.=20 ''This report is a road map for the Department of Justice to bring a crimin= al indictment,'' said John J. Fahy, a certified public accountant who was o= nce a federal prosecutor in New Jersey.=20 With its detailed description of seemingly irrational transactions that ser= ved no economic purpose other than to pump up Enron's earnings, the report = has shifted the focus from the company's balance sheet, which lists assets = and liabilities, to its income statement, which describes revenues and prof= its.=20 To those uncomfortable with the internecine workings of finance, that may s= ound like a distinction without a difference.=20 But in truth, the shift allows the federal inquiries trying to unravel the = Enron collapse to move from an area weighed down by dueling professional op= inions to the familiar stomping ground of criminal prosecutions.=20 ''Moving from the balance sheet to the income statement makes the case a lo= t easier for a prosecutor to bring and a lot easier for a prosecutor to exp= lain to a grand jury,'' Mr. Fahy said.=20 To prove any case against Enron, prosecutors would have to establish that p= otential defendants intended to commit a crime. Under the law, a person can= participate in activities that result in false information being given to = investors without committing a crime, so long as he believed -- even falsel= y -- that the activities were appropriate.=20 That is what created difficulties for a criminal case based on Enron's inco= rrect accounting for the partnerships as separate entities. Executives at E= nron could point to approvals from Arthur Andersen, the company's accountin= g firm, as evidence that they intended nothing improper.=20 But with the report's conclusion that certain transactions served no purpos= e other than to manipulate the reported earnings of the company -- and with= certain executives personally receiving millions of dollars in undisclosed= profits from their partnership dealings -- the hurdle of proving intent to= commit a crime has been dramatically lowered.=20 ''It's going to take a herculean salesmanship job to persuade a jury that t= he Enron executives involved in this could not appreciate the fraudulent na= ture of these transactions,'' said Christopher J. Bebel, formerly a federal= prosecutor and a lawyer with the Securities and Exchange Commission who is= now with Shepherd, Smith & Bebel in Houston.=20 ''Their reliance on the advice of experts is starting to go out the window,= '' Mr. Bebel added, ''and the accountants could end up being key witnesses = for the government in some respects.''=20 Members of Congress, who have been investigating the Enron debacle, made it= clear yesterday that what they are seeing now appears to fall within the r= ealm of a criminal conspiracy.=20 ''We're finding what may clearly be securities fraud,'' Representative Bill= y Tauzin, Republican of Louisiana and chairman of the House Energy and Comm= erce Committee, said on NBC's ''Meet the Press.''=20 Most criminal fraud prosecutions must show that participants had some finan= cial motive to participate in an illegal scheme, and in this instance, form= er prosecutors said, there are plenty of examples of such benefits. Enron i= nsiders received millions of dollars in undisclosed compensation from their= dealings with the partnerships; Mr. Fastow alone, whose spokesman has decl= ined comment, received at least $30 million from his partnership dealings.= =20 An array of other insiders received huge sums in a deal offered to them by = Mr. Fastow and another executive, Michael J. Kopper, who declined to be int= erviewed by the committee. Two participants in the deal earned about $1 mil= lion in profits in just two months from an investment of $5,800 each, the r= eport said.=20 ''The magnitude of these returns raise serious questions as to why Fastow a= nd Kopper offered these investments to the other employees,'' the report sa= id.=20 Ultimately, if the report proves correct that profits were improperly manip= ulated, the range of charges that would be under consideration are the stan= dard mix for corporate frauds, according to former federal prosecutors. The= y include, at their base, securities fraud from the filing of false informa= tion regarding corporate profits with the Securities and Exchange Commissio= n. Those, in turn, lead to charges of mail fraud and wire fraud relating to= the transmission of that information, both to the S.E.C. and to the invest= ing public.=20 Despite the dozens of people involved in the transactions, the report descr= ibes an atmosphere of compartmentalized information, where few people under= stood the full scope of anything that was going on.=20 Employees had little understanding of their roles and responsibilities in t= he transactions; in one particularly stunning passage, the report describes= how an executive who negotiated a deal with Enron on behalf of one of the = partnerships believed that, instead, she was acting on behalf of the energy= company.=20 But, for investigators, the most damning information relates to the repeate= d instances in which the company engaged in transactions that served no pur= pose other than to inflate the earnings Enron reported to investors and the= public.=20 Indeed, the portrait painted by the report is one of a corporation where fa= cts were fungible, capable of being massaged and manipulated to create what= ever outcome most benefited the executives involved. It describes, for exam= ple, transactions with backdated documentation, done for the apparent purpo= se of taking advantage of a high price in a stock that was at foundation of= the deal. By the time the deal was actually done, the price of the stock h= ad fallen dramatically, but Enron was able to book millions more in profit = by simply pretending that the transaction had taken place weeks before it d= id.=20 Repeatedly, the report said, there were transactions in which Enron sold an= asset to a partnership near the end of an accounting period, only to buy t= hem back later after profits had been booked. The partnership involved in t= hose transactions never lost money on any deal, the report said, even when = the value of the asset being bought and sold had declined. Indeed, the repo= rt said, there are suggestions that Enron guaranteed the partnerships invol= ved against loss.=20 Ultimately, certain transactions were simply bogus, the report concluded. F= or example, the most complex series of transactions involve a group of four= partnerships known as Raptor I-IV. Purportedly, the transactions were desi= gned to allow Enron to hedge certain investments it made -- transactions in= which the risk of an investment is shared with another party for the purpo= se of minimizing potential losses. But in truth, the report said, the Rapto= r transactions were simply a complex group of partnerships controlled by En= ron, used as a secret dumpsite where troubled Enron businesses -- and the p= oor financials that accompanied them -- could be hidden.=20 Even worse, the report concluded, is the potential that, since Enron was es= sentially on both sides of each deal, the transactions were merely an illus= ion.=20 ''The fundamental flaw in these transactions is not that the price was too = low, the report said. ''Instead, as a matter of economic substance, it is n= ot clear that anything was really being bought or sold.'' Chart: ''Raising Red Flags'' Enron engaged in over 20 transactions from Sep= tember 1999 to July 2001 with LJM partnerships created and managed by Andre= w S. Fastow, Enron's chief financial officer at the time. The board's speci= al investigation committee found several reasons many of these transactions= raised red flags: Enron often sold the partnership assets at the end of ac= counting periods, only to buy them back later; LJM made a profit even when = the asset's value had declined; and true ownership of certain partnership s= takes was sometimes disguised. Chart shows companies sold or bought back by= Enron from 2000 2001. Cuiaba Brazilian power plant Enron sold its stake in= a Brazilian power plant that was under construction to LJM1 for $11.3 mill= ion, allowing it to book $65 million of income related to a gas supply cont= ract in the third and fourth quarters of 1999. Despite serious construction= problems, Enron bought back its stake for $14.4 million in August 2001. En= ron securities Collaterized loan obligations Enron wanted to sell some secu= rities with low credit ratings but was unable to find a buyer, so it sold t= hem to LJM2 and another partnership. A year and a half later, with their va= lue deteriorating, Enron bought the securities back at cost plus interest, = sparing LJM2 a loss. Nowa Sarzyna Polish power plant Enron wanted to sell i= ts interests in a Polish power plant before the end of 1999 to improve its = balance sheet. Enron sold the plant to LJM2 as a temporary solution, hoping= to find another buyer, and recorded a $16 million gain. Three months later= , after the plant malfunctioned during a test, Enron was forced to buy it b= ack under the terms of a credit agreement, giving LJM2 a 25 percent return.= MEGS Natural gas gathering After failing to find a buyer, Enron sold a 90 = percent equity interest in MEGS to LJM2 for about $26 million, giving Enron= an advantage in its year-end accounting. Less than three months later, Enr= on bought the company back, giving LJM2 a 25 percent return. Later, Enron t= ook a write-off because of diminished performance of the gas wells. Yosemit= e Trust Enron sold its share of certificates in a trust, Yosemite, to LJM2.= The date of the sale was recorded in legal documents as Dec. 29,1999, but = the actual sale appeared to occur on Feb. 28, 2000. LJM2 held the certifica= tes for one day before selling them to an affiliate of Enron. LJM2 earned $= 100,000 plus expenses on the deal. Backbone Fiber optic cable Enron Broadba= nd Services, under pressure to meet quarterly numbers, sold its unactivated= dark fiber optic cable to LJM2 on June 30, 2000, recording a $54 million g= ain. Mr. Fastow was hesitant to invest LJM2's money in the deal, so EBS had= to increase the promised return to LJM2 if it was not able to resell the f= iber within two years. The fiber was eventually sold to outside companies. = (Source: Special investigation committee of Enron's board)(pg. A19)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Financial Desk THE FALL OF ENRON CFO's Deals Detailed by Enron Probe: Andrew Fastow headed= partnerships in which the energy firm's representatives were his own subor= dinates, panel's report shows. JEFF LEEDS TIMES STAFF WRITER 02/04/2002 Los Angeles Times Home Edition A-16 Copyright 2002 / The Times Mirror Company HOUSTON -- At least 13 times in the last three years, private partnerships = headed by Enron Corp.'s chief financial officer cut deals with the energy g= iant in which the executives representing Enron were his own subordinates.= =20 These arrangements by ousted CFO Andrew S. Fastow created a jungle of confl= icts of interest in Enron's executive suites and were a key factor in the f= inancial problems leading to the company's Dec. 2 Chapter 11 bankruptcy fil= ing, according to findings of the special Enron panel that examined the par= tnerships. The report, released Saturday, provides a wide-ranging indictment of the co= mpany's management and financial practices. Much of the focus is on Fastow,= however, as it offers the most detailed account yet of the off-the-books p= artnerships he oversaw.=20 "The transactions between Enron and the [Fastow] partnerships resulted in E= nron increasing its reported financial results by more than a billion dolla= rs, and enriching Fastow and his co-investors by tens of millions of dollar= s at Enron's expense," said the report, released this weekend.=20 Enron's internal investigation alleges that Fastow, a former banking execut= ive who became Enron's CFO four years ago at age 36, raided the energy gian= t from the inside, exposing his employer to deepening risk while orchestrat= ing side deals that paid him at least $30 million.=20 "Fastow, as CFO, knew what assets Enron's business units wanted to sell, ho= w badly and how soon they wanted to sell them and whether they had alternat= e buyers," the report said. "He was in a position to exert great pressure a= nd influence, directly or indirectly, on Enron personnel who were negotiati= ng" with the entities in which he had a personal financial stake.=20 Gordon Andrew, a spokesman for Fastow, declined to comment.=20 The 203-page report was written by a three-member panel led by William Powe= rs, the University of Texas Law School dean appointed to the Enron board sp= ecifically to conduct the inquiry.=20 Enron had turned to Fastow in the late 1990s to devise a strategy that woul= d allow the energy giant to keep investing in new businesses while keeping = the company's credit ratings strong.=20 Fastow responded by increasing Enron's use of so-called special-purpose veh= icles--corporate entities that can be used to absorb gains and losses as lo= ng as they are controlled and partially owned by outside investors.=20 Enron had used such financing at least once before, cutting a joint-venture= deal with the California Public Employees' Retirement System. But Fastow a= dded a twist--he proposed that Enron engage in deals with an ostensibly ind= ependent entity run by one of Enron's own executives.=20 The technique worked for a time. By moving assets and liabilities off its b= ooks, Enron was able to inflate its profit and credit rating--fueling its s= wift ascent on Wall Street and pumping up the value of its executives' stoc= k options.=20 But amid increased scrutiny last year, Enron decided that many of the outsi= de entities weren't truly independent. On Oct. 16, it was forced to disclos= e a $1.2-billion drop in shareholder equity, and the resulting decline in i= ts credit ratings led the company to file for bankruptcy protection.=20 Much of the problem arose from three partnerships engineered or partially o= wned by Fastow.=20 Chewco Investments=20 Fastow's first such off-the-books design for Enron was Chewco Investments--= named for the Chewbacca character in the "Star Wars" films. He planned to u= se Chewco, financed with bank loans, to buy out the California pension syst= em's share of a joint venture that Enron wanted to keep off its books.=20 But the venture was hardly independent, the report found: The bank loans us= ed to fund it were guaranteed by Enron, and initially, Fastow planned to ma= nage it himself while continuing as Enron's CFO.=20 Fastow told employees that Enron's then-president and his mentor, Jeffrey K= . Skilling, had approved of his participation in Chewco as long as it didn'= t have to be disclosed in Enron's regulatory filings, the internal probe fo= und.=20 When Enron's in-house lawyers told him his involvement would have to be dis= closed, Fastow substituted one of his lieutenants, Michael Kopper, to run t= he partnership.=20 Although Chewco "apparently required little management" aside from preparin= g unaudited financial statements for internal use, Kopper received about $2= million in fees, the report said. During certain periods of Chewco's exist= ence, these management tasks "appear to have been performed by Fastow's wif= e," the report said.=20 LJM Cayman=20 Chewco was just the start of Fastow's deal making. In June 1999, he formed = a partnership called LJM, with the letters representing the first initials = of the names of his wife and two children.=20 Fastow formed LJM Cayman to shield Enron from possible losses from its $10-= million investment in a start-up Internet service provider called Rhythm Ne= tConnections Inc.=20 As part of the plan, Fastow told Enron's board that he would serve as the g= eneral partner of LJM Cayman and would invest $1 million of his own money. = In return, he would be paid fees including 100% of the proceeds of the sale= of any assets until he had reached a rate of return of 25%. But he said he= would not receive any gains from increases in the price of Enron stock pai= d to LJM Cayman.=20 The board approved the arrangement, waiving Fastow's potential conflict of = interest.=20 In a complex swap, Enron moved the risk from the Internet company to LJM Ca= yman in exchange for more than $170 million in paper increases on Enron sto= ck locked up in a contract with an outside investment bank.=20 Enron in early 2000 decided to sell the Rhythm shares and had to unwind the= deal with LJM. Fastow negotiated the deal with Enron's chief accounting of= ficer, Richard Causey--another potential conflict.=20 An executive who has been interviewed by congressional investigators said C= ausey "was intimidated by Andy and didn't think it was his role" to haggle = with him.=20 Causey could not be reached for comment.=20 According to the calculations of the board investigators, the final deal re= sulted in Enron giving up options and cash worth $70 million more than the = restricted shares it received.=20 The transaction also exposed another potential conflict. In March 2000, Fas= tow had allowed a handful of Enron executives to participate in LJM Cayman.= These executives--who included Fastow and Kopper--signed an agreement to f= orm an entity called Southampton Place, which acquired a stake in LJM Cayma= n.=20 The deal enabled a Fastow family foundation to receive $4.5 million about t= wo months after Fastow made an initial investment of $25,000. Two other emp= loyees who each invested about $5,800 received about $1 million each in the= same period.=20 The special committee found that Fastow's financial stake was inconsistent = with his representation to Enron's board that he wouldn't receive any value= from Enron stock involved in the LJM Cayman transaction.=20 The panel also found that at least two of the executives who received windf= alls from LJM Cayman were representing Enron at the time in transactions wi= th another Fastow-created entity.=20 LJM2 Co-Investment=20 In October 1999, Fastow engineered the creation of another, far larger enti= ty called LJM2 Co-Investment. Again, he would serve as the entity's general= partner while maintaining his post as Enron's chief financial officer. The= plan was to raise money from outside investors and purchase assets from En= ron and enable the energy giant to remove debt from its books.=20 To raise funds, LJM2 sent an offering memorandum to potential investors. In= an usual move, the document emphasized Fastow's position as Enron CFO, not= ing that LJM2 would have access to "investment opportunities that would not= be available otherwise to outside investors." Critics say it is improper f= or Fastow to dangle the possibility of using inside information for investo= rs' benefit.=20 The report said the deals often took place under terms that were "remarkabl= y favorable" to LJM2 while serving no apparent business purpose for Enron. = For example, in one of the deals, Enron agreed that an LJM2 affiliate would= n't have to start absorbing Enron losses until the Fastow-controlled LJM2 r= eceived an initial return of $41 million, or 30%, on its initial $30-millio= n investment.=20 The report concluded that the troubles created by Fastow's partnerships wou= ld have come to light far sooner if the board itself had exercised closer o= versight. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 A Section How Chewco Brought Down an Empire Peter Behr Washington Post Staff Writer 02/04/2002 The Washington Post FINAL A01 Copyright 2002, The Washington Post Co. All Rights Reserved With its "Star Wars" name, its elusive origin and its central role in the i= mplosion of Enron Corp., the investment partnership named Chewco has been o= ne of the mysteries of the unfolding scandal.=20 Now it stands exposed in 27 detailed pages of a special investigative repor= t. In the Chewco story are examples of huge profits improperly claimed by Enro= n and individual enrichment by Enron insiders. In three years, a $125,000 i= nvestment by a second-level financial executive and his domestic partner ba= llooned into a $10.5 million payoff, plus other lucrative fees.=20 On paper Chewco appeared independent; control was shared by Enron and outsi= de investors in an arrangement that would permit Enron to keep some of its = energy projects and debts off its books. Enron executives created Chewco in= 1997 as part of a complex investment in another Enron partnership that own= ed stakes in natural gas projects.=20 But personal motives dominated Chewco's history, according to the report by= a special investigating committee of Enron's board of directors.=20 First, then-chief financial officer Andrew S. Fastow proposed that he be al= lowed to manage Chewco, the report said. Jeffrey Skilling, then Enron's pre= sident, told the committee that Fastow also wanted to have members of his w= ife's family as Chewco's investors, but Skilling said he told Fastow no.=20 Because of his senior executive position, Fastow could not run Chewco witho= ut publicly disclosing his role, which Skilling did not want, the investiga= tors said. So Fastow turned Chewco over to a friend, Michael J. Kopper, the= n-managing director of Enron Global Finance, whom Fastow supervised. Kopper= 's role did not have to be disclosed because of his lower rank.=20 To remove any public appearance that Kopper might be seen as controlling Ch= ewco, several more pieces were tacked on. An entity, Big River Funding, bec= ame Chewco's limited partner. Little River Funding was set up as the owner = of Big River.=20 In December 1997, as Chewco was being created, Kopper transferred his owner= ship in both Big River and Little River to his domestic partner, William D.= Dodson, an employee of an airline. That left Kopper with no formal ownersh= ip interest in Chewco.=20 Kopper invested $115,000, and Dodson invested $10,000. Before Enron bought = out their interests in March 2001, Fastow stepped in and pressured Enron to= pay more. Kopper and Dodson ultimately shared a $10.5 million windfall fro= m their $125,000 investment, according to the committee and former Enron em= ployees.=20 Kopper, in addition to collecting his regular Enron salary, was paid about = $2 million in questionable management fees relating to Chewco from 1997 to = 2000, the report said. According to the committee, Chewco required little m= anagement -- mainly clerical work involving transferring funds. Much of tha= t was done by another Enron employee on company time and occasionally by Fa= stow's wife, although the report said it wasn't known if she was paid.=20 Kopper and Dodson have an unlisted phone number and could not be reached ye= sterday.=20 The outlines of Chewco's role in Enron's collapse emerged recently in newsp= aper reports and in investigations by lawyers representing shareholders. En= ron, the report said, violated accounting standards when it created Chewco,= enabling the company to claim $405 million of profits from 1997 through 20= 00 that it was not entitled to have, while also concealing more than $600 m= illion in debt. Enron executives broke the rules a second time, the report = said, using Chewco to report a profit on the increased value of Enron commo= n stock held by a related partnership, Jedi.=20 When Enron owned up to its accounting violations concerning Chewco and yet = another partnership, LJM, last November, the disclosures stunned investors = and pushed Enron toward a death spiral that ended with its Dec. 2 bankruptc= y court filing.=20 Chewco was an early example of the Byzantine investment structures that wer= e Fastow's specialty. Its roots go back to 1993, when Enron formed the Jedi= partnership with the giant California Public Employees' Retirement System = (Calpers) to invest in natural gas projects. By 1997, company executives we= re eager to expand Jedi, but Calpers was reluctant.=20 So Fastow and Kopper decided to buy out Calpers's share, which was then wor= th $383 million, and replaced it with their new creation, Chewco Investment= s LP.=20 Jedi was operating off Enron's books. To keep it there, Chewco, as Jedi's n= ew half-owner, would have to meet certain accounting standards. It would ha= ve to be independent of Enron's control, and its owners had to put in a sma= ll but specific amount of real money.=20 That investment requirement came to 3 percent of Chewco's capital, or about= $11 million. Kopper was a successful executive, former associates say, but= he didn't have $11 million. The solution was to borrow most of the money f= rom a willing lender -- in this case, Barclays Bank PLC.=20 The remaining 97 percent included a loan from Jedi and another from Barclay= s. In another questionable part of the transaction, Enron guaranteed the Ba= rclays' loans.=20 But the creation of Chewco was hurriedly done, and there was a fateful slip= .=20 At the last minute, key details of the transaction changed, primarily becau= se Barclays wanted more collateral for its loans. Accordingly, the size of = Barclays' loan to Kopper and Dodson was trimmed by $6.6 million, making the= ir investment less than 3 percent. If Fastow or Kopper had found another in= vestor to make up the difference, Chewco would have met the standard. That = was not done.=20 From its beginning then, Chewco -- and thus Jedi -- didn't meet accounting = requirements, so Enron should not have kept Jedi's debt off its books or ha= ve segregated Jedi's profits and losses from Enron's results, the committee= said. Belatedly, the company corrected the error last November, with the d= evastating revision of its revenue and profits.=20 "We do not know whether this mistake resulted from bad judgment or careless= ness" by Enron employees or their auditor, Arthur Andersen, "or whether it = was caused by Kopper or other Enron employees putting their own interests a= head of their obligations to Enron," the committee said. It noted: "the con= sequences were enormous." http://www.washingtonpost.com=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section A ENRON'S MANY STRANDS: THE BOOKKEEPING Too Clever by Half: Enron's Doomed 'Triumph of Accounting' By FLOYD NORRIS 02/04/2002 The New York Times Page 18, Column 1 c. 2002 New York Times Company The original raptors were fierce creatures that hunted in packs and managed= to bring down larger dinosaurs, which they then devoured.=20 Now the special report of the Enron board committee has clarified just how = four entities known as Raptors played an essential role in destroying Enron= . It is a tale of how accounting rules can be abused and insiders enriched. The report traces the delicate machinery that was used by Enron's accountan= ts. There appears to have been, at least for a time, a tortured interpretat= ion of accounting rules that could be used to justify the hiding of $1 bill= ion in losses.=20 But that smokescreen would have been completely unsuccessful had auditors f= rom Arthur Andersen forced the company to disclose what was happening, as t= hey should have done. Those disclosures would have made it clear that there= was no economic rationale for the transactions, and thus no reason to thin= k that Enron had earned nearly as much money as it said it did.=20 Over 15 months, from the beginning of the third quarter of 2000 through the= third quarter of 2001, Enron reported pretax profits of $1.5 billion. Had = Enron not used the Raptor artifices, the figure would have been 72 percent = lower: $429 million.=20 The accounting rationale was that the risks of some truly bad investments h= ad been transferred from Enron to the Raptors, which were created in conjun= ction with partnerships run by Andrew S. Fastow, then Enron's chief financi= al officer.=20 In fact, as the report makes clear, there was no real transfer of risk, and= Enron eventually had to shoulder the losses. But there was a large transfe= r of wealth to the Fastow partnerships, which were guaranteed huge profits = while taking no risks. Those transactions helped provide $30 million for Mr= . Fastow and millions for other Enron insiders.=20 When it became clear that the Raptor enterprises were failing, Enron desper= ately restructured them, first at the end of 2000 and again three months la= ter. Those reorganizations, which the committee denounces in the strongest = terms, allowed the truth about Enron to stay largely hidden for many months= -- a period when top Enron officials sold large quantities of stock.=20 ''The creation, and especially the subsequent restructuring, of the Raptors= was perceived by many within Enron as a triumph of accounting ingenuity by= a group of innovative accountants,'' the committee report stated. ''We bel= ieve that perception was mistaken. Especially after the restructuring, the = Raptors were little more than a highly complex accounting construct that wa= s destined to collapse.''=20 When it did collapse last fall, Enron was forced to take a large loss, whic= h it painted as extraordinary. It was also forced to take a $1.2 billion re= duction in shareholder equity -- the amount a company's balance sheet shows= the company is worth. As questions about that intensified, Enron's collaps= e began. The Raptors lived up to their name, bringing down a giant.=20 As with any disaster, there seem to be differing recollections. Jeffrey K. = Skilling, Enron's president and chief executive during the March 2001 scram= ble to avoid having to report a half-billion dollars in losses, told the co= mmittee that he had known little of what happened.=20 Other Enron employees, not named by the committee, recalled that Mr. Skilli= ng had taken an intense interest, saying that fixing the Raptors was of the= highest priority and then calling an accountant to congratulate him after = the problem was finessed.=20 There also seems to have been a bit of historical revisionism at Arthur And= ersen, the auditing firm that repeatedly signed off on accounting that the = committee characterized as dubious or clearly incorrect.=20 In a Dec. 28, 2000, memorandum, Andersen partners in Houston reported that = they had consulted with officials at the accounting firm's Chicago headquar= ters before approving a temporary Raptor restructuring that kept Enron from= having to report a loss that year.=20 But on Oct. 12, 2001, days before Enron reported the big loss related to Ra= ptor -- the loss that led to the company's collapse -- an amended version o= f the December memorandum was put in the files. In that version, the Chicag= o partners advised that Enron's accounting in December had been wrong.=20 What happened? Patrick Dorton, an Andersen spokesman, explained that there = had been no need for the original memorandum to mention that the Chicago ex= perts thought the accounting was wrong. That was because the Houston partne= rs believed that the issue in question was not critical to the accounting.= =20 The accounting fiction of the Raptor enterprises stemmed from having the pa= rtnerships agree to assume the losses if some Enron investments lost value,= as they did. The Raptors could stand the losses only because they had prof= its on investments in Enron stock, which was transferred by the company to = them at a discount.=20 It was an accounting hall of mirrors, and those involved knew it. Enron's c= orporate secretary, taking notes at a board committee meeting where a Rapto= r transaction was explained, wrote, ''Does not transfer economic risk, but = transfers P&L volatility,'' referring to the profit and loss statement. In = other words, there was no purpose for the deals save to hide the losses. If= any directors were bothered by this sleight of hand, they do not appear to= have spoken up.=20 If the Raptor accounting was correct, the committee concluded, then ''a com= pany with access to its outstanding stock could place itself on an ascendin= g spiral: an increasing stock price would enable it to keep losses on its i= nvestments from public view; which, in turn, would spur further increases i= n its stock price; which, in turn, would increase its capacity to keep loss= es from its investments from public view.''=20 Arthur Andersen says its auditors acted properly, and it says the board rep= ort ''overlooks the fundamental problem: that poor business decisions on th= e part of Enron executives and its board ultimately brought the company dow= n.''=20 In fact, the board committee's report makes clear that bad investments play= ed an important role in Enron's demise. But it also provides evidence that = if Andersen had done its job well, investors would have known the reality o= f those bad investments long before they did. Chart: ''Raptors, a Step-by-Step Guide'' Through complex derivatives tranac= tions, enterprises called Raptors were used by Enron to hedge the risk that= stock investments it held might decline. Here are how the Raptors worked, = according to a recent report by an investigative committee of Enron's board= . RAPTOR LJM2 1 Creating a Raptor Partnership Each Raptor needed capital to= operate. Enron provided its stock to the Raptor in exchange for a promisso= ry note. LJM2, a partnership run by senior Enron executives and financed by= outside investors, invested $30 million in the Raptor. In return, LJM2 was= promised at least a 30 percent return. 2 Recouping LJM2's Investment The R= aptor could not operate until LJM2 had recouped its investment and made a p= rofit. Enron paid the Raptor $41 milion for a contract that allowed Enron t= o sell the Raptor a certain amount of its stock at a fixed price sometime i= n the future. The Raptor gave the $41 million to LJM2, thereby repaying LJM= 2's investment and giving it a profit of $11 million -- enough to satisfy i= ts investors. 3 Putting the Raptor to Work With LJM2 paid off, Enron made a= contract with the Raptor in which the Raptor agreed to cover any losses fr= om certain Enron investments if those investments declined in value. In ret= urn, the Raptor was promised any gains if the investments appreciated in va= lue. The Problem -- The agreement between Enron and the Raptor protected En= ron from a decline in the value of its investments only if the Raptor was a= ble to cover those losses. That was possible only if the Raptor's principal= asset -- Enron's stock -- rose in value. If the stock fell, it would be un= able to meet its obligations and Enron would be stuck with the losses.=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section A ENRON'S MANY STRANDS: THE BOARD Shareholder Advocates Press For Actions Against Directors By REED ABELSON 02/04/2002 The New York Times Page 20, Column 1 c. 2002 New York Times Company Shareholder activists said yesterday that they would use the sharply critic= al report by a special committee of Enron's board to take a much closer loo= k at the board's own responsibility for the company's collapse.=20 ''Nothing could be more conclusive on the substantial unfitness of the Enro= n board,'' said William Patterson, the director of the office of investment= for the A.F.L.-C.I.O. His federation plans to ask the Securities and Excha= nge Commission today to start an investigation into whether the Enron direc= tors should be barred from serving on boards of other public companies. The= federation is urging companies to remove any Enron director from their own= boards. The directors have maintained, through one of their lawyers, that they were= misled by some Enron executives and were never told about critical transac= tions. They also say they relied on the guidance of outside accountants and= lawyers.=20 The report portrays a board, despite the prominence and financial sophistic= ation of some members, as all too willing to go along with the numerous man= euvers that kept investors in the dark about Enron's true financial health.= Instead of asking pointed questions, the report indicated, the directors a= ppeared to rely too heavily on assurances from Enron executives and outside= advisers. The report found that the board never probed deeply enough to un= derstand what was going on and stop the financial abuses and self-dealing t= hat the report said took place.=20 The board, the report said, ''failed, in our judgment, in its oversight dut= ies.'' If the board had ''been more aggressive and vigilant,'' it continued= , the abuses that allowed Enron to inflate profits by at least $1 billion m= ight never have happened.=20 The report, however, does not distinguish among members of the board or hol= d individual directors accountable for specific actions, Mr. Patterson said= . It offers little insight into why the board was not more skeptical and do= es not examine some of the potential threats to their independence that mig= ht have contributed to their laxity, he said.=20 The directors have been sharply criticized by advocates for shareholders an= d by others for their lack of independence and their coziness with manageme= nt. One director, Lord Wakeham, a former British cabinet member, for exampl= e, was also paid by Enron as a consultant, while another, Herbert S. Winoku= r Jr., an investment manager, was involved with a company that did business= with Enron. Others, including Wendy L. Gramm, a former federal regulator a= nd wife of Senator Phil Gramm, Republican of Texas, work for organizations = that received charitable contributions from Enron.=20 The committee that prepared the report was made up of three directors: Mr. = Winokur, William C. Powers Jr. and Raymond S. Troubh. Mr. Powers, who leads= the committee, and Mr. Troubh joined Enron after the company's collapse an= d were responsible for evaluating the board's own behavior.=20 Whatever the reasons for the directors' behavior, they are sharply criticiz= ed by Mr. Powers and Mr. Troubh for their lack of oversight even when there= were clear indications of significant potential problems at Enron.=20 In particular, the report said, the board was aware of the potential confli= cts involving the creation of partnerships with Enron's chief financial off= icer, Andrew S. Fastow. But the directors apparently never bothered to find= out how much Mr. Fastow might have personally benefited, and they made onl= y a cursory review of transactions between the partnerships and the company= . Even when they should have known some of the transactions were devised pr= imarily to improve Enron's financial results, the report said, they did not= probe deeply enough to find the basic problems with the deals.=20 ''You can't accept stuff like that at face value when it deviates so much f= rom business norms,'' said Robert E. Mittelstaedt Jr., a business professor= at the Wharton School of the University of Pennsylvania. Enron's audit com= mittee ''has a responsibility for risk management in the broadest sense,'' = he said.=20 In particular, Mr. Mittelstaedt faults the board for choosing to suspend En= ron's own code of ethics to create the partnerships.=20 Because the board commissioned the report, it has already been criticized b= y some, including Arthur Andersen, Enron's former accounting firm, as being= self-serving.=20 The report specifically says there is no evidence to suggest that the direc= tors, unlike some Enron executives, had a financial interest in any of part= nerships.=20 But the report does not address other concerns involving the board, like th= e significant sales of stock by some directors, including Norman P. Blake J= r., chief executive of Comdisco.=20 To Enron's critics, the board's real offense may have been its willingness = to listen to the company management when there were indications that they s= hould have taken a closer look. Many of the directors, including Robert K. = Jaedicke, who headed the audit committee, and Mr. Winokur, who headed the f= inance committee, had served on the Enron board since the company was creat= ed in 1985 through a merger.=20 ''The board was asleep,'' said one person close to the board. ''It was mesm= erized by the price of the stock and the apparent success of the company.'' Photo: Some Enron directors have been criticized as lacking in independence= . Lord Wakeham, a director, was also paid as a consultant. (Reuters)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Ri
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