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Enron Accountants May Be Placed On Leave by Board The Wall Street Journal, 02/05/2002 Former Enron Chairman Lay's Whereabouts Unknown Bloomberg, 02/05/2002 Lawmakers Will Subpoena Kenneth Lay --- Ex-Chief of Enron Resigns From Comp= any's Board, Citing Various Inquiries The Wall Street Journal, 02/05/2002 Lay stands down from Enron board after scathing report. Financial Times, 02/05/2002 SENATE PANEL SAYS IT WILL SUBPOENA EX-CHIEF OF ENRON The New York Times, 02/05/2002 Lay Leaves Enron Board; Founder Severs Last Ties to Firm The Washington Post, 02/05/2002 Lay steps down from Enron's board of directors=20 Irate lawmakers working on subpoenas=20 Houston Chronicle, 02/05/2002 Deal at Enron Gave Insiders Fast Fortunes The New York Times, 02/05/2002 Legal Liability for Enron Debacle May Be Determined by 1997 Memo The Wall Street Journal, 02/05/2002 Enron Report Could Bolster Criminal Case Probe: Panel's allegations of fina= ncial subterfuge increase likelihood of indictment, legal experts say. Los Angeles Times, 02/05/2002 Varied Roles Cause Some Conflicts, Brokers Say The New York Times, 02/05/2002 Lawsuits may widen to hit partnerships SPECIAL-PURPOSE VEHICLES. Financial Times, 02/05/2002 Enron workers' benefits reportedly raided=20 $15 million allegedly spent elsewhere=20 Houston Chronicle, 02/05/2002 Enron Witness Points to Lay; Lawmakers Told of 'Fundamental Default of Lead= ership' The Washington Post, 02/05/2002 Little-Known Academic Pushed Onto Enron Stage The Washington Post, 02/05/2002 Bidders Emerge for Enron's British Water Utility --- Sale of Wessex Water C= ould Bring $1.4 Billion To Failed Energy Firm The Wall Street Journal, 02/05/2002 Enron Direct pay-outs decided. Financial Times, 02/05/2002 Ernst & Young Latest Auditor Moving to Alter Some Practices The New York Times, 02/05/2002 Dynegy charges Enron has only itself to blame=20 Houston Chronicle, 02/05/2002 'He should have been here'=20 Ex-staffers irked after trip to D.C.=20 Houston Chronicle, 02/05/2002 Saving Your Career After Earning a Name As a Whistle-Blower The Wall Street Journal, 02/05/2002 Sex and The Scandal The Washington Post, 02/05/2002 The Blue Bayou City; Two Months After 'Black Monday,' Houston Still Is Pick= ing Up The Enron Pieces The Washington Post, 02/05/2002 A Debacle Chronicled in Kitsch The New York Times, 02/05/2002 Decoding Enron The New York Times, 02/05/2002 Enron's Culture of Corruption The Washington Post, 02/05/2002 QUOTATION OF THE DAY The New York Times, 02/05/2002 _____________________________________________________________________ Enron Accountants May Be Placed On Leave by Board By Rebecca Smith Staff Reporter of The Wall Street Journal 02/05/2002 The Wall Street Journal A6 (Copyright © 2002, Dow Jones & Company, Inc.) Enron Corp.'s board is expected to put the company's two top accounting off= icers on administrative leave this week in reaction to an internal report t= hat says neither did his job adequately, sources close to the matter say.= =20 The men, Chief Accounting Officer Richard A. Causey and Chief Risk Officer = Richard B. Buy, reviewed Enron's creation of several outside partnerships r= un by Enron officers and, records indicate, judged them beneficial to Enron= . They also reviewed subsequent transactions with those entities. Recent di= sclosures that these partnerships greatly enriched a handful of Enron emplo= yees at Enron's expense contributed to the Houston energy concern's collaps= e into bankruptcy proceedings in December. Neither man nor an attorney representing them responded to requests to comm= ent yesterday.=20 To date, there is no evidence that Messrs. Causey or Buy invested in any of= the Enron-related partnerships or personally reaped any financial windfall= from them. The men were scheduled to testify Thursday before one of severa= l congressional committees investigating Enron's downfall.=20 Before joining Enron in early 1991, Mr. Causey was an accountant for Arthur= Andersen in Houston and had "primary responsibility for the Enron engageme= nt," according to his company biography. Mr. Buy, before joining Enron in 1= 994, was a vice president at Bankers Trust, assigned to energy lending and = trading in Houston and New York.=20 In his current role at Enron, Mr. Causey was supposed to make sure that Enr= on's accounting practices adhered to industry standards and that its Securi= ties and Exchange Commission disclosures were full and complete. Mr. Buy, a= s chief risk officer, has had primary responsibility for "quantifying and c= ontrolling risks in both Enron's trading activities and investment opportun= ities," according to his company biography.=20 Instead, Mr. Causey has "presided over" accounting decisions that go "well = beyond aggressive," according to the Enron internal report prepared by a sp= ecial, three-person committee of the board. Mr. Buy, according to that same= report, "saw his role more narrowly" than appropriate and "did not affirma= tively carry out . . . a careful review of the economic terms" of transacti= ons between Enron and the related-party entities.=20 Board minutes reviewed by The Wall Street Journal show that Messrs. Causey = and Buy frequently told the board that there were adequate controls in plac= e to protect the company's interests as it transacted business with the off= icer-controlled partnerships, including ones run by Enron's former chief fi= nancial officer, Andrew Fastow.=20 For example, in a meeting of the board's finance committee on Oct. 6, 2000,= Mr. Causey joined then-chief executive Jeffrey Skilling in discussing the = "benefits to the company" of being able to transact business with the LJM p= artnerships set up by Mr. Fastow, according to minutes of that meeting. Pre= viously, Mr. Fastow had told the board that all transactions with the vehic= les he ran would be reviewed by Messrs. Causey, Buy and Skilling in order "= to mitigate any potential conflicts."=20 J.C. Nickens, an attorney representing both men, couldn't be reached to com= ment yesterday. But in an interview last week, he said his clients are blam= eless. Referring to Mr. Causey, Mr. Nickens said that "my client would say = the accounting for these partnerships was appropriate . . . that the deals = were structured and accounted for with professional advice of people on his= staff and Arthur Andersen," which was Enron's auditing firm.=20 All told, the Fastow-related partnerships engaged in more than two dozen tr= ansactions with Enron that left the company, in many cases, holding the bag= . The Enron special committee, in its report, which was released during the= weekend, said that in some cases Enron settled some of its partnership ven= tures for far less money than what the committee felt was fair value. This = suggests that the interests of the officer-controlled partnerships may have= been put ahead of those of Enron. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Former Enron Chairman Lay's Whereabouts Unknown 2002-02-05 08:32 (New York) Washington, Feb. 5 (Bloomberg) -- Kenneth Lay, former chairman of Enro= n Corp., won't appear at a House hearing this morning after his attorney re= fused to accept a subpoena compelling him to appear, CNN said. Lay's attorney, Earl Silbert, said there wasn't enough time because La= y had returned to Houston and Silbert didn't know where to find him, CNN sa= id. This morning the Senate Commerce Committee plans to vote to issue a su= bpoena for Lay to testify on Feb. 12. House and Senate committee members ha= ve said they hope Lay won't take the Fifth Amendment and refuse to testify = on the grounds it may incriminate him. Lay backed out of appearances yesterday and today before the Senate Co= mmerce Committee and a House Financial Services subcommittee. Silbert infor= med both panels that Lay wouldn't appear because of "inflammatory'' comment= s made by members of the committee that he said were prejudicial to his cli= ent. Yesterday the House panel voted to subpoena Lay to appear at 10 a.m. t= his morning. A board-sponsored investigation released this weekend said Enron execu= tives enriched themselves while hiding at least $1 billion in losses in 3,0= 00 partnerships. Those transactions caused Houston energy dealer to file th= e largest bankruptcy reorganization on Dec. 2. The company's failure led to at least 4,500 job losses in Houston and = 1,100 in the U.K. and wiped out millions of dollars of retirement savings f= or Enron employees, whose investments were tied up in the company's stock. Powers Testimony Yesterday Lay resigned from the board of the company he founded in 198= 5, saying it was in the "best interests'' of former and current Enron emplo= yees and "other stakeholders,'' according to a statement distributed by PR = Newswire. In testimony yesterday before the House panel, William Powers Jr., the= head of the Enron's special investigation Committee, said Lay and the rest= of the board failed to halt ``a systematic and pervasive attempt'' by mana= gement to deceive investors about the energy dealer's finances. "What we found was absolutely appalling,'' Powers said. Powers' 203-page investigative report found Enron executives enriched = themselves while hiding at least $1 billion in losses in 3,000 partnerships= . Enron had said it overstated earnings by $586 million since 1997 by faili= ng to disclose partnerships used to hide loans and losing ventures. Powers also said today that Enron's auditor, Arthur Andersen LLP, coul= dn't have performed an independent audit of Enron because it was paid $5.7 = million by the company to help set up the partnerships. "If they helped structure the transactions, they already are going to = hold views of the transactions,'' he told the House Financial Services subc= ommittee on capital markets. Andersen was paid $25 million in audit fees by Enron and $27 million f= or non-audit services in 2000. Senate and House Democrats are introducing b= ills that would prohibit auditors from also providing some consulting servi= ces to the same client. -- William Selway in the San Francisco newsroom at (415) 743-3511, or wselw= ay@bloomberg.net=20 Lawmakers Will Subpoena Kenneth Lay --- Ex-Chief of Enron Resigns From Comp= any's Board, Citing Various Inquiries By Michael Schroeder Staff Reporter of The Wall Street Journal 02/05/2002 The Wall Street Journal A3 (Copyright © 2002, Dow Jones & Company, Inc.) WASHINGTON -- Lawmakers say they will issue a subpoena to compel Kenneth La= y, former chairman of Enron Corp., to appear before committees investigatin= g the collapse of the Houston energy trading giant.=20 Enron director William Powers told a House Financial Services subcommittee = that a recently completed review by the board concluded that Enron's top ma= nagers, including Mr. Lay, outside auditors and directors, all contributed = to the company's downfall. Mr. Lay had canceled his much-anticipated appear= ance before a Senate panel, saying that the hearings would be prosecutorial= . Separately yesterday, Mr. Lay announced his resignation from the Enron boar= d, saying that because of the many investigations being conducted that invo= lve him, his continued role on the board has "become a distraction" as the = company works to emerge from bankruptcy-court proceedings.=20 Meanwhile, Senate Commerce Committee Chairman Ernest Hollings (D., S.C.) ca= lled for a special prosecutor to replace the Justice Department in its crim= inal investigation of Enron. And Harvey Pitt, chairman of the Securities an= d Exchange Commission, pointed a finger at the Financial Accounting Standar= ds Board, the independent rule-setting body, for long delays in updating ru= les, including a request by the SEC more than a decade ago to reconsider ne= w accounting rules for off-balance-sheet special-purpose entities. Enron us= ed these partnerships extensively, which contributed to the company's downf= all.=20 Mr. Powers's testimony was seized on by committee members to press their pr= oposals for additional oversight of auditors, stock analysts and rating age= ncies. Lawmakers are debating whether severe shortcomings in financial repo= rting can be addressed by new SEC rules or legislation.=20 Mr. Hollings's comments are a signal that the high level of partisanship on= the Enron debacle among congressional Democrats is likely to intensify as = more hearings are held in the coming weeks. The Bush administration's exten= sive ties to Enron made it a "cash-and-carry government," he said at a news= conference.=20 Mr. Hollings also said that the Justice Department couldn't be relied on to= conduct an objective investigation, given the Enron connections of several= department officials, including Attorney General John Ashcroft. Mr. Ashcro= ft recused himself from the probe, citing the large campaign contributions = he had gotten from Enron in his 2000 Senate campaign.=20 Justice Department officials responded that appointing a special prosecutor= is unnecessary. "No conflict of interest exists. No person involved in pur= suing this investigation has any conflict, or any ties that would require a= recusal," the department said in a statement.=20 Mr. Hollings also said he had doubts about the objectivity of the Enron int= ernal review, conducted by a special committee of the company's board led b= y Mr. Powers. Mr. Powers "is a very fine gentleman, but he's a member of th= e board," he said.=20 The senator, who canceled his panel's hearing yesterday after Mr. Lay decli= ned to testify, said members would vote today to issue a subpoena.=20 Mr. Lay also said he wouldn't appear at a scheduled House subcommittee hear= ing today. In response, the Financial Services Committee chairman, Rep. Mic= hael Oxley (R., Ohio) attempted yesterday afternoon to serve Mr. Lay a subp= oena through his attorney Earl Silbert. Peggy Peterson, Mr. Oxley's spokesw= oman, said that Mr. Silbert said he "didn't know the whereabouts of his cli= ent."=20 Mr. Silbert didn't return a phone call or answer an e-mail seeking comment.= =20 The subpoenas can't compel Mr. Lay to testify, however. Sen. Byron Dorgan (= D., N.D.) acknowledged that Mr. Lay could use his Fifth Amendment right to = refuse to answer questions when he does appear under subpoena. Two other En= ron executives who lawmakers want to talk with about the company's collapse= have already told lawmakers they plan to do this.=20 In testimony before Rep. Richard Baker's subcommittee, Mr. Powers said that= he found "appalling" problems at Enron. The University of Texas Law School= dean outlined the main findings of his report, focusing on the firm's use = of complex off-the-books partnerships that enriched key employees, includin= g Chief Financial Officer Andrew Fastow. "Virtually everyone, from the boar= d of directors on down," understood the company was using partnerships to o= ffset investment losses with its own stock.=20 Mr. Powers, whose objectivity has been questioned because of Enron contribu= tions to his university's law school, faulted the board of directors, sayin= g it "failed in its duty to provide leadership and oversight." During the h= earing, numerous lawmakers said they were incredulous that the board never = raised any red flags.=20 "Whether the Powers report is appropriately balanced or not, given the limi= ted information on which the report is based, it does establish a basis on = which to conclude . . . that the rules aimed at requiring disclosure were s= o misused that they were warped into a black bag from which no information = was able to escape," Mr. Baker said.=20 Several lawmakers, including Rep. John LaFalce (D., N.Y.), called for legis= lation or new regulations to address accounting and disclosure weaknesses t= hat the Enron scandal has uncovered.=20 Mr. LaFalce also complained that the Bush administration authorized only a = 4% SEC budget increase to $480 million for the next fiscal year. He said he= favors tripling the SEC's budget.=20 ---=20 Journal Link: Listen in as a House panel examines the findings of Enron's s= pecial investigative committee. Also, Andersen CEO Joseph Berardino testifi= es on the accounting firm's relationship with Enron, in the Online Journal = at WSJ.com/JournalLinks, by arrangement with Hearings.com. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 FRONT PAGE - FIRST SECTION - Lay stands down from Enron board after scathin= g report. By ANDREW HILL, SHEILA MCNULTY and PETER SPIEGEL. 02/05/2002 Financial Times © 2002 Financial Times Limited . All Rights Reserved Kenneth Lay, Enron's former chairman and chief executive, yesterday resigne= d from the company's board, two days after publication of a damning interna= l report on the energy trader's ill-fated deals with partnerships.=20 The report, which criticised officers, directors and advisers of the compan= y, has raised the legal stakes in the race to apportion blame for Enron's c= ollapse. In a statement announcing his resignation, Mr Lay said his involvement had = "become a distraction" from achieving the goal of a successful reorganisati= on of the bankrupt company.=20 Two congressional committees moved yesterday to subpoena Mr Lay, compelling= him to appear as early as next week. He unexpectedly withdrew from hearing= s this week after congressmen said the report suggested Enron executives ha= d broken the law.=20 The report analyses in detail some of the deals Enron conducted with off-ba= lance-sheet partnerships. It concludes that many were carried out simply to= flatter Enron's accounts and that Mr Lay, and other senior officers, bore = ultimate responsibility for the failure of oversight.=20 Dynegy, facing a $10bn suit from Enron after pulling out of its abortive re= scue bid last year, said yesterday the report showed Enron's demise was "se= lf-inflicted" and justified its decision to withdraw from the takeover.=20 Shareholders and employees seeking compensation from Enron directors and of= ficials said the report also could provide ammunition for lawsuits against = investors who financed Enron's off-balance-sheet partnerships.=20 Limited partners in the special-purpose vehicles took on little risk and re= ceived disproportionately large returns, according to the report.=20 Investors in one of the partnerships, LJM2 Co-Investment, included funds or= units run by Merrill Lynch (which also led the placement of stakes in LJM2= ), JP Morgan Chase, Citigroup, and other blue-chip companies.=20 Eli Gottesdiener, head of a Washington law firm involved in one suit agains= t Enron and Andersen, its former auditor, declined to say whether limited p= artners would now be sued. But he said lawyers for employees and shareholde= rs would probably "use the report to assist them in casting the net as wide= ly as possible".=20 © Copyright Financial Times Ltd. All rights reserved.=20 http://www.ft.com. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 National Desk; Section A ENRON'S MANY STRANDS: THE OVERVIEW SENATE PANEL SAYS IT WILL SUBPOENA EX-CHIEF OF ENRON By STEPHEN LABATON and RICHARD A. OPPEL Jr. 02/05/2002 The New York Times Page 1, Column 6 c. 2002 New York Times Company WASHINGTON, Feb. 4 -- After Kenneth L. Lay, the former chairman and chief e= xecutive of Enron, refused to testify before the Senate Commerce Committee = this morning, Republicans and Democrats on the panel said they would vote T= uesday to issue a subpoena to compel his appearance.=20 Mr. Lay, who severed his final tie to Enron this evening by resigning from = its board, had infuriated lawmakers by canceling his appearance at the last= minute, saying through his lawyer that Congressional hearings planned for = this week had taken on a prosecutorial tone. ''We decided that we really had no choice but to issue a subpoena,'' Senato= r Byron L. Dorgan, a North Dakota Democrat, said at a news conference this = afternoon. Mr. Lay, he said, ''should not have expected it would ever be a = walk in the park'' to testify at a Congressional hearing.=20 Lawmakers in the House said this evening that they had notified Mr. Lay's l= awyer, Earl J. Silbert, that they intended to issue a subpoena, and were to= ld that he did not know where his client could be found. Mr. Lay had been s= cheduled to testify in the House on Tuesday, but he also backed out of that= date.=20 Mr. Silbert did not respond to requests for comment tonight, but Congressio= nal aides and other lawyers involved in the case said they expected that Mr= . Lay, if subpoenaed, would again refuse to testify, and invoke his Fifth A= mendment right against self-incrimination.=20 Tonight, Mr. Lay issued a brief explanation of why he had decided to remove= himself from the company he founded 16 years ago, expanded into one of the= nation's largest energy concerns and watched helplessly as it spiraled out= of control.=20 ''I want to see Enron survive and successfully emerge from reorganization,'= ' he said. ''Due to the multiple inquiries and investigations, some of whic= h have focused on me personally, I believe my involvement has become a dist= raction to achieving this goal.''=20 Mr. Lay's silence before Congress is a remarkable turnabout for a corporate= executive who not long ago was a highly courted figure in Washington, a fi= nancial patron of many public officials, a guest of both Democratic and Rep= ublican presidents and a top contender for a cabinet position in the admini= stration of the first President Bush.=20 Now he is facing a multitude of investigations by Congress, the Justice Dep= artment and the Securities and Exchange Commission. A report issued on Satu= rday night by three outside directors of Enron, which has filed for bankrup= tcy protection, concluded that he bore overall responsibility as its leader= , but that he appeared to be largely oblivious to the details of questionab= le transactions. The report was based in part on interviews with Mr. Lay an= d foreshadows his defense to the inquiries.=20 The day witnessed the first extensive testimony by a member of Enron's boar= d about the company's demise. William C. Powers, the chairman of the specia= l committee on Enron's board that issued the report, told a Congressional p= anel that his inquiry had uncovered ''a systematic and pervasive attempt by= Enron's management to misrepresent the company's financial condition.''=20 ''The tragic consequences of the related-party transactions and accounting = errors were the result of failures at many levels and by many people,'' sai= d Mr. Powers, the dean of the University of Texas School of Law. ''A flawed= idea, self-enrichment by employees, inadequately designed controls, poor i= mplementation, inattentive oversight, simple and not-so-simple accounting m= istakes, and overreaching in a culture that appears to have encouraged push= ing the limits.''=20 Mr. Powers termed his findings ''absolutely appalling.'' He added, ''There'= s no question that virtually everyone, from the board of directors on down,= everyone understood that the company was seeking to offset its investment = losses with its own stock.''=20 Fresh signs of the political implications of Enron's demise were evident in= a capital that has quickly become captivated by the matter. At a news conf= erence this afternoon, Senator Ernest F. Hollings, the South Carolina Democ= rat who heads the Commerce Committee, sharply criticized the Bush administr= ation for its ties to Enron and its top executives.=20 ''I've never seen a better example of cash-and-carry government than this B= ush administration and Enron,'' he said. ''Specifically, everyone knows how= the Bushes got the cash, whether while he was governor using the planes of= the largest contributor; as president in his campaign the largest contribu= tor; to the Republican committee running the convention and the inaugural c= ommittee and everything else like that.''=20 Mr. Hollings, following some House Democrats, called on the administration = to appoint a special counsel to lead the criminal investigation into Enron'= s collapse. He cited the company's ties to nearly a dozen top officials in = the administration and Attorney General John Ashcroft's excusing himself fr= om the case because he had received campaign donations from Enron.=20 The Justice Department said it saw no reason for such a counsel. ''No confl= ict of interest exists,'' its statement said. ''No person involved in pursu= ing this investigation has any conflict or any ties that would require a re= cusal.''=20 Mr. Hollings gamely deflected a question about his own campaign contributio= ns from the company. Asked whether he had received donations from Enron, he= replied: ''I sure did, but I got 3,500 over 10 years, but our friend Kay B= ailey Hutchison, she got 99,000. Heck, I'm the chairman of the committee. T= hat wasn't a contribution. That was an insult.''=20 Republicans, meanwhile, continued to denounce what they called corruption a= t Enron while noting that the company had ties to Democrats.=20 ''Clearly Enron was a very politically active corporation, and I think that= makes this a more interesting story,'' said Senator Peter G. Fitzgerald, t= he Illinois Republican who is the ranking minority member on one of the sub= committees examining the affair. ''But the fact of the matter is that at ro= ot I think this is a corporate scandal. I don't believe that anyone in the = Bush administration was aware that there was what appears to me to have bee= n a pyramid scheme going on in Enron.''=20 After noting that the administration of President Bill Clinton also promote= d some of Enron's business interests, he added, ''There's a very famous pic= ture of Ken Lay with the previous president as well as the current presiden= t.''=20 At a House financial services subcommittee hearing today, Harvey L. Pitt, t= he chairman of the Securities and Exchange Commission, said that if facts d= escribed in the Enron report as characterized by one lawmaker proved correc= t, ''that would be fraud.''=20 He said his agency was re-examining a broad range of regulations as a resul= t of Enron's problems. ''I am committed and the commission is committed to = re-examining every assumption, every rule, and regulation, in light of Enro= n,'' he said.=20 Specifically, he said, the agency was reviewing disclosure and financial re= porting requirements, the role of audit committees and the oversight of acc= ounting firms. He said that the agency was closely examining other companie= s that have shifted their liabilities off their books and that he believed = that corporate executives ought to face ''personal exposure'' for violating= disclosure rules. Photos: Representative Richard H. Baker of Louisiana, center, the chairman = of a subcommittee of the House Financial Services Committee, consulted with= colleagues and aides yesterday at a hearing on the collapse of Enron. (Ass= ociated Press); The S.E.C. chairman Harvey Pitt before Congress yesterday. = (Associated Press)(pg. C4)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 A Section Lay Leaves Enron Board; Founder Severs Last Ties to Firm Peter Behr Washington Post Staff Writer 02/05/2002 The Washington Post FINAL A04 Copyright 2002, The Washington Post Co. All Rights Reserved Enron Corp. founder Kenneth L. Lay resigned from the company's board of dir= ectors yesterday, two days after an investigative report found him signific= antly responsible for the company's demise.=20 In a letter of resignation cutting his last ties to the company, Lay said: = "I want to see Enron survive and successfully emerge from [bankruptcy] reor= ganization. Due to the multiple inquiries and investigations, some of which= are focused on me personally, I believe that my involvement has become a d= istraction to achieving this goal." Lay was supposed to testify voluntarily yesterday before a Senate committee= , but he canceled the appearance Sunday. His attorney said members of Congr= ess had prejudged Lay before hearing his testimony.=20 Lay and other directors were pointedly criticized in a report released Satu= rday by a special committee appointed by Enron's board and headed by Willia= m Powers Jr., dean of the University of Texas Law School.=20 Powers told members of the House Financial Services Committee yesterday tha= t the failure of Lay and other directors to police accounting and ethics vi= olations at Enron was "appalling." Disclosures of executives' self-dealing = and false financial statements by Enron shattered its credibility with inve= stors and customers, forcing it into bankruptcy.=20 For Lay, the departure ends a tumultuous year at the company he founded 16 = years ago. He stepped down as chief executive a year ago, turning the post = over to his prote{acute}ge{acute} Jeffrey Skilling. While Lay kept the chai= rman's position, he was planning to expand his activities outside the count= ry. Then Skilling's unexpected resignation in August, as Enron's financial = problems were growing, forced Lay to take up the chief executive's duties o= nce again.=20 His assurances last summer that Enron was in good shape has been condemned = by former Enron workers and attacked by lawyers suing Enron and its top exe= cutives on behalf of shareholders and employees. Lay and top Enron executiv= es also face ongoing federal securities and criminal investigations.=20 Lay resigned as chairman and chief executive Jan. 23 under pressure from cr= editors in the Enron bankruptcy reorganization case. Enron is trying to sel= l enough assets to meet creditors' demands while eventually putting survivi= ng units of the company back on their feet.=20 Thomas Roberts, Enron's outside lawyer in the bankruptcy case, received Lay= 's resignation.=20 "This was Ken Lay's decision," Roberts said. While it is difficult for a co= rporate board to remove an individual director, Lay could have been forced = to resign.=20 Roberts said Enron was sorry Lay did not feel comfortable testifying yester= day. "The company would have liked him to tell the company's story and his = story, and the company is sorry that circumstances have led to his leaving = the board."=20 Lay has been working at an office at Enron's Houston headquarters but is cu= t off from former executives and employees he once led. His wife, Linda Lay= , said last week that except for their home, "everything is for sale."=20 The financial implications of Lay's resignation as chairman and chief execu= tive are not yet clear.=20 "His severance package is being discussed now," Roberts said. "With the com= pany in bankruptcy, the board does not have much latitude, if any, in agree= ing to a severance package. It's all subject to the bankruptcy court." http://www.washingtonpost.com=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Lay steps down from Enron's board of directors=20 Irate lawmakers working on subpoenas=20 By JULIE MASON=20 Copyright 2002 Houston Chronicle Washington Bureau=20 Feb. 5, 2002, 12:43AM WASHINGTON -- Former Enron Corp. Chairman Ken Lay resigned from the company= 's board of directors Monday, as irate lawmakers prepared subpoenas that wo= uld force him to appear on Capitol Hill.=20 Lay, who resigned as chairman last month, severed final corporate ties with= Enron, saying his problems had become a distraction to the company's effor= ts to emerge from bankruptcy.=20 "Due to the multiple inquiries and investigations, some of which are focuse= d on me personally, I believe that my involvement has become a distraction = to achieving this goal," Lay said in a statement.=20 The move came during a chaotic day in Washington as lawmakers, stung by Lay= 's abrupt cancellation of highly anticipated testimony on Capitol Hill, too= k steps to compel the embattled former executive to appear.=20 "I understand it would be difficult to come and testify, but he should not = have expected it would ever be a walk in the park," said Sen. Byron Dorgan,= D-N.D.=20 Lay withdrew less than 24 hours before he was to appear Monday at the Senat= e Commerce Committee. He also pulled out of a hearing set for today before = the House Financial Services Committee.=20 In response, the House committee voted unanimously to authorize its chairma= n to subpoena Lay, and the Senate panel is poised to do the same today.=20 The Senate panel tentatively set Feb. 12 as the new day to hear from Lay, w= hile the House committee's new date was undecided.=20 Earl Silbert, Lay's attorney in Washington, D.C., said Monday night he is a= ware that Lay may be subpoenaed by the House Financial Services Committee a= nd suggested to the committee that Lay could testify on Feb. 12 or 13.=20 According to news reports Silbert said he did not know where Lay was when h= e was contacted by the committee about him, but he meant that he did not kn= ow where Lay was when the committee staff was speaking to him.=20 "I knew he had left D.C.," Silbert said.=20 Kelly Kimberly, Lay's newly hired spokeswoman, said Lay returned to Houston= from Washington, D.C., Monday morning.=20 Lawmakers said they are not inclined to barter immunity for Lay's testimony= , and it was unclear whether Lay would invoke his Fifth Amendment right aga= inst self-incrimination and refuse to answer questions.=20 Far from backing down from the heated rhetoric that Lay's attorneys blamed = for his withdrawal, angered lawmakers, again lashed out at Enron and its fo= rmer chairman for failing to appear as promised.=20 "We have not arrived at any preconceived notions here, but I will tell you = it sure appears to me that this company was on the financial equivalent of = steroids," said Sen. Ron Wyden, D-Ore. "They inflated those short-term prof= its and pumped themselves up to the detriment of the long-term health of th= ousands of families in my home state."=20 Sen. Ernest Hollings, D-S.C., chairman of the Senate committee, criticized = the Bush administration for its ties to Enron and called for a special pros= ecutor to oversee the criminal investigation.=20 "I've never seen a better example of cash-and-carry government as this Bush= administration and Enron," Hollings said.=20 Attorney General John Ashcroft recused himself from prosecuting the case, d= isclosing that he took campaign contributions from Enron for a failed 2000 = Senate bid.=20 Hollings criticized the subsequent choice of Deputy Attorney General Larry = Thompson to head up the investigation, noting that Thompson once worked in = a law firm that represented Enron.=20 "In other words, it should be independent," Hollings said.=20 "Of course, finding someone in this town independent of Enron is easier tha= n finding bin Laden, I can tell you that," he said ironically.=20 The Justice Department rejected the call to replace Thompson with a special= prosecutor.=20 "No person involved in pursuing this investigation has any conflict, or any= ties that would require a recusal," Justice Department officials said.=20 Lay, who it was hoped would finally break months of silence on the collapse= of his one-time empire, was to be the star attraction in a week of intense= hearings in both the House and Senate.=20 Instead, his lawyers cited "prosecutorial" tones in the public remarks of l= awmakers preparing to question Lay, in explaining his withdrawal.=20 Committee members generally scoffed at Lay's response, noting that their ad= versarial tone has remained largely consistent since he agreed in December = to testify.=20 "The problem for Mr. Lay is that some of the autopsies have already been do= ne on Enron," said Sen. Peter Fitzgerald, R-Ill. "If Mr. Lay wants to corre= ct some of the damning impressions that are coming out of these documents, = he ought to come before the American people."=20 Lay's decision not to appear came the day after a special committee of Enro= n's board released a 218-page report criticizing company executives, audito= rs, lawyers and board members for allowing improperly created partnerships = to inflate Enron's earnings, hide its debt and wrongfully enrich a handful = of insiders.=20 The report also cited Lay for bearing significant responsibility in the com= pany's collapse.=20 Lay resigned as chairman and CEO of Enron Jan. 23, saying he could not run = the company effectively while facing investigations and lawsuits into Enron= 's collapse.=20 His resignation from the board closes 16 years of service at Enron, leaving= his diminished stock ownership the only remaining link to the company.=20 He retired as chief executive in February 2001, but resumed the position wh= en his successor, Jeff Skilling, quit in August.=20 Lawmakers said Monday that Skilling is still expected to cooperate. Former = Chief Financial Officer Andrew Fastow, also scheduled to testify, has notif= ied lawmakers he will not answer questions.=20 In a brief statement on Lay's resignation from the board, Enron said, "We r= egret that circumstances have led to this. We wish Ken the best."=20 Chronicle reporters Laura Goldberg in Houston and Patty Reinert in Washingt= on contributed to this story.=20 =20 Business/Financial Desk; Section A ENRON'S MANY STRANDS: THE PARTNERSHIPS Deal at Enron Gave Insiders Fast Fortunes By KURT EICHENWALD 02/05/2002 The New York Times Page 1, Column 5 c. 2002 New York Times Company They called it Southampton Place. To most people in Houston, it was the nam= e of a neighborhood known for expensive homes and influential residents.=20 But to a small group of executives at the Enron Corporation, it meant somet= hing far different: the opportunity to obtain millions of dollars of cash, = fast, with the money coming from the company's own coffers. Details of the lucrative investments in Southampton, a limited partnership = involved in dealings with Enron partnerships, were disclosed Saturday in a = report released by a special committee of the Enron board. For directors an= d former employees, the details have proved to be some of the most emotiona= lly charged disclosures in the lengthy report: a small group of insiders ma= de millions in profits in secret deals with some of the partnerships that u= ltimately brought the company to its knees.=20 Two of the investors were able to transform $5,800, the price of a used car= , into more than a million dollars each in just two months, according to th= e report. Andrew S. Fastow, the former chief financial officer of Enron and= engineer of many of the partnership transactions, transformed a $25,000 co= ntribution from a family foundation into $4.5 million in the same matter of= weeks.=20 The deals in early 2000, which involved at least half a dozen Enron employe= es, violated the company's conflict of interest requirements. Last fall, wh= en the first inklings of Southampton emerged, every senior executive invest= ing in the deal who had not already been fired for a role in the partnershi= p problems was terminated. Until then, the report says, no top officials of= the company knew anything about -- let alone approved of -- the insider de= al that had come from Mr. Fastow's finance division.=20 The investment was arranged by Mr. Fastow and another Enron employee, Micha= el Kopper, who both live in Southampton Place in Houston. Investigators wor= king for the board committee worked to figure out why the two executives of= fered the lucrative opportunity to other corporate insiders, but were unabl= e to find an answer.=20 Now, legal experts say, that same question is certain to be examined by Fed= eral prosecutors investigating the Enron debacle.=20 Investigators will look for a quid pro quo arrangement in which something o= f value was expected from the investors in return for the lucrative opportu= nity to participate in such a profitable deal, said Stephen Meagher, a form= er federal prosecutor in San Francisco who handled white-collar cases.=20 A spokesman for Mr. Fastow declined to comment. Mr. Kopper did not return a= telephone message left at his home.=20 The small group of other investors included only people who were involved i= n partnership transactions with Mr. Fastow. Mr. Kopper, like Mr. Fastow, al= so invested $25,000, through a partnership he called Big Doe -- apparently = a nod to the potential profits from the investment.=20 The other investors included Ben F. Glisan Jr., the former Enron treasurer = who helped set up some Enron partnership deals with Mr. Fastow, and Kristin= a Mordaunt, a lawyer who worked for Mr. Fastow before becoming general coun= sel of the company's broadband division. Mr. Glisan and Ms. Mordaunt were t= he executives who each put up $5,800 for a return of $1 million.=20 Two other employees put up smaller amounts, and received thousands in retur= n.=20 Henry F. Schuelke, a lawyer for Mr. Glisan, did not return a phone message.= Ms. Mordaunt's phone number could not be found in a computer search. Howev= er, according to the report, she informed the committee that she never aske= d for and never provided anything in return for the Southampton investment.= Mr. Glisan also told the committee that Mr. Fastow never asked him for any= favors or other consideration in return for the Southampton investment.=20 For some legal experts, the Southampton transaction sounds eerily similar t= o a central part of the investment scandal at the investment house Drexel B= urnham Lambert Inc. more than a decade ago. There, the man in charge of Dre= xel's junk bond operation, Michael R. Milken, offered lucrative interests i= n a partnership called MacPherson Investment Partners L.P. to a group of mu= tual fund managers. Some of those managers, who invested their mutual funds= in other Drexel deals, were subsequently convicted on charges that they ha= d accepted bribes in exchange for decisions they made for their funds.=20 With the Enron executives having fiduciary obligations to the company's sha= reholders, legal experts said, investigators will try to determine whether = anyone appeared to modify their actions because of the investment opportuni= ty.=20 The MacPherson case clearly has a role as precedent in this instance, said = Mr. Meagher, the former prosecutor.=20 Kenneth J. Vianale, the main prosecutor in the MacPherson cases, declined t= o comment, citing a conflict; his firm has already brought class actions ag= ainst Enron on behalf of shareholders.=20 According to the report, both Mr. Glisan and Ms. Mordaunt played roles in n= egotiating with Mr. Fastow's partnerships on behalf of Enron after they rec= eived their returns on the Southampton investment. That month, Mr. Glisan b= ecame treasurer of Enron, and was intimately involved that year in a series= of partnership deals that played a major role in bringing down the company= . Ms. Mordaunt was involved in at least one transaction with a Fastow partn= ership on behalf of Enron after her investment.=20 The Southampton Place partnership traces back to a $10 million investment b= y Enron in March 1998 in Rhythms Netconnections Inc., a privately held Inte= rnet service provider. Enron's stake, 5.4 million shares originally priced = at $1.85 each, proved to be enormously profitable, at least for a while.=20 A little more than a year after Enron purchased its stake, Rhythms went pub= lic at $21 a share and closed on the first day of trading at $69. Soon Enro= n's stake was worth some $300 million, according to the committee's report.= =20 But the company could not cash in its stake because the terms of its invest= ment prohibited selling the stock until the end of 1999. The prices of Inte= rnet stocks were extremely volatile, and the changes in value of Rhythms sh= ares showed up on the company's income statement, because of how Enron was = accounting for the shares.=20 Senior executives wanted to limit those swings in value.=20 That is where the partnerships came in. Mr. Fastow and Mr. Glisan, who woul= d later be appointed Enron's treasurer, arranged a series of transactions s= upposedly to hedge the risk in the Rhythms investment.=20 The complex transactions involved a number of related partnerships. But ult= imately the deals required Enron to contribute both stock in Rhythms and it= s own stock to the partnerships. The report said Mr. Fastow indicated to ot= her Enron executives that he had no financial interest in the transactions.= =20 In 2000, when Enron decided to sell its Rhythms stake, the complex series o= f transactions had to be undone, a process known as unwinding.=20 During the negotiations on the unwinding, Mr. Fastow proposed that Enron pa= y $30 million to one partnership involved He did not reveal at that time th= at the partnership was secretly owned by Southampton, which had just been e= stablished.=20 The fact that Enron executives were profiting off this deal at the expense = of their employer raised serious concerns for the committee.=20 ''We have not seen any evidence that any of the employees, including Fastow= , obtained approval from the chairman and C.E.O. under the code of conduct = to participate financially in the profits of an entity doing business with = Enron,'' the report says. ''While every code violation is a matter to be ta= ken seriously, these violations are particularly troubling.'' Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Legal Liability for Enron Debacle May Be Determined by 1997 Memo By John R. Emshwiller Staff Reporter of The Wall Street Journal 02/05/2002 The Wall Street Journal A6 (Copyright © 2002, Dow Jones & Company, Inc.) Legal liability in the Enron Corp. debacle could depend, in part, on who kn= ew about an innocuous-looking, two-page memorandum dated Dec. 30, 1997, inv= olving one of the now-controversial outside partnerships run by company exe= cutives.=20 Enron's collapse into bankruptcy proceedings late last year, caused in larg= e part by the existence of those partnerships, is now the focus of congress= ional hearings and criminal and civil investigations. The company's downfal= l also has subjected the nation's corporate-accounting practices to unprece= dented scrutiny. The memo was signed by two Enron executives at the time, Jeremy Blachman an= d Michael Kopper. It included plans for how to distribute about $6.6 millio= n from one limited partnership, known as JEDI, to another limited partnersh= ip, known as Chewco Investments. Chewco has received widespread attention r= ecently as one of the partnerships whose questionable accounting treatment = helped bring Enron down. Chewco was run and partly owned by Mr. Kopper, who= resigned last year as a managing director of the Houston energy-trading gi= ant.=20 The memo shows Mr. Blachman was signing on behalf of an Enron unit that was= serving as general partner of JEDI, and Mr. Kopper was signing on behalf o= f Chewco. The memo was on JEDI letterhead and addressed to Chewco Investmen= ts.=20 The final destination and purpose of these funds has become the center of a= controversy between Enron and its longtime auditor Arthur Andersen LLP, as= well as a focus of inquiries by federal investigators probing the Enron co= llapse. Late last year, Enron and Andersen officials said their discovery o= f the use of that money in relation to Chewco had required Enron to retroac= tively reduce reported earnings back to 1997 by nearly $400 million, or mor= e than 10%. This reduction produced the lion's share of a broader financial= restatement that helped force Enron to seek bankruptcy-court protection on= Dec. 2.=20 In Dec. 12 congressional testimony, Andersen's chief executive, Joseph Bera= rdino, said the 1997 handling of the Chewco/JEDI financial arrangements inv= olved "possible illegal acts." He said that in 1997, crucial information ab= out the financial arrangements had been withheld from Andersen by Enron off= icials.=20 Yesterday, an attorney for Mr. Kopper declined to comment. Mr. Blachman, wh= o is currently a managing director at an Enron unit, didn't return phone ca= lls seeking comment. It isn't clear whether Mr. Blachman played anything mo= re than just a minor role in the Chewco matter. A report issued over the we= ekend by Enron's board of directors investigating Enron's executive-run par= tnerships indicates that Mr. Blachman, when interviewed recently, couldn't = recall details of the Dec. 30 document.=20 Mr. Berardino's testimony added to questions of who knew what and when in r= egard to Chewco. The partnership was created in 1997 to purchase from Enron= for $383 million an interest in JEDI, which is an acronym for Joint Energy= Development Investments. Enron had helped form JEDI in 1993 and operated i= t as a separate entity to invest in energy projects. By selling Chewco an i= nterest, Enron was able to keep treating JEDI as independent, which meant k= eeping more than $700 million in JEDI-related debt off Enron's balance shee= t.=20 Enron was only able to do this transaction because Chewco was considered an= independent entity under accounting rules, which required that the entity = have outside equity equal to at least $11.5 million, or 3%, of its $383 mil= lion in assets. Andersen has acknowledged that it reviewed Chewco in 1997 a= nd found that two small limited liability companies, known as Big River Fun= ding and Little River Funding, had put in enough outside equity to meet tha= t requirement. Mr. Kopper, besides his connection to Chewco, also shows up = as signatory for Big River and Little River on its bank-loan documents.=20 As it turned out, however, more than half the outside equity investment was= in effect guaranteed by the $6.6 million due from JEDI to Chewco being dep= osited in accounts as collateral against bank loans, which Big River and Li= ttle River had taken out to invest in Chewco. This collateral deposit meant= Chewco never had enough true outside equity to be treated as independent. = Thus it should have been folded into Enron, along with JEDI, in 1997. Ander= sen has said it wasn't told in 1997 about the collateral arrangement.=20 The 1997 memo talks of sending the $6.6 million to reserve accounts on beha= lf of Little River and Big River. Yesterday, an Andersen spokesman said "th= is is more confirmation of the fact that Enron didn't provide critical info= rmation regarding Chewco to Andersen." An Enron spokesman declined to comme= nt. One person familiar with the matter said that in 1997 Enron officials w= ere telling bankers involved in the Chewco-related loans that Andersen had = reviewed and approved of the now-suspect collateral transaction. The board = report released over the weekend said that Andersen work papers indicated t= hat the accounting firm had access to cash-flow records from JEDI including= the now-suspect $6.6 million distribution. However, the report added, it d= idn't know if Andersen had done anything to trace the disbursements from JE= DI.=20 And it still isn't known who at Enron or Andersen saw or had access to this= 1997 memo over the past four years. If individuals knew about the arrangem= ent and its potential financial impact on Enron, they could be guilty of vi= olations of the law, says one federal investigator looking into the matter.= =20 A Nov. 2, 2001, memorandum prepared by an Andersen official said that the a= ccounting firm was called on Oct. 26 by an Enron official named Rodney Fald= yn who "advised that he had learned that Chewco may not have the requisite = equity" and asked about the possible accounting impact of that situation. T= hat was the same day that The Wall Street Journal disclosed the existence o= f Chewco and its connection to Mr. Kopper. Mr. Faldyn declined to comment y= esterday.=20 Over the next several days, Enron and Andersen began reviewing Chewco, acco= rding to the Andersen memo. On Nov. 2, Andersen received a set of Chewco-re= lated documents from the law firm of Wilmer, Cutler & Pickering, which had = just been hired to help Enron's board of directors do its investigation of = the partnership arrangements. That investigative report, released over the = weekend, was extremely critical of Chewco and similar partnerships as well = as of top Enron officials.=20 The Dec. 30, 1997, memo was part of the Wilmer Cutler packet of documents, = said the Andersen memo. It isn't clear where the law firm obtained the Chew= co-related documents. William McLucas, the firm's lead attorney on the Enro= n investigation, couldn't be reached for comment yesterday. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business; Business Desk Enron Report Could Bolster Criminal Case Probe: Panel's allegations of fina= ncial subterfuge increase likelihood of indictment, legal experts say. WALTER HAMILTON TIMES STAFF WRITER 02/05/2002 Los Angeles Times Home Edition C-1 Copyright 2002 / The Times Mirror Company A report claiming that Enron Corp. executives used partnerships to enrich t= hemselves and mask the company's troubled finances makes it increasingly li= kely that prosecutors will bring criminal fraud charges, legal experts said= Monday.=20 The report, released late Saturday by a special committee of Enron board me= mbers, said the partnerships appeared in some cases to be used for financia= l subterfuge rather than for legitimate business purposes. If investigators can show that Enron officials intentionally deceived inves= tors, it would mark a significant new development in the case, according to= attorneys experienced in corporate fraud.=20 Enron executives would have a stronger defense had the report found that th= ey simply made bad business decisions, attorneys said. Instead, the report = charged that the now-infamous partnerships at the heart of Enron's collapse= often served no "bona fide economic" purpose.=20 "This report makes it more likely that there will be a criminal indictment,= " said Christopher Bebel, a partner at Shepherd Smith & Bebel in Houston.= =20 "It looks like the government's going to have an easier time establishing i= ntent, because now we've learned additional details about the efforts at co= ncealment of the truth as the scheme was unfolding," Bebel said. "And we're= learning about the extent to which members of top management profited."=20 The report detailed a culture of corporate mismanagement and inside dealing= . It pointed the strongest criticism at Andrew S. Fastow, Enron's former ch= ief financial officer, saying that he and several subordinates reaped tens = of millions of dollars in profit at the expense of the company and its shar= eholders.=20 Fastow could not be reached for comment.=20 Some legal authorities cautioned that it was not certain criminal charges w= ould be brought.=20 Though the report contains strident allegations, the three-member panel ack= nowledged that it did not have the full picture. Some key people refused to= cooperate, and the panel lacked access to important documents.=20 Though the report appears to strengthen the government's hand in bringing p= otential fraud charges, Enron executives still have a variety of defenses a= vailable, some authorities said.=20 Enron executives could argue that the partnerships were created and run wit= h the full backing of lawyers and others upon whom they relied for expert a= dvice, said Ira Lee Sorkin, a New York defense attorney who previously was = at both the U.S. attorney's office in New York and the Securities and Excha= nge Commission.=20 Sorkin noted that as a defense, Enron executives could claim that lawyers, = accountants and others signed off on the deals.=20 Still, many experts said the report contains clearly damaging information t= hat lowers the hurdle to bringing a criminal case.=20 Simply put, the difference between a civil case and a criminal one is inten= t, attorneys said. Prosecutors would have to prove that a defendant purpose= ly broke the law as opposed to simply having acted "recklessly."=20 With Enron, prosecutors could argue that Fastow and others were making mill= ions while manipulating the company's books, experts said.=20 "If the evidence is as strong as this report seems to make it, then I'd thi= nk it's a pretty strong case," said Paul Fishman, a New York lawyer who han= dles white-collar crime cases.=20 The report also hands the Justice Department extra ammunition with which to= pursue its case, Fishman and others said. One major strategy in the invest= igation is to coax insiders to cooperate with information about the wrongdo= ing of others.=20 The report may convince some people that it's better to cooperate before ot= hers do and they lose offers of leniency.=20 "There may be enough in [the report] that it may scare the pants off someon= e," Fishman said.=20 If the allegations in the report bear out, the government could charge frau= d on several levels, said Brian O'Neill, a partner at O'Neill, Lysaght & Su= n in Santa Monica.=20 If the company was shuffling its finances while borrowing money from financ= ial institutions, that could be bank fraud, he said. If it used the mail or= electronic means to deceive investors, that could be mail or wire fraud.= =20 The headline-garnering nature of the Enron debacle could itself increase th= e likelihood of criminal charges being brought, said Henry Hu, a securities= -law professor at the University of Texas at Austin.=20 "This case has so gripped the attention of the general public that the fail= ure to bring a criminal prosecution, if the facts warrant it, could undermi= ne confidence in the financial markets," Hu said. "The message it would sen= d is that [criminal wrongdoing] doesn't matter: 'Even in an egregious situa= tion, we won't prosecute criminally.'" Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section C ENRON'S MANY STRANDS: WALL STREET Varied Roles Cause Some Conflicts, Brokers Say By PATRICK McGEEHAN 02/05/2002 The New York Times Page 6, Column 1 c. 2002 New York Times Company Investors may have been astonished to learn that the Enron Corporation allo= wed its former chief financial officer, Andrew S. Fastow, to wear two hats.= But Wall Street insiders could have shrugged and said, ''Is that all?''=20 On Wall Street, the biggest and most successful firms routinely play a vari= ety of roles and simultaneously serve several, and often conflicting, inter= ests. In some cases, the same firms that privately sold shares in the compl= ex partnerships that Enron kept off its balance sheet also lent Enron money= and recommended Enron's stock and bonds to the public. A report by a special committee of Enron's board found that the accounting = for those partnerships -- some of which were run by Mr. Fastow while he was= chief financial officer -- was one cause of the company's collapse. Congre= ssional investigators are asking whether the company's auditor, Arthur Ande= rsen, was blinded to that conflict by the consulting fees Enron was paying = it.=20 While the large accounting firms rush to eliminate their apparent conflicts= , executives on Wall Street are standing behind the securities laws that ha= ve perpetuated theirs. Unless Congress or securities regulators tell them o= therwise, the big securities firms intend to continue raising money for cor= porations by selling stocks, bonds and shares in partnerships to the full s= pectrum of investors, from the most sophisticated millionaires to the novic= es.=20 ''There are inherent conflicts of interest in this business,'' said James W= iggins, a spokesman for Merrill Lynch & Company, the nation's biggest broke= rage firm. ''It's a question of how you manage them.''=20 Like many major firms on Wall Street, Merrill helped to finance Enron's rap= id rise. The firm managed sales of the company's bonds, lined up buyers for= one big partnership run by Mr. Fastow and even collected a fee for advisin= g another company on its purchase of a utility that Enron sold.=20 At times, including last fall, Merrill's stock research department advised = brokerage customers to buy Enron's stock. Donato J. Eassey, an analyst who = followed Enron for Merrill until December, was recommending the stock after= Merrill successfully sold $349 million of shares in LJM2, a partnership cr= eated by Enron executives, through a private offering. Several Merrill inve= stment bankers, including Thomas Davis, now a vice chairman of the firm, bo= ught shares of that partnership for themselves, though their interest was n= ot disclosed to Merrill's customers. So far, they have recovered slightly m= ore than 90 percent of the money they invested, according to a person close= to the partnership.=20 There is no evidence that Merrill's investment bankers or executives ever c= onsidered these various roles an unacceptable conflict of interest. To the = contrary, Merrill's two top executives reassured the firm's employees last = week about the firm's role in selling LJM2.=20 In an internal memorandum on Jan. 30, Merrill's chief executive, David H. K= omansky, and its president, E. Stanley O'Neal, said: ''We placed it private= ly with a limited number of qualified institutional and individual investor= s who received full disclosure about its structure. Co-investment by Merril= l Lynch and some of our qualified employees is common in these kinds of pla= cements and does not represent a conflict of interest. Indeed, it directly = aligns our interests with the sophisticated investors who join us in puttin= g their capital at risk.''=20 If Merrill's bankers, as agents of Enron, gathered any information about En= ron that was not available to the company's shareholders or bondholders, th= ey would have been barred from sharing it, experts in securities law said. = That information belongs to the client and is available to the investment b= ankers under strict terms of confidentiality.=20 ''Investment bankers are not going to blow the whistle on transactions bles= sed by the company's lawyers and accountants,'' said Joseph McLaughlin, a p= artner with the law firm of Sidley Austin Brown & Wood. ''You can't release= the information without the company's permission.''=20 If bankers learned something negative in preparing to manage a private plac= ement for a public company, he said, ''what that calls for is a frank discu= ssion with the company'' to encourage its executive to disclose the informa= tion publicly.=20 But if the company chooses not to tell investors everything -- as Enron cle= arly did not -- that arrangement can leave the securities firm in an awkwar= d position. Its analysts and brokers may be promoting stocks that they woul= d not like so much if they knew what some of their co-workers in the invest= ment-banking department knew.=20 Securities firms long ago became comfortable with the potential for such co= nflicts. They have been playing the dual roles of corporate underwriter and= financial adviser for decades.=20 ''Conflicts of interest in the financial industry are as inevitable as deat= h and taxes,'' said John Coffee, a professor of law at Columbia University.= ''You can't wholly purge them.''=20 The most likely moves to deal with those conflicts, Mr. Coffee and other ex= perts said, will be to insulate analysts even more from their investment-ba= nking counterparts. Rather than allowing the two sides to share more inform= ation, regulators will probably try to limit the bankers' ability to influe= nce the analysts' ratings and views on securities that their firms underwri= te.=20 Beyond that, Wall Street executives are likely to resist calls for change. = It is an industry with codes of conduct that do not prevent an investment b= ank from representing both the buyer and the seller in a merger. ''It's tak= en an incredible perfect storm to force the auditing industry to change,'' = Mr. Coffee said. ''I don't think we're going to see Wall Street fundamental= ly change how it behaves.'' Photo: David H. Komansky, chief executive of Merrill Lynch, wrote a memoran= dum that explained the firm's role in LJM2, created by Enron. (Carol Halebi= an)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 COMPANIES & FINANCE THE ENRON COLLAPSE - Lawsuits may widen to hit
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